Using Long Tail Spend Management to Achieve Savings

Transcription

1 Using Long Tail Spend Management to Achieve Savings Long tail spend management can unlock the next level of savings that many organizations are looking for

2 76% of procurement leaders who participated in a recent study said that increasing spend influence was either a major or critical objective for them 1. It was identified as a critical development area. This means tackling long tail spend is now high on the agenda of procurement leaders. Many organizations have achieved cost savings through the supplier base and byuse of a purchase-to-pay tool, but now they are looking for new efficiencies to leverage. Long tail spend represents a largely untapped source of savings, from their own organization. What is long tail spend? Long tail spend can be defined as all spend that is not strategically managed or under management. This means any spend without a contract framework agreement or negotiated work order. In organizations that have invested significant effort into strategic category management, managed spend tends to be around 80% of all expenditures, leaving long tail spend at 20%. It also includes a small, but significant amount of spend with managed suppliers, which is known as hidden tail. This spend includes purchases made from managed suppliers, but these purchases are outside existing contracts. The remaining tail spend tends to come from roughly 80% of the total number of suppliers. Often this will be fragmented: ad hoc purchases from multiple suppliers, low-value transactions at one-time vendors, non-purchase order spend, off-contract spend, etc. When all the long tail spend is added together it becomes the biggest overall supplier. This biggest supplier costs you a lot of effort and time, which is not clearly visible within the organization. Total spend (by supplier) 80% managed spend Hidden tail 20% tail spend Suppliers Figure 1: Proportion of managed spend and tail spend by supplier 2 1 The Hacket Group, Jan 2016, 2016 Key Procurement Issues Study.

3 IBX Business Network the way we do it What is the business value of tail spend management? Until recently, the generally accepted figure for how much sourcing organizations can save through managed tail spend has been 1% 5% (the less mature the organization, the more the saving). However, new research from The Hackett Group 1, concluded that this figure might be higher: as much as 7.1%. High-value maverick buying that should have been strategically sourced was cited as a factor in raising this figure (30% of respondents estimated 10% or more in savings). This underlines the importance of gaining visibility of tail spend. 42% 27% 20% 1% 4% 6% Average savings: 7.1% Should have been strategically sourced in the first place None 0%-5% 5%-10% 10%-15% 15%-20% >20% Figure 2: Estimated savings achievable through better management of tail spend Source: Key Procurement Issues Study, The Hackett Group, 2016 What are the other benefits of managing long tail spend? By better managing long tail spend, it is not only possible to directly reduce spend; it is also possible to significantly reduce the number of transactions and the related costs within procurement, and in other departments such as finance. This will also help minimize the number of internal resources (sometimes senior) working with tail spend suppliers to further reduce procurement costs. These savings can be significant considering that the administrative cost of each euro spent can be as high as 35%. Improving the visibility of low-value spend suppliers will create opportunities to identify sourcing savings and supplier consolidation. Also, increasing strategically managed spend, and managing long tail spend, will result in increased contract compliance, leading to further savings. Added to this, suppliers are more likely to offer increased discounts when they are the sole providers for a specific category, or when a set volume of purchases is guaranteed. Beyond cost savings, managing long tail spend helps eliminate noncompliant suppliers and consolidate larger suppliers, which leads to reduced business risk, and a reduced risk of fraud across the supply chain. This also increases the chance of your organization being compliant to external legislation such as Sarbanes Oxley (SOX). 1 The Hacket Group, Jan 2016, 2016 Key Procurement Issues Study. 3

4 What are the difficulties organizations must overcome to manage long tail spend? One of the main difficulties with long tail spend management is poor data visibility, caused by factors such as: complex supply chains different IT systems and data sources fragmented and disconnected business processes such as sourcing, contract management and procurement. Also, the sheer number of suppliers, items, transactions, and high number of business stakeholders can simply overwhelm some organizations. There are often not enough available resources with the right skills to analyze the problem and set a corrective action plan. Unfortunately, neither strategic category managers nor operational procurement agents tend to have the knowledge or skills to handle the long tail. Organizations that don t have clearly set policies or well-defined processes are more likely to lack effective control. Part of this process must be constant maintenance to prevent slippage. A good analogy for this aspect is that of keeping a garden. Just as a neat and orderly garden will become overgrown if neglected, maverick spend will creep into the spend cube. This results in a higher percentage of noncompliant purchases, often with low-value transactions and small-volume suppliers. Finally, there is often a lack of adequate tool support to help the organization analyze and manage long tail spend in an efficient manner. A purely manual approach to tail spend management quickly becomes cumbersome and error-prone without the right tool support. There is no quick fix for overcoming these obstacles, but the benefits of doing so are estimated by different sources to be between 15%-20% through reduced procurement cost, increased efficiency, supplier consolidation, additional sourcing savings, and decreased business risk. 4

