A view on how Procurement can turn legislative requirements from the feeling of administrative burden to a strategic benefit
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Without doubt, procurement leaders and their teams, today, face increasing pressure to deliver sustainable savings, and drive additional value and risk mitigation from their supply chain—all while minimising the overall cost of delivery and very often without any additional funding being made available to create the additional value that is being asked of them. However, think differently and there is a greater opportunity for procurement to utilise current tail spend regulatory requirements such as Modern Slavery or GDPR to create the paradigm shift needed to help drive a more strategic agenda and increase investment in cost effective and sustainable tail spend management, which in turn will identify and create savings that can be reinvested in transformative opportunities – enabling Procurement to continue to demonstrate its value add to the organisation.
Take Modern Slavery for example. According to the Global Slavery Index a staggering 40 million people are living in modern slavery today, of which 25 million are in forced labour. The G20 countries are importing risk of modern slavery on a massive scale, collectively, importing US$354 billion worth of at-risk products annually. The numbers are staggering and it makes you realise that this is not just a ‘tick in the compliance procurement box ‘ exercise but is a critical business issue – to seek out abuses in their global supply chain and reward leaders who take on the responsibility and challenge of addressing modern slavery. In addition to potential prosecution and jail time, several high-profile cases in the press show that there’s also significant potential for breaches of the Modern Slavery Act to have a devastating impact on a company’s reputation, its directors, and company profits. As well as these regulatory requirements you only have to read the most recent Deloitte Global Chief Procurement Officer Survey to understand the other pressures facing procurement teams:
• 78% of procurement leaders say that cost reduction remains their overarching business strategy
• 54% of procurement leaders state that managing risk is a top priority, although 65% have either limited or no supplier visibility further than their Tier 1 suppliers
• 16% of procurement leaders want to reduce transaction costs
• 37% of procurement leaders are focused on consolidating spend
These pressures exist across industries, and across market sectors. But meeting them involves addressing a number of challenges, many of them long-standing. Who doesn’t recognise these, for instance?
• An obligation to provide clear accountability and reduced risk in the supply chain
• Commodity price volatility • Evolving supply market demands
• The need to free-up procurement resources, and other resources in the organisation, in order to focus on higher-value strategic procurement activities
• The need to reduce the total cost of the procurement’s service operation, and deliver ever-increasing levels of cost savings for the business
• The importance of retaining key talent
• Ever-changing business requirements
• A growing focus on technology enablement and self service
With the moral, ethical and pressure to demonstrate value, the stakes are high and the time is now for procurement functions to be banging the drum regarding maximising the ROI of addressing tail spend.
Tail Spend in Context
Tail spend is variously defined as those suppliers below a specified annual spend threshold, for instance, or spend that has been delegated to business stakeholders, or spend falling into certain categories—tail spend means different things to different organisations.
Typically constituting a small proportion of overall spend, spread across a number of spend category areas, and typically fulfilled by a large number of transactions and suppliers, tail spend often remains unclassified due to its very nature, which can prove challenging when seeking to identify it and therefore manage it.
Consequently, tail spend can be seen as too minor, and too diffuse, to bother with.
Such disengagement might not always be conscious, or formally defined, but the effect is the same. Consciously or unconsciously, addressing tail spend is not seen as a priority. Which is where the danger lies. For the result of this view of tail spend as too trivial to bother with are higher costs of procurement, supplier proliferation, a loss of pricing power—and missed opportunities for collaboration, risk mitigation, and innovation. And those are just the headline impacts.
For instance, better addressing tail spend can deliver these benefits to an organisation:
• Faster, more efficient—and lower-cost—procurement and finance processes
• Significant vendor reduction, if desired
• Lower prices on spend, delivering cost benefits
• Increased visibility of expenditure, to enhance informed decision making
• Reduced risk to the organisation • Increased compliance
• Significant improvement in contract database management, knowledge of supplier numbers and services, and more efficient access to terms and schedules
Don’t overlook, either, the considerable secondary ‘spillover’ benefits that can come from concentrating spend on fewer suppliers—suppliers, moreover, about which more is known, especially if those suppliers are already part of a business’s strategic, or actively-managed spend.
