This is the final chapter in our tail spend series and we’ve covered some significant ground to understand what tail spend is, why it happens, and the potential issues with ignoring it or managing it in the wrong way. In this final chapter, we'll explore the ways you can find savings in your tail and how to build a strategic sourcing framework to help you manage it going forward.
To get up to speed, you can read the entire Talking to Your Tail Spend series on our blog:
- Talking to Your Tail Spend: The Prologue
- Talking to Your Tail Spend: Chapter 1 - Why don't you call me by my real name?
- Talking To Your Tail Spend: Chapter 2 - Four Tips to Work with Internal Stakeholders
- Talking to Your Tail Spend: Chapter 3 - The Potential Risks Lurking in Your Tail Spend
How do I mine gold (savings) from dust (tail spend)?
The best results will come when we embrace tail spend as a stakeholder need and find ways to expand our oversight in a way that meets the requirements of the business. You first need to know your tail spend, parse it out and really learn the drivers of each segment. Spend avoidance – cutting out the fat – will drive the most savings, but it’s usually a short-term benefit. Reclassifying spend into existing supplier agreements may not seem impactful at first but can bolster the longer-term negotiating power with those suppliers.
Some P2P tools like p-cards and B2B marketplaces will save in process costs as you streamline supplier onboarding and invoice-to-pay steps. The greatest savings are likely to be found in a tactical sourcing process and B2B marketplaces to capture competitive pricing for spend that was previously unmanaged. Don’t expect these savings to reach strategic sourcing levels, there’s a reason we spend months on those big, complex buys, but it’s still well worth the investment.
By the time you are done, your spend curve from Chapter 1 may begin to look more like the one above. Understand that this transition can take years, and even then, it takes continuous effort to harness maverick spend and adjust to changing business needs. So, settle into conversation with your tail spend, get creative with your channel strategy and see if there are some untapped opportunities in your spend curve.
How can I make you easier to manage and be sure I am getting good pricing from you?
As I mentioned above, once we reclassify what we can do and reduce what we should, the rest of the work is to shift tail spend into channels we can better manage. Many companies have embraced the concept of a “source-to-pay channel strategy” that dictates every step in the process by spend category. Often tail spend occurs because the available steps are not appropriate for stakeholder needs.
For example, if the only supplier selection process is a six-month sourcing exercise, then any urgent needs are likely to bypass that process. If suppliers are expected to go through a lengthy setup process for custom catalogs then smaller, local suppliers may not participate. If requisitioners find purchasing tools too clunky they’ll follow the path of least resistance to get what they need.
With the evolution of technology, a stronger focus on user experience, and new services emerging, there are many options to shift the landscape and capture previously untouched spend. The below chart illustrates a framework to manage tail spend.
I’ll focus here on a few that have emerged most recently into the marketplace:
- Tactical Sourcing: Think of this as a 2nd tier to strategic sourcing but a level up from traditional buyers turning a requisition into a PO. Tactical sourcing focuses on an abbreviated process (sometimes called “three bids and a buy”) to competitively gather pricing from a handful of pre-screened suppliers, often within few days. The use of e-sourcing tools speeds up the process and makes this a good fit for urgent needs. Our research shows about 10% of spend is now going through this type of process, with savings of around 4% for spend that may have otherwise gone untouched. This is an activity commonly outsourced to third-party service providers.
- B2B Online Open Marketplace: This emerging segment has arisen from common B2C sites: Amazon Business being most well-known in the U.S., with eBay and Ali Baba offering commercial tools as well. The idea here is that there are types of spend we don’t want or need to tightly manage, and with transparent information on pricing and value most purchasers will make a good decision. These tools offer some guard rails in terms of requisition approvals and spend reporting but save measurable effort by not onboarding suppliers into the supplier master. A recent analysis by The Hackett Group found the benefits of these tools can garner savings ranging from 4.9% to 5.7% for spend that was not previously sourced. For now, these tools fit best with unmanaged, low value indirect goods spend, but we may see that change in the future.
- User-Focused Analytics and Adaptation: Measuring compliance and following up with a carrot or stick may sound old school, but proactive companies use data to take a more adaptive approach. By using compliance data to identify unmet purchaser needs, procurement organizations can find ways to fill the gaps by adding more items or suppliers to managed channels like catalogs. This bottoms-up approach seems counter intuitive to the original supplier consolidation mission, but in a user-centric, agile enterprise it may be the trick to get our arms around fast-moving innovation.
Ready to take the next step in wrangling tail spend? Download this research report from Basware and The Hackett Group for next steps and actionable recommendations.
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.