We’re releasing a series of articles to answer your questions about tail spend, starting with the basics so you understand what tail spend is and we’ll progress along the spectrum to help you manage it. To get up to speed, read our prologue and Chapter 1 on what this tail spend series will help you accomplish.
“Who purchased you and why?”
This is perhaps the most intriguing question and the right place to start when looking at tail spend. A spend analysis is often the first step in building a procurement capability, and if used on an ongoing basis, it can help to understand what spend consolidation efforts leave out. To accurately capture the full picture, analysis should pull in data from multiple sources, such as purchasing/payment systems, purchasing card data, travel and expense systems, and often multiple ERP systems, even petty cash if local branches still use it.
Fortunately, there are many helpful tools on the market that range from free-for-use apps to complex software platforms enabled with artificial intelligence (AI). Nearly all of these will help with generating what we call a “spend cube,” which is an analysis, at the line-item level, of global spend. This can include:
- What was purchased;
- Which supplier it was purchased from; and
- Who purchased it.
Using spend analysis software can also enable automation of data cleansing, enriching and categorization. However, only 19% of companies studied by The Hackett Group have a highly automated spend analysis process today. Given that the use of emerging technologies like AI can cut automated analysis from months to days, getting a deep understanding of our tail spend is much faster.
It’s also worth noting that some of what appears to be tail spend also can be misclassified managed spend. It may take multiple rounds of analysis and data cleansing to really understand the problem. End the process early and it’s usually the end of the tail that gets missed.
The three pieces of information in the spend cube are key to understanding the “long tail” and identifying the culprit purchasers. From there we may want to go low-tech and communicate directly with the “who” to find out more about the reasons for this inconvenient bucket of unmanaged spend.
“Why can't you just go away?”
This may be the most frustrating and futile question because in most cases the culprits we identified as rogue spenders are not doing so intentionally. Few people go to work every day with the intent to break the rules, most just want to get their job done and will buy the things they need to make that happen. If we were to approach these purchasers and ask them why the bought the items in the way they did we’d hear the typical responses about not knowing how to purchase, not having the right supplier available to them, or having a short term, new or urgent need they can’t wait for sourcing to address. Typically, only a small portion of tail spend is unnecessary and shining a light on that problem often takes care of it quickly.
That’s why the approach to eliminating or reducing tail spend is rarely to make it go away. A better question would be “How can we shift this need into a managed channel?” If we change our thinking from defensive gatekeeper to supportive business partner, we’re more likely to find solutions that meet stakeholders needs AND clean up our spend profile.
“How long do you plan on sticking around?"
Ask the purchaser. Or at least ask the data. Once you have visibility into your tail spend and have allocated it to categories, you can look at patterns. Is this a recurring buy? Is our tail spend concentrated in one category, like MRO? If so, is it different across locations or are there patterns? A good, advanced analytics program with data visualization can help you find these patterns.
Beyond the technical solution, don’t underestimate the value of talking to people. Pick a handful of purchasers and ask them why they buy from these suppliers. What is their need and their longer-term plan for this spend? The right questions can trigger an addition to the sourcing pipeline, or it could open an opportunity for retraining on existing tools. Some procurement teams tend to work in a vacuum, focused on their projects – don’t hesitate to engage in interpersonal conversations, even with more junior purchasers in the field.
“Why do you think you're so special and don't need to be managed like everyone else?
Following up on the idea that we – procurement – may need to shift the spend to encompass our users’ spending needs, not eliminate it, let’s think about this question in a more positive way. What is it about tail spend that makes it “special?” Start by asking your stakeholders, who are the purchasers. In my experience you’ll most often hear the following reasons:
- It was last minute, we couldn’t wait
- This is a new need, our existing suppliers don’t provide it
- I always buy this, but it’s not in the catalog
- The local/online price was better than I could get from our approved suppliers
- The global suppliers we engage with can’t serve my needs
- This is a one-time need so it’s not worth sourcing
If we take a hard look at ourselves, most sourcing organizations were not set up to handle quick turnaround, low dollar or one-time deals. Most don’t try to manage 100% of spend and aren’t staffed to do so, even if they have permission, and many purchasing tools are not user-friendly. The type of spend we are talking about often falls outside our process for years and functions well until we decide to disrupt it. It IS a little special, and we may need to expand our solutions to address it.
Ms. Fong is a Principal in The Hackett Group’s Procurement Executive Advisory program and Program Leader for the Purchase to Pay Advisory Program. She has more than 20 years of experience in both industry and consulting with a focus on procurement, supply chain and organizational effectiveness. Amy helps business leaders to improve source to pay processes, manage complex supply chain partnerships, and mature their organization’s service delivery model. She performs extensive primary research on the source to pay and operations space and has authored numerous publications. Ms. Fong holds an MBA from Vanderbilt University and a BS from Syracuse University.