Consider, for instance, GDPR compliance. For an organisation with a long tail spend, there may be hundreds or even thousands of incumbent suppliers, all of which will need formal and relevant GDPR-specific contracts and contract amendments, as well as a process to ensure all new suppliers are placed on appropriate terms.
Or looking at Modern Slavery Act compliance again, the duty of care imposed on organisations to ensure that their supply chains are free of modern slavery can be onerous, and the more focused the supplier base, the less burdensome this becomes. When organisations think of Modern Slavery Act compliance, their first thought isn’t naturally to consider tail spend and we believe going back to the morale, reputation issues, it should be.
Such ‘know your supplier base’ legislative requirements aren’t going to go away—and nor are these two pieces of legislation the only ones in question. Bribery Act compliance, for instance, also falls into this category.
So how might we better manage Tail Spend?
Public Sector vs. Private Sector: The Tail Spend Challenge
First, let’s home in on what exactly we mean by ‘tail spend’. This is important, because the private sector and public sector see tail spend differently, and so see the tail spend challenge differently.
In the private sector, the view of tail spend is of an amount of spend that is of low level, low strategic importance, and with low levels of potential benefit to come from better management. That isn’t to say that procurement functions might not be incentivised to periodically address tail spend, but that the gains to be had from doing so are perceived to be of a lower order of magnitude than is the case with more strategic spend.
Typically, a private sector organisation strategically manages approximately 75% of its third-party spend, and so consequently has about 25% of spend in the ‘tail’. Our view at Retearn, echoing generally-accepted good procurement practice, is that companies should aim to have a minimum of 80% of total spend strategically managed. So while the figure of 75% isn’t too far from this minimum level, it is still some way from the ideal.
In the public sector, on the other hand, spend is typically managed via an agreed process, with the result that there is generally seen to be little incentive to tackle the issue any further at all. As a result, ‘tail’ levels are higher: a figure of 60% is of spend being managed strategically is common, leaving around 40% in the tail.
Tail spend challenges commonly encountered in the public sector include:
• Business users keep procurement activity to themselves, working in silos with little oversight as to what is purchased, and from where
• Business users have a variety of methods to procure goods and services, and often choose the path of least resistance
• There are multiple ways of working, with each department having its own systems and processes
• No “One-Time” vendor management, resulting in potentially hundreds or thousands of new suppliers being added. To create a full vendor record with all details for these vendors is time-consuming, and unnecessarily increases the supplier base
• Lack of visibility around the items that are purchased
• Lack of competitive leverage of total spend, resulting in decreased savings performance
So how can you recognise when your organisation – public or private sector – has a problem with Tail Spend?
Typically, we’d suggest, if two or more of the following statements apply, in relation to your organisation and tail spend, then you need to get a tighter grip on tail spend:
• The number of suppliers is greater than the number of employees
• Fewer than 70% of orders are negotiated by procurement
• New suppliers are being added at over 10% each quarter
• Fewer than 50% of transactions are with preferred suppliers
• Fewer than 50% of purchases are automated e.g. through catalogues
• The risk register has a regular high proportion of tail spend suppliers
Getting to grips with Tail Spend: a focused, four-stage process
Typically, we would encourage organisations to follow four key steps to manage tail spend:
This robust review process ensures that the business has validated the governance, spend, delivery and sustainability of the purchasing cycle and supply chain to identify and implement efficiencies and optimisations.
