Two unexpected truths about tail-end spend are emerging as companies look for ways to relieve margin pressures. Achieving transparency and efficiency in tail-end spend is easier and requires fewer resources than generally believed—and the returns are much higher if the right model is deployed.
Tail-end spend has become a significant source of savings for companies thinking outside the box of traditional procurement. The “tail” constitutes around 20% of overall spend, but in most instances, the huge number of suppliers in this procurement bucket forms the single largest spend pool. Opportunities to relieve margin pressure and simplify operations abound here, but not many companies have taken steps to maximize tail-end spend management, believing that returns are minimal for the resources required.
Rethinking that perception can yield rich rewards. As Everest notes in a recent study1, tail-end spend management can help organizations optimize leftover spend, driving 50% savings over and above the 5–10% achieved by traditional spend management. Underestimating the potential gains from better tail-end management and overestimating the effort involved can cost companies up to 10-15% per year in unrealized savings on the bottom 20% of the spend. This translates into an incremental 2–4% hard savings on the overall addressable spend base.
Tail spend can be split into two parts: the unmanaged spend that comprises 10–20% of the spend base, with a potential of saving 2-5%, and the last 5–10% of spend that contributes to up to 75% of the transaction density. Therefore, the strategies for managing both buckets are distinct. The former is more savings- and compliance-driven, while the latter banks on efficiency and eliminating millions of transactions that lead to higher cost per transaction and low first-pass yield of the process.
Traditional management methods are costing businesses money
Conventional strategies for managing tail-end spend such as procurement cards, catalogs, supplier consolidation, and spot buying do not provide a clear picture of vendor complexity, goods acquired, or where the money actually went. Much of the problem is attributed to firms not being able to get a good handle on the “real tail". Procurement professionals tend to look at the tail through one of the following prisms:
- Viewing certain categories (non-core) as tail, such as a financial services firm that considers facilities management a tail-end category
- Considering transactions below a certain threshold as tail transactions
- Regarding suppliers below a certain annual spend limit as tail-end suppliers
As shown in the graphic on the next page, the reality is that the true tail is a combination of all three. For example, in facilities management, certain suppliers below an annual spend of $500k are considered tail-end suppliers. However, within this set are suppliers whose average purchase ticket size is less than $50k. These fall into the realm of instant consolidation.
Working on disparate platforms tends to hide the level of supplier fragmentation, which leads to duplicate contracts and suppliers. This results in issues with supplier normalization and spend visibility, with many smaller vendors going unmanaged. Non-compliance with policies is a leading cause of over-spend in the tail; firms can realize 4–5% annual savings through demand management and curtailing ad hoc purchases as well as improved compliance.
Getting more with less
Achieving comprehensive tail-end spend management is much easier than most companies believe. The best way to begin is with a close assessment of available resources, since many companies mistakenly believe the ROI to be attained is too low and the resources required too high. Available resources could encompass:
- Site procurement
- Corporate procurement
- Shared services
- Centers of Excellence (CoEs) and/or third parties
- Onshore, offshore, and hybrid service delivery models
A good way to decide on partner support is to gauge the situation from the perspective of in-house technology maturity and the availability of necessary bandwidth and category experience to manage the tail in-house. Service providers demonstrate a great deal of flexibility in adapting to changing client situations.
Third-party expertise can be especially helpful for the tail when the partner brings extensive local buying knowledge, staffing resources, and technologies that enhance the entire process. Newer engagement models benefit the tail using category aggregators and transactional consolidation through specialized tail-end Procure to Pay (P2P) platforms. These platforms manage tail-end vendors from master data setups through procurement to settlement of payments. The right mix of these models can significantly improve ROI on the tail spend.
Industrialized processes produce higher savings
The goal of any operating model should be to support more effective processes. The massive tail-end vendor base means that 80–90% of procurement transactions occur here; standardization/consolidation in this space tends to ripple across the entire Procurement organization. Tail-end spend lends itself well to industrialized processes that eliminate the silos where savings leakage occur. Standard, automated workflows and rule-based controls speed processing and enforce compliance with global policies. Enhanced data collection and spend analysis pave the way for moving tail-end spend to larger, managed contracts or even eliminating it altogether.
Transparency is key. Processes that enable clear, end-to-end visibility into spend from industry to category down to the line-item level help Procurement identify inactive and duplicate supplier accounts, parent-child linkages, and other savings opportunities.
For example, a global energy major leveraged price and demand levers in the tail end to improve preferred vendor spend by 8–10%, reducing savings leakage by nearly $7 million. Tail-end spend analytics and vendor consolidation across multiple categories in the tail were the key levers.
Activity in the tail end cuts across all categories but offers especially significant opportunities in non-strategic and service categories. Focusing on a few categories to start helps refine the process and builds confidence in the operating model.
Put technology to work
Better processes need better supporting technologies such as:
- E-Procurement tools to reduce unnecessary spending and force spend toward preferred suppliers
- Bolt-on vendor on-boarding workflows to prevent proliferation of small, one-time vendors and built-in duplication checks to prevent buyers from setting up vendors without approval
- Consolidating low-value transactions on standard non-ERP-based platforms of record to help drive better master data quality and control of the growing tail
- Business Process as a Service (BPaaS) delivery models for technologies that are globally accessible and quick to implement and provide a unified platform that monitors and enforces compliance across the organization
Better delivery models deliver benefits too significant to ignore
A global approach to tail-end spend management using industrialized processes and strong controls offers proven benefits in savings, improved compliance, a more rational supply base, and enhanced reporting quality regarding spend and risk factors. Leveraging external partners might be necessary to acquire the necessary assets, but the cost is offset by the additional savings gleaned from the provider’s category expertise, scale, and off-the-shelf technologies. Outcome-based commercial models from specialist providers in this space offer ROI ranges of 4–5 times the investment, with faster payback. For companies with approximately $1 billion in spend, 10% saved in the tail end adds up to $20–25 million—per year. In this era when every cent counts, such returns are worth the cost of implementation.
For more information, contact, firstname.lastname@example.org and visit, genpact.com/what-we-do/business-services/indirect-source-to-pay
- Betting on Tail Spend to Save Coin, Saurabh Gupta, Vishnu Khandelwal, Abhishek Menon, Everest, March 2014