Look after the pennies: 7 reasons to optimise tail spend

Tail spend management has climbed to the top of the Procurement agenda in recent years. That’s hardly surprising, because a (too) large number of small purchases scattered across a (too) large number of suppliers drives costs up sharply, for example for maintaining contracts, but also for the administrative processes around ordering and invoicing. Procurement professionals increasingly realise that they’re missing opportunities to achieve substantial savings and to deploy the procurement department on (strategic) activities that genuinely contribute to the organisation’s bottom line. In this blog, Menno Steur, Director Solutions at Spendlinq, explains what improvements optimising tail spend can bring to your organisation, your people, your procurement processes and the data you steer by.

Why tail spend management is necessary

“Although it has long been an overlooked discipline, tail spend is an important part of procurement policy,” says Menno. “Tail spend covers the cost of purchased products and services that aren’t directly tied to the organisation’s primary activities, such as office supplies, IT services and travel & accommodation expenses. Although this spend often looks small, it accounts for a considerable share of procurement costs. According to the Pareto principle – the 80/20 rule – strategic suppliers make up just 20% of the supplier base but represent 80% of procurement spend. Logically, tail spend with non-strategic suppliers – also known as C-spend – represents only 20% of total procurement spend yet covers as much as 80% of an organisation’s suppliers. This relatively small share of procurement spend with C suppliers has a big impact on the Procurement and Accounts Payable departments. There is often a lack of proper insight into the nature and size of this spend, especially because it involves low-value, low-risk purchases. In many cases, the services and products are bought from suppliers without a contract, often under varying and frequently non-negotiated terms. Over a year, this adds up to a large number of transactions that are either too small to go through the (strategic) procurement department, or involve C items that aren’t in framework contract catalogues. Of course, the importance and impact of tail spend will differ for every organisation. But it should be clear that good tail spend management is indispensable for procurement organisations that want more control over spend and processes, a more efficient supplier base, lower direct and indirect procurement costs, and better analysis and reporting. What’s more, centralising procurement can lead to standardisation of products and services, improving efficiency and quality.”

7 reasons to optimise tail spend (management)

More and more procurement professionals are discovering the opportunities that tail spend management can offer with the right mix of people, processes and systems – from insight and control to direct savings. Read on to find out what improvements optimising tail spend management can bring to your organisation, your people, your procurement processes and the data you steer by:

1. Achieve cost savings
   Tail spend can account for a considerable percentage of an organisation’s total procurement spend. Procurement is responsible for streamlining procurement processes and achieving cost savings. By tackling tail spend, it can identify opportunities for consolidation, negotiate better prices and contract terms, and implement cost-saving solutions.
2. Streamline processes
   Tail spend is typically scattered across the organisation and happens ad hoc. This brings inefficiency and more (unnecessary) administrative costs. With a better grip on tail spend, processes become simpler, administrative overhead costs fall and procurement activities become more effective.
3. Reduce risk and increase compliance
   Organisations can run into compliance and risk issues as a result of small spend. Procurement is responsible for identifying and avoiding procurement risks, as well as for monitoring compliance with internal and external policies and regulations. Tail spend management helps Procurement enforce these rules, reduce the risk of unauthorised spend or non-compliance, and improve compliance and risk management.
4. Improve supplier relationships
   Procurement plays a central role in developing and managing strategic supplier relationships. Tail spend often involves a large number of C-suppliers, which leads to fragmented relationships and little negotiating power. By focusing more actively on tail spend, CPOs can consolidate suppliers, negotiate better terms and build deeper relationships with the most important strategic suppliers. This increases the organisation’s buying power and makes it possible to agree smarter deals with suppliers.
5. Data as the foundation for decision-making
   To make well-informed procurement decisions, Procurement relies on data and analysis. Small purchases generate a considerable amount of transaction data, despite their low individual value. Procurement professionals can capture and analyse this data by tackling tail spend, gaining insight into spend trends (‘spend visibility’), uncovering efficiency opportunities and enabling data-driven decision-making across the whole procurement function.
6. ‘Operational excellence’
   Procurement professionals strive for ‘operational excellence’ in their field. By managing tail spend efficiently, they can streamline the procurement process from start to finish, link resources to strategic projects and build a culture of efficiency within the company. This improves overall procurement performance and supports the organisation’s broader operational goals.
7. Greater ease of use and happier employees
   A completely different perspective: in practice, employees still often pay for tail spend purchases out of their own pocket and then claim the costs back. However, a growing number of employees (more than 30%, according to research) say they don’t want to pay costs themselves and then wait for their money. Good management of tail spend therefore also means greater ease of use and happier employees.

Menno concludes: “You may recognise the challenges we’ve outlined and want to know which concrete steps you can take to optimise tail spend management in your own organisation. Of course, the importance and impact of tail spend will differ for every organisation. We can help you with every step in digitalising your tail spend processes, analysing all aspects along the way. For this we offer a Quick Scan, in which we analyse your situation in a short period and can give you concrete advice. Not only on the use of technology, such as P2P solutions, expense management solutions or p-cards – ‘smart’ physical or virtual payment cards that let you set the purpose and limit for each user, apply tailored approval flows and track transactions. We look at the whole picture of people, processes, data and technology to make sure you take the right steps in the digital transformation towards better grip, control and insight into your (tail) spend.”