In one public sector example where this process was followed, closer management and process transformation of the tail spend resulted in the following:
• Average savings of 7% of the total value of tail spend
• Productivity efficiencies gained from a streamlined, centralised process
• Systems enhancements that provided greater visibility and control over low-value suppliers and improved influence of spend on SMEs, local businesses, and the third sector
• Better inter-departmental collaboration, and more consistent messaging and branding
When it comes to managing the tail, such an outcome clearly runs distinctly counter to the widely-held assumption that the cost and resources needed to review tail spend are not worthy of the time or investment. Typically, it is thought that as the savings will be modest it is not worth the effort to dedicate any time. However, a different view would be that the organisation or Procurement function is lacking a group savings and innovation culture and focus from not actively managing the tail spend which would yield significant returns from leverage and collaboration.
The level of control (or lack of) an organisation will have on its tail spend depends on a number of factors including maturity, focus, strategic intent, business \ stakeholder alignment and could be for any number of reasons:
One of the largest hidden costs is process – market insights suggest a large blue chip organisation typically spends up to £350 per supplier to manage and maintain their systems (covering set up, contract management, queries, purchase order management and invoice payments). Invoicing costs often categorised separately and ranging anywhere between £10-£50 per transaction depending on the company systems and processes.
Other typical tail management benefits can be categorised as:
That said, tackling tail spend can prove difficult. Many businesses which target tail spend think that they can do so by implementing e-sourcing or conducting ‘blanket’ negotiations with suppliers. While these techniques can result in quick wins, they can also fail to take advantage of all the potential opportunities, and the benefits can soon be lost when decisions are reversed or new practices not maintained.
In addition, asking suppliers to comply with new terms, or deliver further cost reductions, can run the risk of backfiring when the supplier looks to increase prices at the first opportunity. Running contract compliance processes or price negotiations without credible supply chain alternatives—which is often the case in the tail spend—can lead to supply risk issues, as it can be challenging to undertake successful supplier changes within short timescales.
Delivering a successful Tail Spend process
To successfully deliver a tail spend management process, there are a number of issues that it is important to ‘get right’. Failure to do so risks expending time and resources on a tail spend project that does not deliver on its full promise.
• Identify objectives and resources: At the start of the process, the objective(s) need to be clearly defined and communicated to all key stakeholders, and the business needs to commit the necessary ongoing resources. It is important to have a dedicated team or dedicated focus from individuals within their roles for the tail. Be warned: if tail spend rationalisation is treated as ‘add-on’ work for an existing team, then day-to-day activities will always tend to take priority. Likewise, they will also need appropriate resource, collaboration and buy-in from other functions.
• Identify the tail: it is important to define the tail at category level (through regular accurate spend data and ongoing supplier relationship matrix per category), in order to enable clarity and rationalisation. Consider how many suppliers are needed in each category, and how often buyers will need to meet the suppliers in each spend category. Often the most neglected category spend areas are a good place to start looking for ‘wins’, in order to help quickly demonstrate the value of the initiative to business stakeholders.
• Subset the tail: it is also important to recognise that the tail is not some single homogenous mass. In practice, it can be regarded as falling into several parts—including a ‘hidden’ tail. Both the ‘hidden’ tail (which are generally services or goods bought from normally strategically-managed suppliers, but which have been purchased non-compliantly) and the ‘head’ of the tail can contain sizeable portions of total spend. However, since this spend is not covered by professionally-negotiated contracts that are centrally approved as acceptable to the organisation, or is conducted without use of existing contracts, then there is a high potential for savings in these segments—even though most companies lack visibility into this spend, and therefore fail to understand the total volume of business they do, or could do, with known and approved vendors, thus missing out on opportunities for bundling demand and achieving volume discounts. Alternatively, to choose another example, organisations may not know that they are using several suppliers for the same items, thus missing out on chances for supplier consolidation.
In summary, the key to realizing the high potential savings in both the ‘hidden’ tail and the ‘head’ of the tail is to drive as much as possible of the purchasing into strategically managed spend—the goal, indeed, should be to have a minimum of 80% of total spend strategically managed.
The ‘middle’ of the tail, and the ‘tail’ of the tail usually do not present the same savings opportunities in absolute terms, for the obvious reason that they contain a smaller percentage of total spend. In the ‘middle’ of the tail, though, it is still possible for companies to achieve significant spending reductions in percentage terms, along with significant operational efficiencies.
