5 frequently asked questions about managing tail end spend
Not only does it save you money, it improves compliance and reduces risk. Warren Hallworth, from Capita Procurement Solutions, discusses the benefits of tail end management.
What is tail spend management?
Typically an organisation will strategically manage circa 80% of its total third party spend. The remaining 20% can be too fragmented and low value to justify diverting scarce resources to manage it. This ‘tail spend’ is comprised of a large volume of low value transactions not covered by corporate contracts across a wide range of categories and suppliers. While it does not lend itself to category management or strategic procurement approaches it adds up to a significant amount of spend.
Effective tail spend management can provide an incremental stream of savings, driving value from low value spend, as well as providing improved control and compliance. In the last year or so, we’ve seen a huge growth in interest from clients who want to manage their tail spend better.
What’s driving the growth in interest in tail spend management?
There are many benefits to tackling tail end spend – we’ve found that managing your tail spend can achieve cost reductions between 5% and 20% and an increase in process efficiency of over 10%.
But, primarily, the growth in interest tends to be driven by our clients’ desire to increase compliance, both to procurement processes and to the utilisation of existing contracts.
Why are clients interested in improving compliance?
Besides the potential to deliver additional savings, there is a recognition that out of control ‘maverick’ spending leaves our clients open to an increased level of third party risk, which is becoming an increasingly important factor across all sectors.
How does better management of the tail spend reduce third party risk?
In our experience the drive to improve compliance, coupled with better use of spend analytics in the tail spend, will drive down the number of suppliers being utilised, pointing a greater volume of spend to approved suppliers.
This means that our clients have a better understanding of their supply base and have less ‘one time vendor’ activity with lesser known, unmanaged suppliers, enabling clients to make better
and more informed procurement decisions.
What does best practice look like when it comes to tail end?
Spend analytics is really important. It categorises spend at supplier level, which often gives a new view of expenditure, rather than service or directorate based budgets. This means you can identify opportunities for consolidation – both when a single supplier is used by multiple requisitioners and when the same type of goods and services are being bought from different suppliers.
Having all the contract data is paramount to drive compliance and commercial benefits through the contracts in place, also identifying gaps to address to reduce the tail. The use of corporate contracts should maximise your buying power and drive down unit costs. Corporate contracts are a key enabler for a tail solution, the data provides a holistic view of the size of the challenge and subsequent opportunity.
Process and policy are crucial in delivering a successful solution. Without the operational process and policy there is a risk that the tail challenge will arise later down the line.
Overall tail spend management is about having the right systems and processes in place, eg, revised workflows that bring procurement into the approval process, consolidating this activity centrally or putting in place catalogues, corporate contracts and instigating demand management practices.