Tail spend typically refers to a relatively small proportion of suppliers accounting for a very large proportion of spend. It can be difficult for organisations to understand what tail spend even looks like because it can be spread across a diverse range of suppliers, multiple back office systems, a broad range of spend categories, thousands of interactions and transactions and a high number of staff, across numerous sites etc. Often the suppliers are completely unknown because they are one-off suppliers or are created without planning.
Finance and procurement executives often ignore issues when it comes to tail-spend, such as poor data visibility – if there is not an effective spend control system in place that is covering all of an organisation’s expenditure there will be poor data visibility. This makes understanding what the tail looks like very challenging. Often organisations struggle with simple controls. There may be no formalised supplier approval process in place. Staff may request the creation of a new supplier almost at will, with no option for the procurement team to say there is already a supplier in place that could provide that particular product/service. Whilst items being bought may be legitimate, there may not be a centralised contract, or if there is, individuals at department level are not aware of it and ad-hoc purchases are put through.
Furthermore, for many organisations the tail is not being managed proactively, which means that finance and procurement teams are effectively firefighting by reacting to short term issues, whether that is emergency purchasing or the need to set up new suppliers very quickly. There is not always a great deal of control over the way the suppliers are being engaged and issues around procurement risk are not really being considered. The seemingly low potential savings to be made through controlling tail spend are often not seen as particularly strategic so organisations invest procurement staff in high end suppliers because that is seen as where the bigger opportunity is.
It is clear that tail spend occurs when there is lack of order and compliance on processes, whether that be the supplier creation process, the order approval process etc. All of this leads to a number of issues, including:
- High transaction costs – spending lots of money with different suppliers.
- Large invoice-handling workload – where there are lots of low-cost transactions and the cost of processing those transactions is disproportionately high. The accounts payable function is therefore less efficient than what it could be as there is not an official supplier process in place.
- Exposure to risk – without understanding the tail, organisations cannot have a strong understanding of where money is being spent and what the risk is within the organisation.
- A wasted opportunity - if the tail is not effectively monitored and controlled it is not clear where there are savings to be made.
If any of these issues are effecting your organisation, then it is time to tackle tail spend by building best-in-class processes. According to our spend control partner PROACTIS, “for a typical organisation 5% savings on tail-spend can be equivalent of a 10% increase in net profit.” The PROACTIS Spend Control solutions can provide new levels of interaction and collaboration, information access, process efficiencies, enforced compliance and built-in risk evaluation and assessment.
For further information, call us on +44 (0)203 866 8800 or download the tail spend whitepaper: