Procurement professionals are responsible for managing spend across an organization. Most of their efforts are focused on the top 20% of their supplier relationships as this typically accounts for about 80% of their company's spend. But what about the rest of it? A lot of Sourcing Heroes tend to disregard this seemingly invaluable amount of spend even though those transactions take place with the majority of their suppliers.
We believe there is an opportunity to capitalize on the untapped value that is held in this forgotten category commonly referred to as tail spend.
In this article, we'll cover the following:
Tail spend typically refers to the many high-volume, low-value transactions that take place in an organization that are typically unmanaged by procurement.
In most companies, nobody actively manages tail spend at all. The procurement team may set up processes, policies, or systems for buyers to follow, known as a “set and forget” approach.
“Buyers” in this respect means anybody in the organization who makes a low-value purchase using company money. This may be, for examples, someone in marketing ordering pizzas for a team lunch, an accountant ordering a new mousepad, or an HR professional arranging accommodation for a business trip.
Low-value purchases like these often take place on third-party websites, or via email and phone, which means they are unclassified and “invisible” to the procurement team. Tail spend includes purchases that are one-off or don’t happen enough to be included in an online catalog.
The Pareto Principle or 80/20 rule provides a useful guide for understanding tail spend.
Most organizations establish spend thresholds to determine which purchases are actively managed by the procurement team. These vary depending on company size. For example, a small to medium-sized business might have a spend threshold of $10,000, while very large companies may have a threshold of $1 million or more. Thresholds may be lowered in times of financial stress (such as the COVID-19 crisis) to reduce unmanaged spend.
Sub-threshold purchases take place without the involvement of procurement. Maverick spend occurs when somebody in the business makes a purchase over the threshold without involving procurement, or otherwise do not follow policies or rules.
The problem with segmenting spend by cost is that even low-cost purchases can carry risk or societal impacts. For example, choosing a very low-cost caterer could potentially lead to a sub-standard meal being served at a corporate event (risking reputational damage) or even risk food safety breaches.
Tail spend can occur in any category but is particularly common in office products, print, packaging, business travel, business services, professional services, marketing, facilities, and temporary staffing. Being uncategorized, these transactions are not included in cost-savings initiatives such as bulk purchasing agreements arranged through a Group Purchasing Organization (GPO).
In general, tail spend is:
If you had asked this question 15 to 20 years ago, the answer would have been no, because procurement simply couldn’t hope to track such a high volume of transactions manually. But with so many procurement technology solutions on the market place, it is now possible to achieve granular visibility of every transaction that takes place in real time. Artificial Intelligence and Machine Learning are rapidly getting better at categorizing spend, which enables advanced analytics and subsequent benefits including:
