Every Procurement organization is faced with the need to deliver cost savings. But virtually every Procurement organization ignores or gives lip service to an area that promises substantial savings opportunity: Tail spend.
What exactly is Tail spend? Why does it not get the attention that its saving potential promises? And what can companies do to tackle this area without compromising their focus on larger spend areas?
What is Tail Spend?
When I think of tail spend I tend to think of the money spent on goods and services that is so small that it typically gets no attention from the Procurement team at all.
If you think of an A-B-C classification of expenditures, the “A” class represents the goods or services which are very high in value, for which there is large focus and resource allotted to ensure that this spending is given the highest level of attention. Conversely the “C” class represents goods and services of such low value that it is considered highly transactional and gets not much more than administrative attention at best.
Some refer to this as the 80-20 rule, whereby 80% of the spend is on 20% of the skus and/or transactions, and 20% of the spend is on 80% of the skus and/or transactions. The Boston Consulting Group ascribes to this definition.
Why is Tail Spend Ignored?
Tail spend is generally ignored in Procurement organizations and the level of attention it gets varies.
In some cases the Procurement does the most basic work possible: finding suppliers, sending out RFQs, making award decisions, and issuing terms and conditions and purchase orders. Anything more attention than that is restricted to dealing with any issues that arise, only when they arise.
In other cases the Procurement team doesn’t do any work at all. Faced with the reality that Procurement won’t give them any time at all, other functions (eg. Marketing, Legal, Manufacturing) will go out and find suppliers and award business on their own, without any Procurement involvement at all. This type of rogue buying is sometimes a deliberate work-around from Procurement, but more often than not it is done out of necessity.
Why does this lack of attention and focus happen at all? Spend is spend after all, and there is always an opportunity for savings and the need for controls. Why does Procurement give tail spend such short shrift:
1. Organizational Priorities
Most organizations look at the highest level of spend, at all levels. There is only so much detail that management and executives will look at. Further the goods and services with the highest spend garner the most attention.
The extended values are so significant that higher levels of management must provide explicit approval and signatures authorizing purchase. Tight controls are necessary given the amount of money involved.
2. Limited Resources
There are only so many people in a Procurement team and there is only so much time in the day. With all the attention required by high value spend there is little to no time left to consider tail spend.
The processes are typically identical. No matter the value of spend suppliers must be found, qualified, quoted, negotiated with, contracted and managed. With high value spend those processes and the ensuing preparation, analyses, questions, controls and metrics are intensified. For tail spend it means that the processes are performed in the simplest and most transactional manner possible.
3. What Gets Measured is What Gets Done
Procurement teams are measured on many things but topping the list is always negotiated savings. Not just savings in percentage terms, but savings in extended dollar terms.
So if you need to deliver a million dollars in savings it is much easier to attain that goal by focussing your limited time on the fewest possible skus and suppliers with the highest dollar opportunity.
You may be able to get double digit percentage savings on tail spend but it doesn’t add up too much from an extended dollar standpoint. And what gets measured is what gets done.
4. Rogue Buying
Either as a deliberate effort to avoid Procurement, or as a necessary effort to get stuff done when ignored by Procurement, other functions will engage in Rogue buying. Even though they are not experts in the purchasing process, they need to acquire goods and services and they can’t afford to wait.
The danger of lack of controls and fraudulent and illegal behaviour is real. But it is not enough to stop this activity.
5. Lack of Expertise
Procurement professionals must not only be expert negotiations and masters of the purchasing process, but they also need to have a level of expertise in the commodities or categories that they are managing.
They don’t have to be deep technical experts but they do need to have a credible working knowledge of what they are buying so that they can expertly negotiate and deal with suppliers who themselves are experts in what they are selling.
Without this expertise, particularly for tail spend, and without the time or inclination to acquire this expertise, Procurement teams will often shy away from these types of spend and let others do whatever they need to do.
How Can Tail Spend be Managed Effectively?
All of the traditional reasons why Tail spend is ignored do not need to impede focussing on it in the future. There are options to consider to address this to the benefit of all:
a. Hire Dedicated Resources
However you measure tail spend, whether it is 10% or 20% of your spend you need to do the math on the cost savings opportunity. For instance if you have $1 million dollars in tail spend, and you think you can save 10%-15% of that spend if you only had time to focus on it, that translates to over $100,000 in savings.
For that money you can afford to hire dedicated resource to deliver those savings. More savings will accrue to the company than the cost of this dedicated resource. And on top of that you will regain control.
b. Hire Procurement Consultants or Outsource Procurement
There are companies that offer Procurement as a Service (PaaS). They are made up of career Procurement professionals who have the pre-established processes, controls, supplier relationships, and resources that can be put to use on your tail spend.
Typically these firms work on either a flat rate basis or some gainsharing arrangement. Whatever the conditions are, they act as an extension of your Procurement team and can work on the tail spend that you will never get to anyways.
Presented with this option and the savings potential far too many companies hear about the savings these companies can deliver and try to do it themselves. But all of the conditions that got them to ignore tail spend in the past still prevail and all they end up doing is damaging their ethical behaviour and integrity.
c. Leverage and Collaborate with Suppliers
Suppliers want your business. In too many cases these relationships are not managed, are kept transactional, and are not developed or grown in any way. But suppliers are very often more than happy to help you if you have problems. They are merely to be told what your problems are and asked to help.
They will generally have many ideas on steps that you, or you and the supplier together, can take to reduce costs. I remember when faced with a similar problem at one company we simply sent letters to these suppliers asking for their help and ideas to reduce costs. The ease and speed at which we achieved real savings was incredible and unprecedented.
Tail spend may be of lower value but it is spend nonetheless. All of the reasons why organizations have traditionally ignored tail spend are quite frankly excuses.
There are many ways to reduce tail spend costs if you think creatively. Procurement professionals are proud. And they want to do it all. But it is smarter to leverage external resources and take credit for those savings than do nothing and live with the knowledge that you have left all those savings on the table.