SCDigest magazine has highlighted the crucial importance of effective tail spend management and category management in any effort to achieve satisfactory organisational cost reduction.
Tail spend is usually defined as spending on relatively large volumes of lower cost procurement transactions over a range of categories like office supplies, maintenance and repair operations and professional services. While spending on these products is essential, it is also the main source of what the US Institute of Supply Management (IMS) calls “rogue spend.”
The IMS defines rogue spend as the “process of an employee buying a needed product or service without complying with the organization’s normal or prescribed process; off-contract buying.”
Because most of these transactions are small, they are generally not subject to strategic sourcing. Most are bought outside procurement procedures and outside contracts.
In 2016, a study by The Hackett Group found that a sizeable 29% of indirect spend was off-contract. When this rogue spend is high, poor company practises like inadequate spend visibility, and even outright violations of procurement policy often lay behind it.
The ISM found that it was by no means rare to find rogue spend levels hitting 80% of the total expenses of some organisations. Suddenly, meticulous tail spend management and tighter category management begin to look much more important.
Meanwhile, the Hackett study found that 10% of rogue tail spend was commonplace among ‘non-mature procurement organisations’, while 5% was typical of ‘world-class organisations.’ However, although tail spend typically accounts for no more than a fifth of a company’s total spend, shaving just 5% off that amount can result in appreciable cost reductions.
Tail spend management can be time-consuming and probably something that procurement professionals don’t need to do that often – once every six months should suffice. But the data has to be mined thoroughly when it is being done. As SC Digest points out, this process tends to be much easier for companies that have harnessed technological solutions for tail spend management, which even smaller firms can access via the right procurement consultancy.
Ed founded Odesma in 2014 with the explicit intent of creating a new kind of procurement consultancy founded entirely on cloud principles. Deploying best-of-breed subject matter experts alongside the best on demand technology to deliver rapid and effective change for customers.