In Part one of “Is tail spending costing your business money?“ We described the basic steps required to get your tail spend data into a format that enables you to understand the make-up of the spend and look for ways to extract the value of the savings from it. In this Part 2, I go into what to do. But, of course, no one wants to do all this work for nothing.
By now, we should understand “the who and the what”, which means that we can now start to do something about it.
What to do about it?
I would recommend taking a piecemeal or chunk size approach to the data. Yes, it will likely take longer overall, but it will be manageable and have a higher chance of success.
Start by identifying those categories within the tail spend that are generally higher volume, higher value items and can be grouped. Alternatively, group purchases by like-for-like suppliers. These larger “buckets” are worth putting the time and effort into. However, while it is tempting to go after it all at once, the additional resources and time required on staff will likely make it unwieldy.
- Once we have the “buckets” defined with the items, there are several options to manage them:
- Categories, for example, Office Supplies, Telecommunication, Printing etc., may be large enough value in their own right to take to market in a competitive tender process and bring those items under contract management (I’ll write about competitive tenders in another article for those interested). This type of approach has the potential to unlock serious savings value and, more than likely, consolidate suppliers.
- In other situations, it may be a case of already having an existing supplier through which you can purchase these tail spend items. Then, you can shut down the “other” suppliers and again bring the spending under contract management.
Both of the above approaches can reduce the number of suppliers and provide back office efficiencies regardless of savings.
When we found no process for ordering office supplies, I recently had one client who put a process in place with exceptional results. In this case, employees bought their own office and stationery supplies and then claimed them back through their expense claims. As you can imagine, spending and prices were all over the place, and purchasing was literally out of control.
Working with the company, we took the pdf invoices, got them into a digital format and once we understood the spend, we put a process in place that, without going to market (we had some historical data in the tail spend to support our decision) nominated a specific supplier, appointed a central purchasing person and then communicated to all employees that expense claims for office supplies would not be paid unless the purchase was approved first. This went a long way to reining spending and resulted in close to 30% savings in the first year.
Admittedly, there were some unhappy employees to start with, but that settled down quickly, and now everyone has accepted the process, and the organisation continues to bank savings. It also meant that the accounts department handled only one invoice per month, not multiple expense claims.
Today, in this case, we continue to monitor the purchases quarterly and take corrective action where necessary.
Risks of doing nothing
Organisations are potentially risky if they don’t manage their tail spend. Tail spend is typically informal, un-monitored and left alone it allows people to make decisions at their discretion with the possibility of consequences such as:
- Little to no concern about getting the best price (Price Risk)
- An operational risk to the business by purchases that may not have been appropriately vetted could present a risk to employees, the company and their customers.
If you haven’t reviewed your tail spend recently, there is a high chance you are paying too much and putting your organisation at risk. If you struggle to know where to start to get your tail spend under control, ERA may help you get back on track and save you considerable money while helping put the processes required to manage tail spend.
There are also software tools such as ERAs SpendVueTM that will provide top-line executives with in-depth intelligence on their organisation’s spending, including tail spend. Certified analysts drill deep into your company’s financial data and apply ERA’s proprietary industry benchmarks to your spending. The result? Clear, immediate, and actionable insights are available in an accessible and engaging format. ERAs certified advisors work with you to identify a pathway to cash flow improvement that best suits your organisation’s needs. You can view a short video of SpendVueTM at the following link https://vimeo.com/680583659
If you want to know more about managing your tail spend, please contact Grant Morrow.
Grant Morrow is a Principal Consultant at Expense Reduction Analysts and is a SpendVue certified advisor.
He brings over 30 years of hands-on experience working with SME companies to identify where they are overspending and develop strategies for better cost management.