We’ve released a series of articles to answer your questions about tail spend. We started by defining tail spend, discussed how to better work with stakeholders to manage it, and now we’re diving into the potential risks lurking in your tail spend and the problem with taking a scorched Earth approach. To get up to speed, read our prologue, Chapter 1 and Chapter 2 on what this tail spend series will help you accomplish.
What is the risk exposure in my tail spend?
Risk is an increasingly important consideration in procurement and we’re right to think about the impact of risk hidden in our unmanaged spend. The tricky thing about risk is that it can differ across companies, even within the same industry. Supplier financial risk is important to most, but what about brand risk, geopolitical risk in the supply chain, and the risk of payment fraud? Depending on the spend category, IP risk or labor practice risk may also be a consideration.
The starting point, once again, is the spend analysis, with the category manager charged with determining the highest risks for their category. If a category isn’t actively managed, it can be assigned to a risk team for a basic analysis. Given that the average company only actively monitors about a quarter of suppliers for risk, there’s a lot of unwatched suppliers even outside the long tail. Risk assessments are typically driven by supplier spend or a triggering high-risk factor.
Risk mitigation must always be balanced with efficiency, so resist the urge to over-control and instead look at automated tools for faster assessments and ongoing triggers to keep the process agile. While some P2P tools like P-cards and B2B marketplaces involve letting go of control for lower-risk items and opening up choice to users, these tools still provide visibility into spend.
Choosing the types of spend appropriate for less controlled channels is just as important as deciding which suppliers need risk mitigation. Then we need to guide purchasers down the right path when they have a need – it’s all connected.
So I’ll just stop funding all tail spend. Problem solved…or is it?
This may sound like the easiest path – what if we just shut it all down and only allow purchases from approved suppliers who have been through our sourcing and contracting process? The classic tactic here is a “No PO, No Pay” policy, meaning all spend must go through the formal procurement process and be approved prior to purchase.
While our research shows that 48% of organizations implement this type of policy to manage compliance, we find that 61% did not consider the policy to be effective. One impact of these policies is that they punish suppliers for buyer behavior, which is not ideal and ultimately not always enforceable (suppliers need to be paid for their business). They also don’t address the root cause of maverick spend, which as discussed in Chapter 2 can range from lack of training to urgent business needs to not finding an available supplier for the needs.
These policies may put a transactional speed bump in the road, but they don’t expand our sourcing capabilities or improve the user experience. As the “command and control” model becomes less common and digital enterprises focus on collaboration we need to find a softer way.
Top-performing companies do use POs more than others, with 72% of spend on a PO or contract, but they tend to use less punitive ways to address unmanaged and maverick spend through technology, training and process improvement. You could stop funding all of your tail spend – and after better understanding it maybe some of it should be cut off – but cutting off the portion driven by a legitimate business need is counterproductive to our desired role as a valued business partner.
Read the latest articles on tail spend from sourcing and procurement industry thought leaders.
To get up to speed, you can read the entire Talking to Your Tail Spend series on our blog:
Ms. Fong is a Principal in The Hackett Group’s Procurement Executive Advisory program and Program Leader for the Purchase to Pay Advisory Program. She has more than 20 years of experience in both industry and consulting with a focus on procurement, supply chain and organizational effectiveness. Amy helps business leaders to improve source to pay processes, manage complex supply chain partnerships, and mature their organization’s service delivery model. She performs extensive primary research on the source to pay and operations space and has authored numerous publications. Ms. Fong holds an MBA from Vanderbilt University and a BS from Syracuse University.