Achieving tail-spend value
How do you drive savings from the fragmented long tail of small-spend suppliers?
Unlocking value from tail-spend suppliers is a challenging and intensive task. Indeed, most organizations shy away from it, putting their efforts into other priorities.
However, a structured approach based on rigorous analytics and execution can provide a substantial return on investment.
There are three key reasons why unlocking value from the tail is challenging:
- Fragmentation of the tail: Dealing with hundreds – if not thousands – of suppliers causes complexities, engaging them being just one example. Correct contact details for small suppliers are often difficult to obtain. Plus, appropriate messaging and incentivization needs to be managed correctly to protect your brand’s reputation.
- Lack of understanding of suppliers: The long list of tail suppliers is typically not categorized according to a standard spend taxonomy. This makes it difficult to know how to approach suppliers, as some may be providing sensitive or business-critical services.
- Limited understanding of contractual arrangements: There are typically no existing contracts for tail-spend suppliers, as products and services tend to be bought using ad hoc purchase orders. Without a good understanding of the current commercial agreement, it is difficult to estimate the additional value that can be achieved.
Organizations can unlock significant value from their tail spend by addressing these challenges. Implementing a data analytics structure, supported by senior executive sponsorship and a pragmatic mindset, can pay dividends.
Your key objective should be supplier consolidation, so that greater spend is given to a smaller number of suppliers.
Your key objective should be supplier consolidation, so that greater spend is given to a smaller number of suppliers. This builds stronger relationships with fewer suppliers and incentivizes both parties to drive greater value.
A structured approach
A robust approach to maximizing value from your tail spend should involve:
- a thorough analysis of spend data, categorized using automated tools and manual online searches, providing an accurate view of spend
- working with procurement, business and finance stakeholders to define treatment strategies for each section of the tail spend based on opportunity value and business risk
- senior executive sponsorship of the agreed treatment strategies
- a pragmatic approach to engaging suppliers and realizing the benefits
- the creation of an execution engine which engages with suppliers through a well-defined process and response algorithm
- support for change in internal behaviours, mindset and policies, and governance of cost management.
As CPOs face greater pressure to achieve more value from third-party spend, there is a need to look beyond the traditional high-spend categories and influence all spend areas including the tail. A structured analytics driven approach will unlock significantly greater value from the tail spend, offering optimum return on investment for the effort involved.
Masterclass in action
Efficio supported a large global technology group to achieve over $8 million annualized benefits from over 6,000 tail-spend suppliers representing a total spend of $250 million.
The first phase of the program was to identify tail-spend suppliers across the UK and Europe before a global rollout. Spend visibility within the tail spend was achieved using a structured approach. This was followed by treatment strategies for each tail-spend segment. The senior executive team ensured key decisions were made in a timely manner throughout the program.