Addressing the tradeoff between headcount and compliance when addressing tail spend
Tail spend is spend at an organization that is not strategically managed and typically under $100K per purchase. However, tail spend is not inconsequential, making up 20% of overall annual procurement spend. Because it comprises hundreds if not thousands of small-spend purchases and is generally not automated, tail spend is a high-touch nightmare as it involves some level of interaction with 80% of all vendors.
In these blogs, my goal is to review relevant topics that our team hears from during our 40+ weekly meetings with customers, prospects, partners, advisors, and other procurement leaders. The coverage will range from “what good looks like” in tail spend management, the challenges we hear that companies are facing, and how business are planning to achieve their annual KPIs in within the context of tail spend.
The complexity of the tradeoff between headcount and compliance when looking at tail spend is something that has come up in a lot of my conversations recently. Tail spend compliance means different things to different companies and industries. For Financial Services, Healthcare, and Insurance organizations, tail spend compliance typically addresses the validation, security, and reliability of the vendors used for products and services their company consumes. But for manufacturing, engineering, transportation and other related industries, tail spend compliance usually refers to internal policies and controls that are setup to ensure competitive bidding is leveraged to drive prices. These competitive prices stretch location’s budgets further and impact the bottom line across the company’s indirect purchases, while thoroughly vetted vendors are used for most direct purchases. For entities that receive public funds in some capacity, such as state and local government or higher education, compliance is mandated to ensure fiscal responsibility to taxpayer money and a fair, transparent, and level playing field for all businesses to complete. This includes an increasing focus on the inclusion of disadvantaged business enterprises (DBEs).
To achieve the above compliance, there are three key hurdles:
- A designated team in place to set up the internal policies.
- A procurement team with the bandwidth and willingness to adhere to said policies.
- Clean data to report against the outputs and prove compliance.
When you boil it down, ensuring compliance comes down to a willing team and clean data.
Let’s break each hurdle down:
Creating internal policies: In the public or education space, these are typically set up outside the scope of procurement by some type of governing body. This reduces the time needed from the team, but meeting compliance is mandatory and there are serious fines associated with not following and documenting the correct policies. For other industries, we find that their focus continuously gets pulled to the 20% of transactions that make up 80% of their spend (not tail spend). So to ensure success, a specific team or individual needs to be placed on tail spend compliance, which tends to be ignored even when the spend total exceed tens of millions to a billion, depending on enterprise side.
A compliant team: No matter the industry, this hurdle is the #1 challenge. This is namely because procurement teams are already bottlenecked with their time, and end users outside of the procurement office rarely know who the trusted vendor or vendors are that they should use. For organizations that do have procurement sourcing tail spend purchases, they admittedly acknowledge the inefficiencies and their desire to streamline the process. Many companies are taking steps in the right direction using preferred vendors, catalogs, Amazon Business, or business process outsourcers (BPOs). Despite steps in the right directions, we’ve been educated by our customers that most of these approaches still have clear challenges for tail spend that I’ll break down in a later blog. To summarize this hurdle, procurement is limited in time and headcount and end users are limited by their desire to adopt a new process or technology. Today these processes are still too manual.
Reporting tail spend compliance: A very wise procurement leader commonly uses the saying, “if you’re putting garbage data in you’re going to get garbage data out.” This couldn’t be more true in the world of tail spend. When we start a tail spend automation initiative with our prospects, they joke about how crumby their data is on the small to medium sized purchases. Most have been putting off a tail spend transformation project or compliance rollout until they’re able to get their “arms around the tail spend data.” Most of these companies have been in this static state for the last 3-5 years. Our respectful “challenge” made back to these companies is to upstream the data cleanliness problem by creating a front-end process versus trying to pull data in a reactive manner. Before you can report against clean data, we recommend finding a method to better collect data in a structured way and then pulling meaningful conclusions using data analysis.
Having a team in place and clean data is essential for both compliance and driving strategic decisions regarding suppliers, buyers, shoppers and transactions. These decisions should be based off data, not assumptions. With the correct internal policies in place, a willing and able team, the proper technology and data to work with, procurement organizations will be on their way to efficiently managing tail spend.
