Our Hot Topic for June: Tail-Spend Management

Hot Topic

Our Hot Topic for June is Tail Spend Management, sometimes referred to as Tail-end Spend, but we prefer just "tail". (The "tail-end" as far as I am concerned is the cut of Cod that my parents ask for when they go to the fish and chip shop ...)

Anyway, Tail Spend is the "last" 20% or so of an organisation's total third-party spend, with "last" in this context usually meaning the spend coming from the smallest suppliers. So in spend profiles, we usually see that the 'pareto' rule or even a more extreme concentration of business applies - the largest 20% of suppliers often account for well over the 80% of spend pareto would suggest. It can often be 90% or even more, which obviously means you might have the smallest 80% of your suppliers (by value)  accounting for well under 20% of spend.

In the past couple of years, there has been a strong trend for solution providers (consulting, outsourcing and software firms) to offer products and services aimed at helping organisations to manage this tail spend more efficiently and effectively. It's been interesting to observe this trend; Chirag Shah, the CEO of Xchanging Procurement Services, has made it a key element of their strategy, whilst we've seen GEP, Accenture, Capita, and many others promoting what they can do in this area.

At the ProcureCon Marketing event this week, Arvato had a stand. I don't tend to think of them as a procurement consulting option (rather than a more general BPO provider ) but I picked up a leaflet on their stand and the first thing I saw was "we can help you with your procurement tail spend".

Why have we seen this growth in focus, from the market side certainly? If we were being cynical (heaven forbid) we might suggest that perhaps consulting offerings around category management have passed their peak now; all the big buyers have been through at least one cycle. And large-scale, big-bang procurement outsourcing has also somewhat stalled in favour of more nuanced offerings. So it may be that the providers see tail-spend filling a gap in their sales pipelines.

But to be more positive, it is undoubtedly true that many organisations struggle to really get to grips with the tail. Inevitably, the most skilled procurement resource tends to go on the big contracts, suppliers, and categories. Finding enough internal time and resource to handle the smaller stuff if difficult; hence why most procurement policies, even where governance is strong, allow low-value buying to happen without procurement involvement. It is just not a good use of time or money for procurement to spend time on these purchases.

However, even without procurement functional involvement, these processes still have a significant transaction cost. Whether the process is formal and well organised (catalogues linked to ERP, purchasing cards or whatever), or more random, the cost of each transaction is significant compared to the value of what is being bought. There may also be lost value opportunities; a lot of small transactions might potentially be aggregated into a spend that would be worth sourcing more professionally. But this is difficult to achieve; even getting good information about the elements of the tail spend can be a challenge. And the tail might even include fraud or corruption going on beneath the radar of visibility and focus.

Anyway, through this month, we hope to have some guest posts from people with strong views and ideas on the subject (please contact us if you would like to write something). And we will be back with more of our own thoughts, including some notes of caution in terms of handling tail spend. Like most things in procurement, the arguments are more complex than you might first think!

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