The Quick Guide to Unmanaged Spend

Unmanaged spend, tail spend, rogue spend, maverick spend: no matter what you call it, it’s all a type of spending that puts an organization’s bottom line at risk. Unmanaged spend is the result of procurement processes that are too complex, too archaic, or too inefficient. This type of spending opens an organization to all kinds of problems, from wasted resources to compliance risk and even a competitive disadvantage. 

Fortunately, there are some ways to reduce unmanaged spend and minimize its impact. The first step to reigning in unmanaged spend is to understand how it crops up to begin with, and the different ways unmanaged spend is categorized. 

What is unmanaged spend?

Unmanaged spend is any spending that occurs outside of your defined procurement cycle. Within this category, there are a few specific types of off-book spend, such as: 

• Rogue or maverick spend: this spending behavior is the result of employees deliberately ignoring procurement processes or the misalignment of procurement policies with the everyday practices of purchasers within the organization.
• Tail spend: often defined as the money a company spends on purchases that account for roughly 80% of total transactions, which makes up about 20% of the company's spend by volume. There is no one size fits all definition for tail spend across different businesses, or even across one business, simply because every organization and business unit’s spending is unique. 
• Indirect spend: the goods and services purchased by a company that are incidental or subsequent to the product or service a company is offering—think of safety goggles, office supplies, or janitorial services. 
  

Unmanaged spend and tail spend are, essentially, two different terms for the same problem. Tail spend can include anything from maverick spend to misclassified purchases. 

Indirect spend quickly can become a form of unmanaged spend if not carefully monitored. Research by McKinsey found that indirect spend tends to be fragmented among multiple locations, business units, and categories. This makes it hard for the procurement team to identify and manage indirect spend.

These types of unmanaged spend all boil down to the same problem. When a procurement team doesn’t have oversight into tail or unmanaged spend, it puts the company at risk. 

The risks of unmanaged spend

There are many reasons why it’s critical to bring unmanaged spend under control, chief among them the cost savings that companies leave on the table by neglecting tail spend. The financial case for identifying and controlling unmanaged spend is clear. Consider a few of these third-party data points: 

• According to A.T. Kearney, “companies can realize benefits of 10 percent to 15 percent across a broad range of tail spend with 50 percent fewer resources when they adopt tail spend best practices.”
• Accenture found that since tail spend “is managed by procurement professionals, companies typically can achieve a one-time savings of 10 to 15 percent when addressing this spend the first time, and 2 to 5 percent per year in savings thereafter.”
  

But, the risks go beyond financial implications. Companies that ignore unmanaged spend are at risk of losing a competitive advantage. If your competitors are addressing tail spend and your organization is failing to do so, your business will be at a disadvantage. 

Moreover, failing to address unmanaged spend creates a culture of mediocrity — or worse, one of institutional dishonesty. A business that fails to manage spending is at risk of failing to execute its fiduciary duties to the best of its ability. Not only does unmanaged spend drag on the business’ bottom line, but it also prevents opportunities for growth and creates an uninspiring — or even downright lazy — work environment. 

How to combat unmanaged spend

The first step in reigning in unmanaged spend is to find it. The most common reason for unmanaged spend is a lack of visibility. Unmanaged spend tends to result from procurement and contract management running on separate systems, siloed subgroups within the same organization, a large number of vendors, or decentralized policies that make it difficult to gain oversight into procurement spending. 

Define your tail, or unmanaged spend in these three steps: 

1. Get a visual representation of cleansed, normalized spend information to the best of your ability. 
2. Add the risk stratification so you know what spend to go after, why you want to attack that spend, and what the potential cost-savings and value add is.  
3. Factor in your industry-specific dynamics. 
   

Then, start to chip away at your unmanaged spend one department or team at a time. Start with one key business unit that has unmanaged spend. Introduce a spend management system with technologies like automated sourcing platforms that are connected to your P2P or ERP system. Train members of each department on the importance of the program to the overall company. 

Adding automation is key. Organizations that successfully reduce unmanaged spend all have one feature in common: the process was automated as much as possible. Automating entire sourcing events means that teams can easily adopt the system and have less incentive to go off-book with their purchases. 

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For more resources on reducing unmanaged spend, check out Fairmarkit’s blog, The Source.