The problem with unmanaged spend and why it matters
Cost savings are rarely absent from corporate agendas and for good reason - after all, spending is a company’s biggest threat to financial success.
Yet procurement teams will know only too well that whilst significant outlays are appropriately managed, the smaller transactions and maverick spends which make up the tail are both unseen and unplanned.
In this series we’ll be covering the key criteria involved in mastering tail spend control, enabling you to budget more effectively and realise a significant improvement to the bottom line.
We’ll discuss how to troubleshoot and solve problems, implement a management framework for better sourcing and finally, run through the different solutions available on the market today.
So, kicking off today, let’s start the troubleshooting: how do companies solve the problems of unmanaged spend - and can it really make a substantial financial impact?
Why maverick spend spells trouble
Recent research we commissioned alongside CIPS and Supply Manager Insider showed almost 4 in 10 procurement professionals surveyed admit that more than 50% of their tail spend is made without active management.
Yet with tail spend accounting for as much as 80% of a company’s transactions and up to 20% of purchasing spend, those “unseen” pounds can run into the millions.
What’s more, untracked spending denies procurement teams the chance to accurately set budgets or effectively use analysis to advise future purchases.
Unseen purchasing often takes departments over budget, despite best planning - and those maverick transactions are often made from exponentially widening supplier pools. This leads to too much choice and a much bigger job in benchmarking for cost and suitability.
With a company culture of unchecked spending in the tail, indirect costs can never be forecasted making future budget setting impossible.
After all, how can you get a handle on unplanned spending if it’s never logged or tracked?
Analyse to realise those cost savings
The key to taking control of tail spend is visibility. Without the data on purchases, it’s impossible to analyse, and analysis will be the route to saving costs.
Crucial to this process is changing the corporate culture to reflect a proper procure-to-pay process. This article from CIPS makes a great start on ways to tackle maverick spend but essentially the focus should be on formalising purchasing at all levels and ensuring the procurement process is followed, capturing data on the myriad small transactions.
This data then represents your most valuable asset - and proper tail spend analysis can equate to surprisingly significant savings. Having the ability to tighten supplier pools, by vetting companies for suitability and value leads to more mindful purchases, and logging spend properly allows for accurate forecasting and budgeting.
Without this level of control, tail spend can invisibly drain resources and profitability and result in low cost benefit ratios. Greater accountability in this area is never a wasted endeavour but it’s likely that taking charge of unseen spend will be a secret weapon for realising huge gains.
Next week: with more visibility in the tail, how can we spot opportunities to drive savings?
To find out more tail spend facts from over 400 procurement professionals download our white paper.