Today’s guest post, which is part one of a two-part series, is from Gonzague de Thieulloy, a Managing Director at Xchanging Procurement who manages tail-end spend management programs at Xchanging’s largest European customers.
Tail-end spend management is finally becoming a procurement priority, and for good reason. Historically, procurement organizations have been focused on trying to manage their strategic spend, the 80% of spend that represents around 20% of their suppliers. While companies have been striving to manage those strategic suppliers, they’ve left the myriad of smaller suppliers — the ‘tail-end’ of the spend — unmanaged. But that is starting to change.
Until recently, you would have been hard pressed to find any company managing their full strategic spend properly. Ten years ago, most organizations were only confidently managing 40-60% of that spend, at best. Now, due to procurement’s increased visibility and greater strategic role, many companies are managing their entire strategic spend effectively — the full 80%. This has left more than a few companies wondering what they can do with the remaining 20%, not least because of the financial benefits. Everest Group suggests that inclusion of tail-end spend increases procurement outsourcing savings potential by 1.5 times. But this is just one reason to manage tail-end spend.
Complexities of Tail-End Spend
However companies are discovering that they can’t use the same procurement methodologies for tail-end spend as they have for their strategic spend. For one thing, tail-end spend is far more complex than strategic spend: there are many more suppliers, the spend is very fragmented, and there are a lot more individuals buying. Tail-end spend “buyers” are end-users: people in HR, marketing, finance, IT, and so on — ordering goods and services as needed. They are not professional buyers, in the traditional procurement sense, which means trying to manage this spend requires change management — an added layer of process. As long as the total cost is less than the agreed threshold for tail-end spend, then these “buyers” can place orders with whomever and however they want.
Tail-End Spend Risks
Not only is the 20% tail-end spend complex, it can also be very risky, which is another reason organizations are now starting to pay attention to it. With the 80% spend, companies typically have an experienced buyer managing key suppliers and auditing those suppliers on a number of different aspects. The company that is on the ball knows everything there is to know about their strategic suppliers: whom they work with, their values, their practices, their working conditions, who their suppliers are, etc. With unmanaged tail-end spend, nobody is looking after these suppliers. Companies have no idea who they are buying from, making them susceptible to a number of risks.
One such risk is the potential damage to a company’s reputation. With all of the corporate sustainability issues now in the spotlight, unmanaged spend means companies may be doing business with suppliers that violate their own CSR principles. Imagine the harm it would do to your brand if it were discovered that one of your suppliers was using child labor or heavily polluting the environment. The damage could be irreparable. Beyond brand damage, you would also be responsible for supporting companies carrying out these practices. The reputational impact alone could put your company into a tail-spin.
Another type of risk that is common of unmanaged tail-end spend is a best practice risk. When companies let people from across the business buy from whomever they want, there is a chance that they will just buy from a personal connection, or from a supplier with whom they have a historic relationship. This often results in individuals overpaying for what they are buying which is, of course, financially damaging to the company. But more seriously, they may be in breach of fair practice regulations, putting the company at risk of being sued.
Companies that fail to address this complexity and risk are leaving a lot more on the table than they think. In tomorrow’s post, we will discuss the tail-end spend solution.
More information on Tail-End Spend Management can be found on Xchanging’s Tail-End Spend Management page.