In previous posts, we talked about the importance of controlling tail spend and how—even though it might only be 20% of your procurement spend—it can oftentimes harbor a large savings opportunity. Some studies have estimated an average savings potential of 15%, but depending on the make-up of the tail spend, the savings opportunity can get into the 15- 40% range, especially where services, travel, and shipping are concerned. By managing tail spend and capturing it for post-spend analysis, procurement organizations will not only experience real savings, they will also increase their chances of identifying additional opportunities for strategic sourcing and thereby decrease spend over time.
But the most important reason to get tail spend under control is not to avoid overspending, both in terms of product and service cost and budget—it’s to mitigate the risks that unchecked tail spend can pose to your company. These risks include, but are not limited to:
Rebate and Discount Loss
In some categories, the only way to realize negotiated savings is to hit a volume or spend level with a supplier, at which point they offer you a discount on future purchases or—as is common in some categories—a rebate. If much of the targeted spend with the supplier qualifies as tail spend purchases, such as office supplies, contingent labor, or shipping, and neither the requisitioner nor the approver knows that an off-contract purchase means the organization will actually lose money because it isn’t able to attain the rebate, it is very likely that the intended savings will never be realized.
Employees could increase their risk of injury without a system that steers the user to the right vendor, especially in travel and services where key employees might be taking TNCs (transportation network companies) with relatively unvetted drivers, booking sub-par security services in dangerous locales, or buying uncertified, unsafe products.
If an employee increases his risk of injury, the organization in turn increases its liability with respect to benefits and compensation. In addition, hiring a professional without the proper certifications or insurance could increase the organization’s liability even further if the contractor is injured on-site or his work harms a member of the public.
The average employee doesn’t usually think about these types of situations when he is buying a box of copy paper, booking a cab ride, or hiring a workman to replace the carpet—but they are all situations that come with a very real financial risk for the company. The average organization is exposed to all of these risks on a daily basis if their tail spend is not under control.
But luckily, as we discussed in the recent posts that covered the importance of integrated procurement and why punch-outs don’t cut it, getting tail spend under control is very easy with an integrated e-shopping and e-procurement platform.