September 2020SHARE
September 2020
SHARE

Summary

Most organizations run a tight ship when it comes to managing their strategic spend — i.e., top 80% of spend with a few strategic suppliers, while they are constantly finding better ways to manage Tail Spend.

Tail Spend, while constituting only 20% of the total spend, makes up for almost 80% of the transaction volume, and contributes to the increasing number of suppliers. Read this article to understand why Tail spend is equally critical and how organizations must tackle it to make their procurement more resilient.

John, a procurement manager at a large Fortune 500 company, is having a rough day. It’s time for annual planning, and yet again, he appears to be struggling with limited information about total spend. The company has been running many initiatives from time to time, to make procurement democratic and digital. Unfortunately, the outcome has not fully addressed all the challenges. While the main spend is managed well, the lower value spend in the indirect spend categories remains largely unaddressed.

Some of the challenges John is concerned about and would like to find answers to are common to other large organizations as well.

  • How can I reduce costs associated with low-value transactions?
  • How can I provide a more seamless buying experience to the end-user, removing their dependency on the Procurement team for low-value purchases?
  • How can I improve savings from low-value transactions?
  • How can I further leverage the best existing suppliers and reduce the need to create new suppliers?
  • How can I have better governance around the low value spend?

Most organizations run a tight ship when it comes to managing their strategic spend — i.e., top 80% of spend with a few strategic suppliers, while they are constantly finding better ways to manage Tail Spend.

Tail Spend, while constituting only 20% of the total spend, makes up for almost 80% of the transaction volume, and contributes to the increasing number of suppliers. Over 65% companies have limited visibility beyond their strategic suppliersi. Getting complete visibility to the current Tail Spend will be the best place to start addressing challenges.

According to the Boston Consulting Group, companies that can manage their Tail Spend using digital technologies can cut their annual spend by 5-10% on averageii . That could translate to millions in savings for large organizations!

How organizations typically manage Tail Spend

One way to curtail Tail Spend has been to avoid it, which is driven by laying down certain procurement policies, introducing checks on the creation of a purchase request, and manual interception of requests to consolidate demand. The approach causes a delay in placing the order with the supplier, leaving behind a dissatisfied requestor and a procurement team loaded with manual tactical (non-strategic) tasks.

Another way of controlling Tail Spend is by introducing new ways to place a request and defining rules around which supplier orders can be placed with. This is achieved by connecting the procurement system with online supplier catalogs and allowing requestors to use purchasing cards (P-cards) to complete the purchase immediately. Organizations, however, have been unable to extract the best out of this approach. The limitation here has been the challenge with catalog content maintenance and the ability to provide catalogs for all categories of goods and services.

Setting up a dedicated team to intercept purchase requests below a pre-defined value threshold and analyze spend is another popular method to manage Tail Spend. This is either an in-house or outsourced team, tasked with ensuring the purchase request is routed to the correct supplier, especially in scenarios where the supplier is unknown. They identify a new supplier through a sourcing event or place the order with an open marketplace. Such an approach has been partially effective due to dependency on human intervention and increased turnaround time. Many a time for the requestor, the wait is not worth for a small value request.

The constant evolution of technology and its applicability in addressing specific business challenges does provide a solution or the way forward to John’s challenges. An Intelligent Procurement Suite is undoubtedly the answer.

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Technology Solutions available

Tail Spend management solutions have been available in the market over the last few years. Of late, business-to-business marketplaces have been re-positioning themselves as Tail Spend management solutions to tackle challenges faced by procurement organizations such as John’s to address Tail Spend challenges effectively. Large global organizations have invested in these solutions and have achieved early benefits. Over a period, the Tail Spend problem seems to resurface, calling for time and attention all over again. Can there be a definitive solution to John’s challenges?

How to Move the Dot

The need of the hour is a comprehensive digital solution. An AI-powered application that can make existing Tail Spend management techniques highly effective by automating the end-to-end cycle of events – from analysis to execution. One that can offer real-time spend visibility to the organization, provide insights to proactively support better governance, and improve the end requestor’s buying experience.

The first step in effective spend management is having complete visibility to categorized spend accurately. The application should be able to extract data/information from multiple existing procurement systems, unstructured data as well, combine it with external data feeds for enrichment. It must offer the best data mining and processing capabilities along with several machine-learning algorithms that can primarily automate cleansing, normalization, and spend data classification, by adding the necessary granularity required for Tail Spend management.

A rich foundation of analytics from a non-traditional perspective is the only way to completely address John’s challenges, designed with the aim to provide a consolidated view of spend to support both strategic and operational decisions in a procurement organization. The traditional approach of determining Tail Spend by the 80-20 rule has been proven to be ineffective. Tail Spend is determined based on various other strategic parameters that can be pre-configured to help organizations gain visibility into “real tail.” This becomes the basis for Tail Spend analytics, with further insights that lead to opportunities to aggregate demand, rationalize suppliers, rationalize price, and payment terms, — keenly sought after by decision-makers like John.

Analyzing the spend alone is never enough to resolve the challenges that John has set out to address. An area that has not been in the spotlight is, ‘what happens after the analytics is complete?’ How does the procurement team ensure their recommendations from the analytics are applied by the requestors on a regular basis?

One of the approaches is to leverage more data that is already available within the organizations’ systems. Analyzing the buying channels and buying behavior of requestors adds value. Such analytics can be combined with spend analytics to provide insights at a category level to support procurement managers devise better spend orchestration strategies. Getting end-to-end visibility into such detail empowers procurement managers with much-needed intelligence to spend governance. John and others will now have access to all information required to address the challenges with an intelligent tool that is largely autonomous.

As described earlier, one of the key challenges is when the end requestor reaches out to the procurement team, seeking direction in placing a request for what they would like to buy. This challenge can be addressed by offering an AI based conversational interface that’s pre-trained to Sourcing & Procurement context. This interface will work by integrating with the existing procurement system already in use at an organization and support the overall spend orchestration strategy by directing the requestors to pre-configured buying channels and workflows. The design philosophy behind this interface that the user needs to know is what to buy, and not how to buy. Alongside directing the requestor, the application will also ensure that there are no incomplete purchase requests created. Relevant suggestions fetched from existing data can be presented to the requestor to help complete it. Most requests that would have otherwise been handled by the procurement team and spot buying desk can thus be fulfilled during the requesting stage itself. With the aim that no requestor leaves the application without placing the request, they are always directed to alternate and compliant options, including approved external marketplaces, and if needed, as a last resort to the procurement team. Once confirmed by the requestor, a request is automatically processed further as per the pre-configured workflow in the underlying procurement system, to complete the transaction. The conversational interaction additionally improves user satisfaction, and exponentially increases the adoption of compliant processes.

Money saved is money earned

In Deloitte’s Global CPO Survey 2019iii, 70% of respondents indicated that saving costs is a strong priority. The same survey found that consolidating spend is the top priority for organizations. This is especially relevant in times we find ourselves in today where there is a need for hyper-efficiency.

Over 90% of procurement leaders agree that procurement will need to be more agile to respond to market changesiv . At EdgeVerve, we help our clients improve procurement health and amplify outcomes with our cognitive, connected solution ProcureEdge. We’ve helped deliver 5x improvement in productivity and 2x savings in costs through cutting edge technology and insights from our S&P experts.

Procurement managers can have complete control over total spend, with reduced complexity. Improved management of Tail Spend can free up capital for better investments in the future of the company. And there is no better time than now.

References:

  1. https://www.edgeverve.com/business-applications/procureedge/
  2. https://www.bcg.com/publications/2019/taming-tail-spend
  3. https://www.edgeverve.com/business-applications/procureedge/

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