Tail end spend can hide maverick purchasing, waste and even fraud, which is why many organisations are starting to realise the benefits of tackling it.
Tail end spend – also called long tail, or low value spend – is the 20% of spend that typically goes unmanaged within an organisation. This 20% tends to be spread across multiple spend categories and via a large number of low value transactions with numerous suppliers, many of which are used very infrequently. In fact, tail end often accounts for 80% of all an organisation’s suppliers.
Tail end spend tends to be unclassified, and therefore ‘invisible’, because the purchases are too small, or too infrequent to go through an organisation’s procurement system. This is one of the key factors which makes tail end spend hard to manage.
And, while the value of tail end spend will obviously vary depending on the size of an organisation, that invisible 20% often contains a few ‘maverick’ high cost purchases that should have gone through a more strategic purchasing process , or even in some cases procurement fraud.
For some, tail spend in itself isn’t always a big problem per se, but the fact that it is largely invisible and unmanaged means there are certainly opportunities for savings.
Tackling tail end spend can seem rather daunting, not least because of the sheer number of suppliers involved. And for many organisations, it’s simply not commercially viable to undertake such a project. But improved process efficiency and better allocation of time and resources for tail spend can bring in significant cost savings and increased ROI for the company as a whole.
Unlocking the value of the tail end
Working with our clients, public and private sector, we’ve found that managing your tail spend can achieve:
- cost reduction between 5% and 20%
- an increase in process efficiency of over 10%
- reduced risk across the supply chain
- an increase in the amount of strategically managed spend from the average 80% to over 90%
- increased usage of, and compliance with, procurement systems / processes
- increased visibility across the procurement process
- improved and effective contract and supplier management of all suppliers.
What does best practice look like when it comes to tail end?
Spend analytics is really important. It categorises spend at supplier level, which often gives a new view of expenditure, rather than service or directorate based budgets. This means you can identify opportunities for consolidation – both when a single supplier is used by multiple requisitioners and when the same type of goods and services are being bought from different suppliers.
Having all the contract data is paramount to drive compliance and commercial benefits through the contracts in place, also identifying gaps to address to reduce the tail. The use of corporate contracts should maximise your buying power and drive down unit costs. Corporate contracts are a key enabler for a tail solution, the data provides a holistic view of the size of the challenge and subsequent opportunity.
Process and policy are crucial in delivering a successful solution. Without the operational process and policy there is a risk that the tail challenge will arise later down the line.
Overall tail spend management is about having the right systems and processes in place, eg, revised workflows that bring procurement into the approval process, consolidating this activity centrally or putting in place catalogues, corporate contracts and instigating demand management practices.