If you’ve spent any time at all around Procurement professionals, then you’ve likely heard about Tail Spend Sourcing. There are numerous consultants, technology providers, outsourcing providers and even some Procurement Leaders singing its praises.
That’s unfortunate. Organizations pursuing Tail Spend Sourcing are explicitly communicating that they’ve given up on managing 60%+ of their supplier base, and perhaps more importantly, that they are willing to violate ‘Sourcing 101’ rules. Tail Spend Sourcing is a temporary band-aid that sets fire to 70%+ of value that should rightfully accrue to the buying organization, for at least the following 5 reasons:
- Unmanaged Spend ≠ Spend Category. Tail Spend is not a unique spend category, and thus cannot be sourced effectively as a spend category. Tail Spend – or more accurately, unmanaged spend, – is an aggregation of 40%-60% of total spend from 60%-80% of the total vendor population. Attempting to source Tail Spend as a unique category makes no sense whatsoever. No procurement professional would ever consider sourcing Professional Services, Technology Hardware, Marketing Production, T&E, MRO and Banking Services as a single event; nor should this be attempted under the guise of Tail Spend Sourcing.
- Undefined requirements lead to poor results. Sourcing scope without the benefit of business requirements, KPIs/SLAs and overall category-level strategy is poor substitute for good work. This is true in traditional Category Sourcing, and certainly holds true for Tail Spend Sourcing. Sourcing in the ‘blind’ is a rookie move – which telegraphs your vendors that the Procurement team are amateurs, but also because, in best case scenario, Tail Spend Sourcing will achieve only 30%-40% of the savings and only for a very limited period of time (eg. the results are not sustainable).
- Technology is not the answer. As in all cases, if you are executing basics well, then technology on top of that will make you more efficient. But if you are not doing the fundamentals and basics well (e.g. if you are even considering Tail Spend Sourcing), technology will not help you; technology will enable you to create crap at the speed of light.
- Poor results masquerading as achievement. “You don’t know what you don’t know”. Tail Spend Sourcing may generate some positive results but these results are short-term in nature. Worse, Tail Spend Sourcing will almost never address key Procurement objectives, including: a) reducing operating complexity, b) reducing operating risk, and c) maximizing cost reduction on a sustainable basis. To this point, a professional (who will go unnamed) recently boasted of generating $18 million cost reduction in “Tail Spend”. Yet, this effort generated a paltry 4.5% cost reduction based on $400 million baseline; resulting in missed cost reduction of at least $42 million.
- Incremental work effort for comprehensive category sourcing vs Tail Spend Sourcing is minimal. Comprehensive category-level sourcing (including applicable portions of Tail Spend) requires only a few months of additional work vs Tail Spend Sourcing. These few months of work typically translate into many million – and sometimes, tens of millions – of savings.
So, what should you do? My advise is that Tail Spend must be addressed within the scope of broader category strategy. The only way to permanently address Tail Spend is by consolidating spend across a small number of preferred vendors. Will this fully eliminate the Tail? Unlikely, but based on experience, it will reduce the number of vendors in the Tail by 80%-90%. This will create cost savings of at least 15%-20% – and often much more. This approach will reduce vendor risk. And ultimately, this approach will position the buying to firm to fully leverage their purchasing power and engage in value-added discussions with preferred suppliers from a position of strength.