Across the country and the world, businesses suffer a significant tail-spend problem – in particular, the public sector spends over £1 billion every year on tail-spend. This is an overlooked area of spending that companies can cut down, but so many instead waste money on unnecessary and uncatalogued purchases. Procurement and sourcing departments typically bear the brunt of this inefficient spending; managing this will go a long way towards helping your entire operation thrive. In this article, we will define the tail-spend problem and its symptoms, alongside solutions that assist companies in navigating their tail purchases along the source-to-pay cycle.
Stewart Foxall, ELCOM’s CCO notes “Tail-Spend typically accounts for a relatively small percentage of an organisation’s overall spend, but a disproportionately large proportion of its total transactions and supplier base. These factors make Tail-Spend complex and time consuming for Procurement departments to manage. Digitalisation and automation of procurement processes have now matured, optimising the management of this area of expenditure. ELCOM’s EVOLVE Spend Management Solution is leading the market, with solutions to tackle Tail-Spend at every stage in the Source to Pay lifecycle. Such as MultiQuote for running fast turnaround sourcing exercises, unlocking cash-releasing savings. EVOLVE Catalogue to deliver organisations a standardised catalogue and limit rogue buying. EVOLVE P2P to ensure control and governance through requisition, order, receipt, and invoice. ELCOM stands ready to support organisations on the automation and digitalisation of their procurement function.”
1. What is the Tail-Spend Problem?
Tail-spend is often tricky to define because it is such a mutable term – the precise number might differ but, generally, this refers to the 80% of transactions that form only 20% of an organisation’s spend. These are small purchases that often do not pass procurement departments and do not end up on the company’s catalogue system; the business doesn’t manage these transactions, which can become an issue if you are not careful.
Tail-spend transactions can spread across the whole company – this may comprise print costs, signs, uniforms, marketing, and more. This can include a few maverick spends that are relatively high-cost but could provide little value and bloat business spending while avoiding the proper procurement channels. These may not necessarily spell disaster for an enterprise, but the mere presence of these near-invisible transactions can do a lot of harm – with this in mind, you should be able to recognise the signs of tail-spend issues.
2. Signs You Have a Tail-Spend Problem
If you have a problem with your tail-spend, this should become evident in several key ways. Your procurement and finance teams might have conflicting information and may define tail-spend differently – each side might differ on what they consider to be an unnecessary cost. A business that has too many suppliers (again, the definition of ‘too many’ can depend on the sector or company) is also more likely to develop a tail-spend issue, as they might miss out on better deals that they can achieve with fewer suppliers.
On top of this, without correctly managing your purchases, you might find yourself with too much stock. If you streamline your tail purchases, you can get the most from every penny – for example, the Derby Teaching Hospitals NHS Foundation Trust saved over £120,000 by controlling tail-spend. The Trust did this by managing their procurement department and using systems that make their supply, contract, and purchasing processes more efficient; they now save roughly 5% of their yearly spend.
3. Sourcing the Right Suppliers
Tail-spend issues often start with supply problems, meaning you need a way to unite your business with the correct suppliers; a company could easily waste money by choosing improper suppliers for one-off or not-so-frequent transactions. Your operation cannot simply streamline its biggest contracts, the tail also requires a level of scrutiny and focus – spreading the business across too many suppliers can again become a waste of money. You may be able to find better deals and services by consolidating your providers in a way that shows consistency and loyalty.
Given that around 75% of tail-spend is via the online market, you might also need a robust digital storefront to reach the necessary suppliers – this can also help to centralise your purchases with simple online paper trails that track everything. One example of this is Elcom’s MultiQuote, a digital marketplace that uses procurement turnarounds to provide savings of about 12.5% from up to 10,000 suppliers; this limits maverick spending too. EVOLVE eSourcing Tender similarly provides more control of procurement, using formal sourcing exercises to reduce expenses. Focusing on supply and procurement is always a good first step towards good tail-spending.
4. Contracts and Catalogues
Many companies find it difficult to measure the performance of their contracts; without analytics or data, the business might not have any idea which of their current or prior suppliers are working and which are not. It is thus important for a company to have streamlined, efficient contracts that cover their expenses – as well as a flexible catalogue to manage their low-cost purchases. However, catalogues, contracts, and procurement can often conflict, especially from human error when you need to implement the same data repeatedly.
Key performance indicators are paramount when investigating the efficacy of a company’s contracts – this can range from a 15% saving compared to a competitor, to a 7% profit increase. Without knowing how to measure the ways a contract is helping or hindering your business, you could be missing out on ways to save or make money. Using software that focuses on tangible outcomes and KPIs, you can figure out which contracts work best for you; EVOLVE Contract provides these features and more, while EVOLVE Catalogue Management provides consistent information across every department.
5. How Purchase-to-Pay Helps
Adopting a purchase-to-pay approach can be a big boost to the business – one that makes the most of your money and tail-spend. This holistic method integrates the entire purchasing process, with full transparency and control from requisition, to orders, to the receipt of goods, and even to invoices. Spreading these facets across multiple domains could overcomplicate the whole procedure, especially with slow governance at each stage and the presence of maverick spending.
With a centralised purchase-to-pay system, businesses can leave invisible transactions in the past with a fully consistent paper trail – and one that enforces standing financial instructions. If this system uses automation, human error will also drop significantly, and there will already be a massive efficiency increase. PECOS P2P is a purchase-to-pay solution by Elcom, one that the Scottish government uses to automate procurement processes.
There is much that you can do to combat the tail-spend problem – by making an effort to streamline the tail of your business’s buying, you should come away with a remarkably more efficient operation. Regarding the benefits, the numbers do not lie; Britain’s hospital trusts have saved thousands upon thousands of pounds, and procurement departments typically see a higher return on investment of around 6.88x by managing the tail. With EVOLVE and other Elcom innovations, companies of all sizes can cut down on needless expenses – contact Elcom today to learn more.