Many organizations, and external consultants, often develop an approach to tackle only the "theoretical" Tail-spend, which fit criteria such as bottom 10 percent, low volume, non-contracted, etc. A numerical definition often makes isolation of such spend itself a daunting task. GEP defines Tail-spend as everything that is not under active management. Find out more about how maximizing spend under management is the only way to address Tail-spend.

1. WHITE PAPER
Understanding
Tail-spend Management
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2. Understanding Tail-spend Management
Introduction
World-class organizations have a good level of control over most of their cost structure. As this visibility and control
increases, eventually a point is reached when the effort required to go further appears to be greater than the
benefits. At this point, a number of challenges arise:
• Poor data visibility
• Lack of effective controls
• Little market leverage
• Low potential savings
• Lack of interest from other stakeholders
• Lack of category expertise in the very high number of categories remaining
Organizations often find it difficult to define and execute a unified approach which allows them to get their arms
around this last portion of sourceable spend. Traditional strategic sourcing approaches need to be flexed and made
more resource-efficient, while technology and transactional procurement processes also play a critical role.
Attempts to address this challenge have led to the appearance of a new vertical within Procurement departments:
“Tail-spend Management” (TSM). In challenging economic conditions, where CFO’s are leaving no stone unturned
in the quest for cost reduction, TSM is becoming a hot topic in medium to high maturity procurement organizations.
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3. Understanding Tail-spend Management
Definition of Tail-spend
The term tail spend comes from the Pareto principle, which states that only 20% of your suppliers will account for
80% of your spend. Accordingly, 80% of your suppliers will account for 20% of your spend, and this ever-thinning
series drawn in a block graph looks like a tail. Note that the Pareto principle works more or less exactly depending on
data sets, while the 80/20 ratio will vary from firm to firm depending on a number of variables. In some firms, 80%
of suppliers may account for more or less than 20% but in most cases the true figure will be close to 20%.
Spend
Many organizations, and many external consultants, develop an approach to tackle only the “theoretical” tail-
spend, which fits criteria such as the bottom 20% by value, low PO volume, non-contracted spend and so on. A
theoretical definition often makes the isolation of such spend a daunting task in itself. GEP prefers to use a different,
wider definition based on the realities of the challenges faced by our clients over the years. For GEP, tail-spend is
quite simply unaddressed spend, by which we mean spend on commodities and categories which have not been
formally addressed by Procurement in the last 2 to 3 years. (If you have not addressed those categories accounting
for at least 60-70% of your spend in the last 2 to 3 years, it is unlikely that your focus is going to be on tail spend
anyway.) By using this definition we believe organizations can avoid wasting time on theoretical definitions and can
much sooner get to work tackling the real issue: unaddressed spend and new savings opportunities.
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4. Understanding Tail-spend Management
Qualities of tail-spend
The large number of categories within tail-spend varies from firm to firm, but regardless of the specific categories,
tail-spend displays a number of common characteristics:
• It rarely includes direct materials
• It contains a disproportionately high percentage of spend from the furthest-flung subsidiaries of the
organization
• It often contains suppliers that no one in the procurement team has heard of
• Non-compliance and maverick spend often lurk here
• A majority of it is either not low-price, or not low-volume
This last point may seem surprising, but it is one of the most important things for organizations considering tackling
their tail-spend for the first time to understand. Significant parts of tail-spend can be addressed using well
established sourcing techniques. The key is how to execute effective sourcing strategies while maximizing
efficiency. The low value of tail-spend categories means that return on investment (ROI) is always going to be lower
than for core categories. Successful approaches will have an eye on both sides of the efficiency/effectiveness
equation.
Efficiency Effectiveness
Maximize ROI Deliver Savings
Harness technology Reclassify data
Adopt appropriate Improve compliance
processes and policies Harness category expertise
Consolidate spend across
countries
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5. Understanding Tail-spend Management
Approaching tail-spend management
There are many ways to approach tail-spend management (TSM) and the best results are achieved by following a
variety of approaches simultaneously. Like other types of sourcing, an iterative loop is involved, whereby data is
constantly reviewed in the light of previous sourcing activities and changing business requirements.
Spend Analysis
Filtering
P2P
Sourcing
Spot Buying
1. Spend Analysis
The starting point here is data. Best-in-class spend analytics software, such as GEP's eSpend tool, will take data from
a variety of sources, such as Accounts Payable, General Ledger, ERP systems, etc., and typically classifies around
95% of your data at the first iteration, already deep into a 20% tail. Over time this classification can improve even
closer to 100%; indeed proactive TSM will actually improve data classification over time. Good spend analytic
solutions will also allow you to drill right down to the line item level, critical in the next stage, which is classifying tail-
spend data.
