Don’t Allow Tail Spend Management to Impact Opportunities for Competitive Advantage

Our Hot Topic for the month of June is Tail Spend Management - how organisations can achieve better efficiency and effectiveness, not to mention savings, from the “final 20%” of spend. In part 1 of this article, we looked at what usually happens when organisations address tail spend, through removing it, simplifying or outsourcing it.

Hot Topic

Today we want to get into some of the risks around tail spend management. The potential benefits of looking at it more carefully and trying some diffident approaches are clear. It does not tend to get much attention and therefore opportunities to manage it better, to reduce transaction costs, look for aggregation opportunities and so on are clear. But we need to be careful, consider the risks too, and ensure we don’t rejecting the essential along with the inessential, or "throw the baby out with the tail spend management bathwater," as the saying has it.

The first risk is that there may well be suppliers who are actually critical to the organisation from a risk point of view who might get classified into the tail spend “bucket.” You might imagine a small software firm and a licence that only costs a few thousand a year, but the software is actually a mission-critical part of a customer-facing system and process. (A similar case might be a supplier of a low overall spend but critical raw material in a manufacturing context.)

Telling this firm that you are no longer going to deal with them directly and they have to go through a third party or a prime contractor might not be the right thing to do. They might not be happy – and it might just distance you from the relationship, leading to less of the risk visibility needed to help ensure continuity of supply.

What about innovation and new suppliers? By definition, many new suppliers will start as small suppliers. It may be goods or services that have not been purchased before, so initially only a small quantity is needed. It may be an innovative idea, something outside the normal specification for the goods and services involved, meaning a small trial purchase is sensible. Or a budget holder – or procurement – may want to test out a new supplier with a small order initially.

In any case, the supplier is not immediately going to feature in the “big supplier” list. And yet, this might be a supplier that can provide real competitive advantage in the future. Taking away the opportunity to establish a good relationship with such suppliers, or even stopping the search for new supply sources altogether in the interests of simplification, is clearly not the right way to go about tail spend management.

There is a case therefore that rather than saying the suppliers that provide the smallest value of product go into that tail spend bucket, it would be better to consider it as the suppliers (or spend areas) that are the least important and have limited future potential. Now we acknowledge that definition is a lot harder to flesh out rather than simply printing off the supplier list and drawing a line at a certain point. But in any case, being aware of the risks of inappropriate methodologies for tail spend management is vital.

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First Voice

  1. bitter and twisted:

    At what level/scale do you define tail spend?

    ie. whats the difference between the tail spend for a 100m$ widget company and the tail spend for the 100m$ widget division of the 10b$ company?

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