How Tail Spend Can Result in Tailspin
Updated: Feb 3, 2020
The term "tail spend" is based on the concept of the Pareto Curve, or as it's commonly known the 80/20 rule. When the 80/20 rule is applied to procurement it tends to indicate that 80% of an organization's total spend is made with 20% of its vendor base and the remaining 20%, consisting of high-volume but low-dollar transactions, occurs with 80% of the vendor base. That high-volume spend across a large vendor pool creates a long tail that can keep growing if it's not managed properly. Some of the problems with this scenario include too many vendors to manage, potentially resulting in oversight challenges, unfavorable terms and conditions for buyers due to a lack of bulk-purchasing, and too many invoices to process, diminishing economy of effort.
Tail spend is comprised of all the follow-on, or indirect, activity that often goes unnoticed when it comes to an organization's procurement function. We're talking about all of the incidentals like software, professional services and other ancillary commodities that coincide with, but reside outside of, larger ongoing procurements. This level of spend is usually too small to be captured through category management practices but it ends up nickel-and-diming an agency to death. The recent CPO Survey 2018 by Deloitte revealed that overall supply chain transparency is poor, “with 65 percent of procurement leaders having limited or no visibility beyond their Tier 1 suppliers.” Limited data visibility, disparate systems that don't link contracting, financial and property management together, lack of aggregated demand, and decentralized processes are the usual culprits behind tail spend.
These procurements are considered low priority because, individually, they represent small-dollar transactions; therefore they go unmanaged. In my opinion, not focusing on tail spend is one of the biggest mistakes that an agency can make. When it comes to Total Cost of Acquisition, tail spend is overlooked and rarely factored into the budget cycle but, left unchecked, it can breed problems down stream that can have significant impacts. For example, the cost of rogue software license renewals, alone, can be enough to move the needle if they fly under the radar long enough.
At my organization, I'm just as concerned about how we buy our consumables as I am the way we procure for our major Acquisition programs. When you're dealing with lean appropriations every penny is precious, so I don't consider 20% of unmanaged tail spend to be in the noise. In the Federal space, the required databases that drive transparency for Congress and the taxpayer offer some good baseline information that most agencies can start with to begin identifying the opportunities to bring tail spend under management. To me, the most important thing is to change the mindset that these small, fragmented, procurements are too trivial to focus on.
Admittedly, it can be quite challenging for an organization's senior procurement official to quantify the problem but if you eat the elephant in bite-sized chunks it's possible. Juxtaposing trends in spend data with high-risk categories can help to identify the best opportunities for savings. Benchmarking, analytics and automation will influence spending patterns and outcomes from the vendor base. The use of these tools needs to be enforced through policy and well-defined business processes to prevent customers from circumventing spend-under-management approaches once they're established. The hardest part is the culture shift which requires that buyers flag and contest the onesie-twosie habits that their customers have likely adopted over the course of years. You know the proverbial 'but that's how we've always done it' thinking that can be pervasive among both operators and buyers that need to get things done quickly.
Managing tail spend can absolutely deliver value to the organization and it shouldn't be avoided just because it's hard. With enough attention on the matter, at the right levels in the organization, culture can change because procurement is a strategic enabler for mission or profit objectives. So get control of your tail spend before it spins out of control, resulting in increased cost and risk.