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6. Understanding Tail-spend Management
2. Filtering
Deep dive data analysis will allow you to filter and reclassify your tail-spend so that appropriate strategies can be
employed by category. We typically use filtering models like the one below to ensure that different types of tail-
spend are addressed in an appropriate manner:
E.g. French fries classified
Misclassified in “electronics‐other” Reclassify and incorporate in
Items because European office existing contracts
calls them “chips”
E.g. Welders and fitters in Strategic Sourcing with 3
Low price, high
factories, corporate gift year+ contracts to achieve
frequency articles
ti l volumes
l
E.g. Macbooks bought for Eliminate the spend,
Maverick
supermarket checkout introduce checkpoints to
Spend counters ensure compliance
Tail Spend
T il S d E.g. Construction of a
Rapid RFP or e‐auction,
One‐time, but warehouse, office shifting,
ensure procurement is
high amount consultants for an
involved in negotiations
acquisition
E.g. Spend on coffee at
Fragmented 1760 facilities worldwide Consolidate and source
spend classified under “Misc” by centrally
each of them
Low price, low E.g. ID badges for new
Distilled true tail-spend
volume employees
Right from the start managing tail-spend effectively involves reducing the size of the tail. Following data
classification sourcing opportunities will be identified and some will normally be handed to core category managers
to address.
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7. Understanding Tail-spend Management
3. Sourcing
As per the classification above, some tail-spend categories will be identified as appropriate for more traditional
sourcing approaches. Here the key is efficiency. Online eRFx and eAuction tools, such as those in GEP's technology
suite, hugely improve efficiency by leveraging standardized templates and engaging multiple vendors
simultaneously. The time, effort, and number of vendors included can also be flexed in line with value and sensitivity
of spend.
Kickoff with Stakeholder
Collect/validate data
Consult SME, finalize plan
Bid and buy One source Mini RFP
(3-5 weeks) (2-3 weeks) (6-10 weeks)
Request bids Request break Create and
from suppliers -down of cast issue RFP
Collate and analyze responses
Negotiation rounds
Final savings sign-off
Accelerated sourcing projects match effort to reward and ensure that a higher volume of projects can be run
simultaneously by TSM resource. Of course, carrying out sourcing projects on tail-spend categories drives an ever-
higher percentage of spend under contract and has many benefits in terms of risk management and sustainability
as well as cost savings.
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8. Understanding Tail-spend Management
4. Spot buys
While the approach has been top-down and data driven so far bottom-up approaches to address spend at the point
of requisition are also excellent ways to realize benefits from proactive tail-spend management. Spot buys will
frequently follow an even more accelerated sourcing process than those shown above, and here again filtering and
classification is essential for proper prioritization and optimal results.
PO Data
User
Supplier database Bring under
Contract existing
Database contract
Requisition Requisition Sole
Sourcing
definition Assessment
Ÿ Scope of services Ÿ What is the estimated annual
Ÿ Criticality of service spend for requirement?
3-Bid and Buy
Ÿ Specifications Ÿ Are there existing contracts for or Quick RFQ
Ÿ Urgency of requirement similar service in the company? with select
Ÿ Frequency of requirement Ÿ Are there existing suppliers for suppliers
Ÿ Estimate Spend/Budget the similar service in the Value and
amount database?
Ÿ Business requirements Ÿ What is the total spend for the
leverage Accelerated
Ÿ Must have and good to category across company? sourcing project
have supplier capabilities Ÿ How critical and urgent is the
requirement? (mini-RFP)
Ÿ Establish baseline and savings
methodology
Ÿ Access category expertise to
establish savings potential and
Strategic
appropriate alternative vendors
Sourcing Project
Tail spend sourcing
methodology framework
If spot buys are channeled through Procurement then repeat spot buys in low-volume categories can be identified
and driven onto contract through sourcing over time, while ongoing spot buys can benefit from accelerated
sourcing techniques such as 3-bid and buy.