• Identify value levers: To enable sustainable savings with minimum maintenance, procurement functions should focus on value levers that can take out inefficiencies that have arisen in the supply chain over the years. Some of the key value levers include supplier rationalisation, global sourcing vs local sourcing, minimum order quantity optimisation, specification reviews, and competitive tenders or negotiation using market benchmarking.
• Develop an implementation roadmap, and then execute it: Quantify the savings potential and risk involved in the tail spend management process, and then review these regularly with a cross-functional steering group (call them Procurement Champions?) in order to identify costs and timescales, and prioritise projects.
• Communicate: At every stage, and even more so when engaging cross-functional teams, it is important to maintain good communication with an executive team—who will help maintain focus on tail spend as a priority—highlighting positives, as well as escalating challenges that can be addressed on time. It is important to avoid the misconception that because tail spend involves low spend items, a tail spend project is somehow less important than other strategic projects, as it is easy to then lose track of projects if issues are not managed quickly and efficiently.
The bottom line
Correctly implemented, tail spend management initiatives deliver not only significant savings, but also broader benefits to the wider business. Rationalising supply chains at this level helps to differentiate between transactional spend and critical spend, resulting in renewed focus, clarity and innovation. Operationally, too, making an impact on tail spend usefully reduces duplication and complexity, cutting down the number of materials/services/invoices/suppliers that are involved in the supply chain.
As a result, the procurement function, the quality assurance function, and the organisation’s supply chain teams can more efficiently manage the supply chain, and redeploy resource elsewhere. It is not an exaggeration to describe the effect as being a ‘virtuous circle’, where distractions and irrelevancies are winnowed away, enabling a greater and greater proportion of spend to be professionally and strategically managed. Other key reasons to point towards regular tail spend rationalism and collaboration of suppliers as best practice is:
Regulation 6 of the Public Contract Regulations 2015 which stipulates that supply or service contracts which are regular in nature or which are intended to be renewed within a given period must be aggregated.
Known examples of a number of established central purchasing bodies, who establish framework agreements which Councils can use via a ‘mini-competition’ to select the best value supplier from a framework.
Cost Avoidance: While hard savings have a quantifiable P&L contribution (or are more easily tracked and reported upon), on-going cost avoidance created from maintaining rationalism and collaboration of the supply base creates important strategic value.
Methods of cost avoidance delivery can include:
Price protection – delaying supplier price increases, or slowing the rate of price increases with price protection
Negotiation – negotiating prices that are lower than initial quotes
Value-adds – including additional value-added goods and services free-of-charge to an agreement. For example, when bidding on a large piece of equipment, the supplier can also include installation and maintenance services free-of-charge
Continuous improvement savings – signing long-term contracts with continuous improvement savings requirements. These are provisions in contracts that require the suppliers to create ways to reduce the organisations total cost of use
Substitutes – identifying supplier substitutes that perform the same or similar functions at lower cost, or those that are the same cost with greater quality/efficiency
Even so, a tail spend management initiative is not something to be lightly undertaken. The investment in time and resource can be significant—significant enough to possibly prove to be a barrier. If so, canny procurement functions would do well to recall the secondary ‘spillover’ benefits of tackling tail spend, in terms of improved—and easier—compliance with the requirements of GDPR, the Modern Slavery Act, and other ‘know your supplier base’ initiatives. If the wider organisation proves reluctant to invest in tail spend reduction, then the compliance argument may well help to tip the balance.
Using our procurement expertise, we can help you rationalise your current tail spend to improve compliance and greater utilise your volume spend to a relevant number of suppliers to enable you to make informed and improved procurement decisions Click here for further information.
Read our Case Study on how we partnered with Serco’s internal procurement team to deliver over £1million savings and reduce their risk of non-contracted supplier spend in line with their values including key GDPR and Modern Slavery clauses.
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