5 IBX Business Network the way we do it The smart approach to long tail spend Organizations should first analyze their spend data with a thorough spend and supplier assessment. This type of spend analysis exercise helps gain an understanding of the current state, and will serve as a foundation for a business case in readiness for the next step. The next step is to gain top management and stakeholder backing. To be successful with a long tail spend management initiative, it is necessary to have the buy-in of your C-suite, i.e., the CPO and CFO, by means of a solid business case and clear description of the savings outcome. Establishing the support of top management will also help with the third step, which is to set-up clear policies and processes to drive the long tail management initiative. This includes compliance policies, preferred vendor lists, no purchase order no pay policies, etc. The processes should also include automated procurement, with catalog suppliers, as well as spot buy, and free text orders channeled through a tactical and operational procurement team. The next step involves, selecting and implementing the right tool to the complete solution for long tail spend management. Generally, crucial tools include a spend analytics tool and an easy-to-use eprocurement system with a good search engine featuring rich content, efficient buying channels,and support for spot buy and tactical esourcing. Finally, setting up a dedicated team to monitor long tail spend suppliers is key to a complete solution for long tail spend. Spot buying and operational-free text orders at preferred suppliers will run more efficiently with a dedicated group managing the process. It is also possible to outsource this work to an external team. Set up dedicated long tail spend management team Analyze Start using appropriate tools An integrated approach to managing tail spend Build business case Introduce policies and procedures 5

6 Summary It is important to realize that there is no one quick solution to managing long tail spend. If there are no clear policies or processes to guide an organization on what to do and who needs to do it, optimized and managed tail spend will not be achieved. By combining the right tool with the right approach, and analysis the hidden benefits from an additional level of savings in unaddressed spend can be gained. Abduelkadir Tekin Expert in procurement and sourcing consulting I support large enterprises to define strategy and to drive the delivery of their business operations transformation in purchasing, procurement and the business process outsourcing (BPO) area. I have worked with companies such as Deutsche Post DHL, Stora Enso, Lufthansa, Otto Group, Hilti, and Vorwerk, which achieved truly world-class results and continuous growth in their organizations. Capgemini Abduelkadir.Tekin@capgemini.com LinkedIn 6

7 IBX Business Network Procurement As It Should Be. The IBX Business Network connects over 350 large buying organizations to 550,000 suppliers and provides services in more than 140 geographies. A cloudbased, ERP-independent, closed-loop eprocurement platform, the IBX Business Network optimizes end-user experience, enables superior spend management while lowering total cost of operations. e-purchasing Cloud pioneer since 2000 Rated Strong Performer by Forrester in 2014 Top-ranked procurement vendor by Gartner in 2016 Part of Capgemini since 2010 We envision A World Of Connected Businesses and we intend to realize this by Making Procurement Everybody s Business Buying Customers Legally Invoicecompliant in +40 Countries +550,000 Suppliers Operational Products in +140 Countries $27 Billion in managed spend +25,000 sourcing events

8 For more details contact: About IBX Business Network The IBX Business Network is part of the Capgemini Group, one of the world s foremost providers of consulting, technology and outsourcing services. The Group reported 2015 global revenues of EUR 11.9 billion. Together with its clients, Capgemini creates and delivers business, technology and digital solutions that fit their needs, enabling them to achieve innovation and competitiveness. A deeply multicultural organization, Capgemini has developed its own way of working, the Collaborative Business Experience TM, and draws on Rightshore, its worldwide delivery model. The information contained in this document is proprietary Capgemini. All rights reserved. Rightshore is a trademark belonging to Capgemini. EDGE Connecting over 350 large buying organizations, 550,000 suppliers and providing services in more than 140 geographies, the IBX Business Network is a cloud-based eprocurement platform that optimizes user experience, enables superior spend management, while exacting lower total cost of ownership. A complete ready-to-run procurement service, the IBX Business Network supports the entire closed-loop source-purchase-pay process and results in lower costs and faster ROI, increased spend visibility and transparency, increased control and compliance, and improved supplier quality. Learn more about us at The information contained in this document is proprietary Capgemini. All rights reserved. Rightshore is a trademark belonging to Capgemini. EDGE