Assessing the True Cost of Tail Spend, Part 1
Gain control over tail spend so it doesn’t “wag the dog” when it comes to your company’s profitability.
The internet and globalization have made today’s business environment more competitive than ever before. Increasing an organization’s revenues is not enough to achieve and maintain profitability; now every function within that organization must also account for every dollar spent. That can become a challenge for Procurement when it comes to indirect spend and an even bigger challenge when it comes to tail spend.
Direct spend (those items and services necessary to produce the company’s core product) is usually well managed, with procurement controls and protocols in place.
However, when it comes to indirect spend (those items and services unrelated to the core product but necessary to run the day-to-day business), processes and protocols may be minimal or simply ignored…if they exist at all. If you don’t think this is something to be concerned about, here’s a disturbing statistic. According to Deloitte’s CPO Survey 2018, overall transparency within the supply chain is poor, “with 65 percent of procurement leaders having limited or no visibility beyond their Tier 1 suppliers.”
This can cost a business more than you might imagine since, according to a ProcureCon 2015 benchmarking study, over 40% of U.S. businesses spend over 40% of their total procurement on indirect goods and services, including office and cleaning supplies, uniforms, IT services, furniture and more. For larger companies with multiple locations, decentralized purchasing and a lack of oversight can lead to overspending, duplicate or unnecessary purchases, and non-compliance. And these problems are exacerbated when it comes to tail spend.
How does tail spend differ from indirect spend?
Tail spend is a subset of indirect spend. As noted above, indirect spend covers all goods and services not necessary for the production of core products sold to end customers. Although oversight may not be as disciplined as it should be, the organization may still have a list of preferred vendors and contracts that employees are expected to use for indirect products.
Tail spend (also known as maverick spend, rogue spend, and dark purchasing) occurs when an employee, perhaps with the best of intentions, goes outside the normal process of procurement to acquire needed items and services. Often this takes place on an as-needed basis with no policies in place to direct the purchases. Adding to the problem is that the buying function for these kinds of purchases is often dispersed within the organization. Among those who now have the responsibility for purchasing: senior department heads, operation staff, accounts payable staff, and finance.
So in a time where businesses are required to manage and account for every dollar spent, tail spend is virtually unmanaged. Besides the problems I listed above (duplicate purchases, overspending, etc.) an even bigger penalty of unmanaged tail spend is that, by being “off the grid,” there is a total lack of visibility into these purchases which makes planning and forecasting difficult and likely inaccurate and can make early payment discount capture literally disappear.
Identify the scope of your tail spend problem.
If you don’t have visibility into the purchase process, how do you know you have a problem? One of the quickest ways to measure your problem is by looking at your vendor list and understanding the “80-20 rule.” This rule asserts that while 80 percent of a company’s spend comes from 20 percent of its suppliers, the logical and realistic conclusion is that 20 percent of its spend comes from 80 percent of the suppliers.
Spend Matters, in its study, “Fix the Tail to Propel Procurement: Attacking the Tail Spend Problem in B2B,” identifies this as a much larger issue. The study found that 35 percent of respondents identified managing tail spend as a major priority, noting “The biggest problem based on total economic value is that, on average, procurement professionals spend the majority of their time on the 80%-90% of the suppliers that represent less than 5%-10% of spend and business value.
Regardless of whether it’s 80/20 or 90/10, however, the fact is that tail spend takes up far more time and resources than it should. But there are ways to measure how much of a problem this presents.
In Part Two, Reggie Peterson takes a closer look at one of the more common problems behind tail spend — vendor oversaturation. You’ll also learn some strategies you can use to bring the tail-spend-wagging dog to heel.