What Amazon Business Has Learned About Managing Tail Spend

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“Amazon, like any other organization, is not immune to the challenges you all are having with tail spend.”

That was Jeff Oar, head of customer success, enterprise, at Amazon Business, speaking on a recent webinar held by Spend Matters (and co-hosted by our own Pierre Mitchell).

If one of the 800-pound gorillas has a tail spend problem — and we say that as politely as possible, given the fact that Spend Matters and Amazon Business joined forces on the indirect spend research study underpinning this report and the webinar — chances are, your organization is, too.

What Exactly is the Problem?

The biggest problem 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, according to the report.

That, in a nutshell, creates the “tail” of tail spend.

See the tail spend histogram and how to calculate your own by downloading the free report.

And since time is money, “the biggest cost in procurement is the opportunity cost of [practitioners] not spending their time strategically on the efforts that will deliver more value to the business,” said Pierre Mitchell on the webinar.

Is the Tail Spend Problem Still a Thing?

Based on our survey of 100 procurement practitioners and quick-polling of attendees on the related webinar, it sure is.

According to the report, of the 100 practitioners surveyed, tail spend improvement (35% of respondents) was the top priority heading into 2018, with healthy doses of contract management (35%) and reducing supplier/supply risk and non-compliance (34%).

Indeed, that top priority was reflected in the sentiments of webinar attendees, as well:

A bit of sample bias aside — attendees had come to a tail spend webinar, after all — it’s clear that tail spend is a concern for a lot of practitioners.

Interestingly, both research study respondents and webinar attendees had similar priorities when it came to the opportunity areas that would be most meaningful to the ROI of their procurement department, as well:

Survey respondents also indicated overall process efficiency and cycle time (35%) and user adoption and satisfaction (35%) as their top two areas of opportunity.

All of that is to say that procurement practitioners are looking for new ways to streamline their processes — and are hoping that new, easier-to-use technology tools may hold some clues to solving their pain.

Main Study Findings

For “all the gory details,” as Pierre likes to say, of the research study, be sure to grab the free report or listen to the free webinar — but here were the main takeaways:

  • The average procurement full-time equivalent (FTE) manages more than $50 million in indirect spend, 300 suppliers (with over 85% in the tail) and more than 2,500 purchase orders per year.
  • Only less than 25% of purchases were “no touch.”
  • The average procurement professional spends 58% of time on non-strategic work (i.e., poor ROI).
  • “Mid tail,” one-off spot buys that go unmanaged are a roughly a 1% spend savings opportunity, while off-contract “maverick” spending is estimated at roughly a 1.2% spend savings opportunity.
  • Nearly 60% of respondents cited a lack of penalties or enforcement for non-compliance.

Ultimately, an integrated — and above all, easy-to-use B2C-like — experience is seemingly what practitioners are looking for to make their jobs easier.

What Amazon Has Learned

Shortly after arriving at Amazon Business in 2014 (at that time, it was Amazon Supply), Jeff Oar began amassing a good amount of experience with vertically focused teams, including private and public sectors, from across geographies.

That helped him get a holistic picture of the issues customers were having, and what they wanted to see in a technology offering.

When working with his earlier customers, it was not a surprise to hear that Amazon “was a little bit of a dirty word on procurement teams,” he said on the webinar. “The biggest issues they were having were lack of transparency into spend, concerns around contract leakage or supplier fragmentation and productivity loss, and there weren’t any comprehensive analytics [especially] within public sector.”

“And then customers were seeing amazon.com or Amazon Marketplace all over their p-card statements, but they had no idea what those purchases were,” he continued. “Without that visibility, organizations were missing opportunities to identify the mid-tail where they could be strategically negotiating to drive down costs.”

Oar painted an example of one Amazon client, a higher-education institution on the East Coast, at which the engineering and applied sciences school had a project where seniors had a number of miscellaneous purchasing needs.

“This was very far from strategic purchasing for the college,” he said.

Once the department started funneling its purchases through Amazon Business and began following the analytics, procurement began to see patterns in purchasing that helped the team realize what it could start including in its negotiated relationships, given the purchase volume.

That’s an example of mid-tail spend that could be a source of savings for procurement. At that point, Amazon knew it needed to get specific about its offering to these various businesses and institutions in various sectors, according to Oar.

He then turned the microscope on himself.

“We’re a company of over 350,000 employees and we certainly leverage an ERP and e-procurement system [internally],” Oar said. “But when I go to try to purchase something for the office or my team, it’s frankly not an intuitive process. I’m jumping in and out of various supplier catalogs, and it’s not as easy to find what I need.”

If we can integrate an Amazon-like experience with existing ERPs and e-procurement systems, he concluded, we can drive better adoption and derive more value from those tools.

How Am I Currently Managing My Tail Spend? How Can I Do It Better?  

To fully understand the root causes and root solutions to these problems in-depth:

 

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