5. P2P
And finally, also in terms of a bottom-up approach, driving as much low-value spend onto technology platforms
such as P-cards, online catalogues and punch-outs gives Procurement much greater visibility and control over tail-
spend and greatly reduces manual effort. GEP's ePurchase module allows our clients to manage all of these
platforms in one place. As more spend is driven online, data quality is improved, so that when spend analysis is
refreshed an ever-greater percentage of data visibility is achieved and the iterative loop can start again.
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9. Understanding Tail-spend Management
Critical success factors
A good understanding of the nature and challenges of tail-spend is not difficult for procurement
professionals to grasp, but given an expectation of low ROI, data challenges and at best lukewarm interest
from the rest of the organization, knowing what to do and how to do it is not so clear cut. GEP has been
working with global clients on TSM for the last ten years, and our experience demonstrates that the
following are the three critical success factors:
1. Procurement technology
At the time of writing there is no single tool on the market specifically for tail-spend management,
nor do we expect to see such a tool, but having the right tools in place for all of your spend
management is a critical contributor to the efficiency required for cost-effective TSM. In addition,
the more integrated your different procurement tools are, the more efficiency you gain. Best-in class
spend analytics is invaluable when it comes to addressing tail spend, but we also believe all of this
data should speak to your supplier management, contract management, P2P and eRFx/eAuction
tools: once you have identified a tail-spend vendor you can quickly check if a contract is in place, if
there are any performance issues, include them in a RFQ. Even simple things like allowing vendors to
pre-register themselves online can be hugely beneficial in the high vendor volume environment of
TSM. A high degree of process automation throughout the category management cycle allows TSM
resources to dedicate themselves to value-add activities, while P2P technology is a huge help in
driving compliance and improving data quality over time.
2. Simplify processes and increase control
To work within the limits imposed by low spend, procurement processes need to be simplified.
Exceptions should be obtained from Legal and Finance approvals for projects in low spend and low
risk categories. RFPs can be reduced to RFQs. NDAs can be dropped in low sensitivity categories.
Lengthy negotiations can be replaced by a 3-bid & buy process process or an e-auction. In short,
each process needs to be examined and simplified, and the effort justified in terms of the potential
benefits.
While procurement processes should be simplified, controls need to be tightened elsewhere. Once
a TSM team is put in place, effective controls have to be in place to ensure that all tail-spend is
sourced through them. For low-spend items, functional teams can get complacent and bypass
Procurement, which can derail the process. Effective controls need to be coupled with extensive
communication to drive awareness within the organization.
3. Establish dedicated resource and manage performance
Our starting point for defining tail-spend was Pareto, and one of the most prevalent
interpretations of the Pareto Principle is that you should ignore the bottom 20% and focus on the
top 80%. Addressing tail-spend flies in the face of this and the danger with any TSM approach is
taking focus away from the true priorities. Expecting existing category managers to deal with tail-
spend is unrealistic and is really tantamount to ask them to focus on the wrong things. For this
reason dedicated TSM resource is critical to ensure a positive impact has been made. TSM is a prime
“category” for outsourcing. An outsourced service provider will be able to leverage much broader
category expertise, scalable technologies and processes and can flex resource over time. For CPOs,
tail-spend can be managed through a single commercial relationship underpinned by a robust
service level agreement (SLA) and agreed ROI. If savings is the principle measure of any Procurement
team, the need to justify investment is even more intense in TSM.
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10. Understanding Tail-spend Management
Conclusions
With tail-spend management, take unaddressed spend as your starting point and deploy a variety of approaches to
reduce this spend and bring it under control. Having the right tools and processes in place is vital in tackling tail-
spend, but having dedicated and specialist TSM resource is equally crucial. Making significant advances in data
visibility and contracted spend will help you further your risk management and sustainability objectives over time,
while a difficult economic environment is paradoxically the perfect time to tackle your tail-spend head on. Do it
now, before someone remembers the Pareto Principle again.
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11. ®
GEP (Global eProcure) is a leading procurement services firm dedicated to helping enterprises add value
and reduce costs through procurement and supply chain transformation. With a comprehensive portfolio
of services and solutions, GEP helps many of the world's largest organizations uncover savings
opportunities, and deliver these savings to the bottom line. We have managed over $50 billion of spend
on behalf of these clients, across industry sectors and geographies.
Our blended model combines management consulting, strategic sourcing support, implementation and
outsourcing services with a full suite of best-in-class procurement tools and technology solutions. Our
global footprint helps us to deliver these services wherever our clients need them. Headquartered in New
Jersey, USA, we have offices in London (UK), Prague (Czech Republic), Mumbai & Hyderabad (India),
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