Ask Avis: Reducing Un-Managed Spend
In this webisode edition of Ask Avis, Avis Yates Rivers, CEO of Technology Concepts Group International (TCGi), provides insights on the topic of Un-Managed Spend, also commonly referred to as Tail Spend. For most medium to large corporations, across all industries, un-managed spend has become a real problem, wasting millions of dollars, draining resources and jeopardizing compliance.
What do we mean by un-managed spend?
Procurement’s corporate managed buying process has been developed to leverage the greatest cost savings and the most strategically negotiated contracts. Any spend outside this purview is considered un-managed.
These purchases are typically comparatively small relative to the larger purchases that are strategically negotiated.
But this can be as much as 25% or more of the total spend, adding up to tens of millions of dollars.
Why is it referred to as “Tail” spend?
If you looked at a graph (see below) of spend in dollars (vertical axis) to number of vendors (horizontal axis), the area beyond the managed spend, curves out to nearly a long straight horizontal line, that looks like a “TAIL”.
These make up many smaller purchases by many non-strategic vendors in greater numbers than the “managed” vendors.
To view the comprehensive 30+ minute webinar video including detailed graph on Tail Spend, please click here.
How critical an issue is Tail Spend for most corporations?
In a recent Procurement Benchmark Report, where 100 Procurement Executives were interviewed, more than 3 out of 4, or 80% of them stated that their top metrics for measuring the value of Procurement is “achieving a higher percentage of managed spend as a percentage of total spend” (See the related infographic in the Report).
What are the consequences of Tail Spend?
- Lost savings from not taking advantage of company-leveraged discounts.
- Too many vendors to effectively manage, pulling procurement professionals away from more high-level projects.
- Compliance issues due to so many vendors and contracts and potential conflicts with existing corporate contracts.
- The one-off purchase that occurs because “I need it now” or “I’ve always done it this way” that adds up over the course of a year, especially at less-centralized company locations.
Why does Tail Spend tend to get out of control?
- Procurement professionals are already overburdened responding to the core needs of the business.
- They don’t have the time required to analyze the data or implement more effective processes.
- Procurement departments lack the necessary headcount to liaise with all business units to get the necessary data (benchmarks) and make changes in the current supply chain.
- Stakeholders are usually unwilling to give up buying power.
- Individual business units bypass the Procurement Department with purchases that fall outside or even conflict with existing negotiated contracts.
The general consensus of most Procurement Executives is that the value of a Procurement Organization is directly tied to how much un-managed spend it has. This correlates to the current trend of Chief Procurement Officers (CPO) getting a seat on the Corporate Board (as stated in the aforementioned Procurement Benchmark Report) and the increasing importance placed on Procurement as part of a company’s overall strategic vision.
Creating a plan to manage spend has never been more critical to your company’s success.
Spend 90 seconds as part of our Ask Avis Webisode Series to gain valuable insights on Reducing Tail Spend. For more a comprehensive review and for first steps, go to the Webinar on Getting Tail Spend Under Control. Other material on Managing Tail Spend can be found here.