In the fast-changing world of strategic Procurement, certain categories of spend get all the thunder: IT Procurement gets to help drive a company’s innovation. Business Services Procurement gets to restructure a company’s operations and drive competitiveness. Travel Procurement gets to look at pictures of exotic destinations all day (just kidding). And most large companies are well aware – by now – of the cost savings and strategic advantages of being more strategic about the way you buy things in an organization. For the most part. For most of the stuff a company buys.
But there’s another sort of spend that never gets any love, a sleeping giant that’s actually costing companies millions of dollars and opening them up to risk: Tail Spend.
What is tail spend?
It’s not exactly a “category” of Procurement so much as it is a species of spend. It’s all the money an organization pours into Procurement that doesn’t get captured under contracts and vendor agreements. All the little decentralized expenses that add up – consider the department ordering printer ink with a credit card instead of working through established vendor agreements. It’s the “long tail” of company spend that doesn’t seem so significant until you realize it often adds up to around 20% of a company’s overall spend.
“20% or more of a company’s spend, give or take, happens with vendors who aren’t under contract,” says a Tail Spend expert in Argentus’ network working as a Strategic Sourcing Manager in Financial Services. “That amount of dollars opens up opportunity and risk, depending on what those suppliers are providing the organization.”
Why do companies often let tail spend accumulate, despite being Procurement pros in other areas?
“I think the overall goal of Procurement is that, but there’s always rogue spend. From the CEO right down to the clerk. It just happens organically. Sometimes it happens historically.”
Tail spend is something that cuts across industries. It happens in companies of all sizes: “It happens a lot in your larger organizations that don’t have central Purchasing,” he says. “Where every department can do their own thing. Any organization will have tail spend. Large organizations will have tail spend, and then as you go from medium down to small they typically don’t have centralized purchasing so they’ll have tail spend that isn’t under contract.”
An article from Supply Chain-as-a-service provider SCI identified some more reasons – other than the inevitable – why tail spend is such a persistent thorn in company’s sides:
- Companies often try to tackle the loose ends in a shortsighted way. They try to improve it, then move on, and revert to the same original processes that let costs add up.
- Tail Spend typically has less data associated with it than other categories of money spent.
- There are so many different products and services falling into tail spend that it’s hard to keep track of them all.
- There’s a perception that because it’s “odds and ends” there aren’t significant savings opportunities.
- Leadership isn’t interested in it because it doesn’t seem significant.
- It lacks ownership in most organizations.
However, SDI’s article cites a Proactis whitepaper saying that “a 5% savings on tail spend can be the equivalent of a 10% increase in net profit.”
So the benefits towards tackling tail spend can be huge, and it’s not just in terms of cost savings: “sometimes it’s not just saving a dollar,” our contact says. “It’s reducing company risk. There are whole sorts of risk associated with uncaptured spend. It could be insurance. If you’re dealing with a vendor and there’s no agreement in place, what insurance do they have in place to protect your organization? Without a contract, there’s no reason for them to have enough. Also price volatility. If there’s no contract, they can charge one side of the company one price and the other side another price. It’s also how they handle your confidential information.”
When you put together all these factors, you start to see the immense potential in getting a handle on Tail Spend. But how? “I think you need to have dedicated resources to just deal with tail spend,” he says. “It can’t be part of your Procurement team’s job to deal with it on top of whatever they’re doing. It won’t be looked at on top of normal Procurement. There are definitely wins to be had when you focus on Tail Spend. The more resources you focus, the more value you get.”
So is your company tracking Tail Spend? Maybe it’s time to take another look.