When it comes to procurement, businesses typically focus on the more strategic aspects of cost reduction such as strategic sourcing and contract negotiations. Whilst these areas of procurement certainly offer attractive savings, focussing solely on these activities can cause businesses to lose sight over seemingly less-significant, indirect costs. Tail spend – often referred to as maverick expenditure – refers to the cumulative spend of smaller, one-off and often lower value purchases. General estimations indicate that most organisational tail spend accounts for 80% of all transactions, but only 20% of total spend volume.
Whilst such transactions may seem insignificant on their own, these purchases are often made outside of contracts and as a result can falloff the radar of spend management, over a period of time this accumulates into tail spend. The main issue with tail spend is the lack of traceability, making it difficult for organisations to identify where valuable money is being lost and how to reduce the spend. Additionally, undocumented spend can also leave businesses exposed to risk of none-compliance
Putting a tail spend management procedure in place, is relatively simple. However, identifying and analysing tail spend itself can prove to be a difficult and time-consuming task – often requiring businesses to track thousands of purchases, a vast range of product categories and an extensive supplier base. Because of this many businesses fail to reap the benefits of a tail spend strategy, choosing to ignore tail spend altogether.
Traditional methods of managing tail spend include using catalogs and purchasing cards. Procurement catalogs are typically created by purchasing managers or key stakeholders and limit the supplies that employees can order. Alternatively, purchasing cards automatically track who is buying what and how often – which can allow procurement teams to identify areas where smaller supplies could be procured more strategically in bulk.
Nonetheless, both methods can be restrictive – typically limiting employees to a single supplier or a restricted number of supplies that may not fulfil purchasing needs.
Of course, there are now technological innovations which have dramatically improved the process of tracking and analysing tail spend data.One main reason that tail spend has previously been difficult to track is the use of PDF invoices stored across different platforms and databases across the company, making it difficult to retrieve and compile all data for a single supplier. Further to this, a supplier may not always use the same name to list their invoices, for example, substituting their legal business name for their trading name, or using an acronym version of their name – making a manual spend management process even more difficult and prone to human error. Now, data crawling tools can be used to automatically scrape various organisational databases and platforms, using wide search terms that include all possible versions of a supplier name, to retrieve all supplier data.
A variety of tail spend software is now also able to automate many of the activities involved within the purchase request (PR) to purchase order(PO) process. This includes the use of robotic process automation (RBA) to automatically consolidate vendor data and select the most appropriate supplier(s), as well as digital governance software to track employee spend and notify key stakeholders when corporate procurement procedures are not being followed.
Because many businesses opt to ignore their tail spend, implementing a tail spend strategy can bring several benefits to organisations, including further savings and competitive advantage. Further benefits include:
Increased purchase efficiency: tracking tail spend can help procurement managers to identify areas of repeat spend across different departments within an organisation on like-for-like purchases – such as office supplies. This can then allow managers to consolidate the supplier base for procuring such products in bulk for the entire organisation. Alongside cost reduction benefits, this also increases purchasing efficiency, freeing up more employee time for productive work rather than searching for supplies.
Reduced Supplier Risk: Through consolidating the supplier base, procurement managers can make strategic decisions about which suppliers to negotiate contracts with, evaluating previous performance and reliability. This also limits one-off purchases with unvetted suppliers, allowing organisations to minimise the risk of interactions with fraudulent operators.
Enhanced Organisational Satisfaction: Introducing a tail spend strategy creates a systematic way for employees and stakeholders to procure new supplies, improving employee efficiency and overall organisational satisfaction with the ease of supplier procurement.
Previously a grey area, tail spend is increasingly becoming a recognised source of additional cost savings for many organisations, aided by the use of specific tail spend software. Nonetheless, implementing an effective tail spend strategy can be challenging, even for experienced finance teams, ensuring that time and resources invested don’t outweigh the potential savings of effective tail spend management. As such, it’s important for businesses to recognise when help should be outsourced.
At Athena Commercial, our Arrowhead software offers SMEs the ability to gain transparency over their entire company spend through a simple and user-friendly interface. Alongside our software, our experience procurement officers can guide your team through the entire tail spend strategy formation process, helping you to identify the best software solutions as well as implementing them into your business.
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