Why is outsourcing tail spend a priority?
What do you do when service demand exceeds resource capability? It is a question that many procurement organizations have been facing for some time—the leaning of their departments in the face of increasing spend under management demand. Add into the equation data privacy and security regulations that hold companies responsible for breaches by suppliers in their extended chain, and acute crises are now a common daily occurrence.
As if the above responsibilities were not enough, along comes a global pandemic adding to the burden by creating a host of new and urgent responsibilities.
Against this backdrop of increasing demand and higher expectations, how does your procurement team renegotiate agreements, consolidate suppliers, and drive savings while taming ‘nuisance’ and unmanaged tail spend categories?
Grabbing the Tail
Tail Spend: 80% of suppliers accounting for 20% of overall spend across multiple categories in which purchasing is sporadic and, often times, goes unmanaged.
Have you ever had an extensive list of things to do from which you decided which tasks are a priority? If you chose to start with the easy ones first, you are not alone.
According to research by Maryam Kouchaki, “people gravitate toward simpler tasks when struggling with a heavy workload.” While an understandable inclination, Kouchaki, an associate professor of management and organizations at Northwestern’s Kellogg School of Management, finds that the “strategy doesn’t pay off in the long run.”
For procurement departments, addressing traditional areas of spend may not be easy, but it is familiar and of course, necessary. Having to turn their attention to the last and most complex challenge—bringing tail spend under control—is a “long-run” responsibility most CPOs want to avoid.
No Easy Task
Beyond adding yet another responsibility to an understaffed and overburdened procurement team, why is managing tail spend such a difficult task?
Research shows several common challenges with effectively managing tail spend, including insufficient data visibility, fluctuating specifications, and sporadic requirements that make strategic planning difficult.
While emerging digital platforms can address some of these challenges, according to a Deloitte global survey of CPOs, technology alone is not the answer. What is needed is a high level of expertise that provides dedicated and vigilant auditing and management of tail spend.
The question then becomes one of time and resources. Do you develop that expertise internally or look to an outside, third-party specializing in this area?
Outside the Box (or Department)
One thing we have not yet touched on is the reward for effectively managing your tail spend.
Countless studies report a financial savings of 10 to 20 percent for organizations who can get their tail spend under control. However, there are numerous advantages beyond direct cost savings that impact the bottom line, including better risk management, addressing maverick spend, driving innovation through a more strategic engagement with suppliers, and ultimately better service delivery to end customers.
Realizing those returns begins with recognizing the solution comes down to effective talent management; given their already heavy workload, does your in-house team have the cycles or even the depth of experience to manage complex and nuisance expenses such as uniform rental, waste and recycling, security services, and pest control?
For example, if you are spending $1.5M on uniform rental out of a $100M spend under management budget, are you able to invest the necessary time and resources to effectively manage this category without compromising work in the other critical day-to-day areas of your procurement practice?
For most organizations, trying to manage tail spend in-house is a penny-wise, pound-foolish exercise, which is another reason it is the last frontier of procurement savings. When you do the analysis, taming your tail spend by outsourcing its management to an expert third-party is not only the right strategy—it is the only strategy.