How to manage tail spend before it becomes a runaway train
Typically, a few items contribute a major percentage of the expenses in an organization. As an example, salary expense could be the single largest item of expense that consumes more than half the costs of the company.
The same logic applies in reverse as well. There are many items of expenditure that, together, contribute only a small percentage of the total expense budget. It is also used as another example of the 80:20 rule of management; 80% of the budget being consumed by 20% of items while 80% of the items of expense consume only 20% of it.
This, the consumption of about 20% of the budget being consumed by almost 80% of items, is known as tail spend. The percentages are illustrative. It could be 70:30 in some organizations and 90:10 in some others.
The 80:20 principle of management blends in nicely with the benefits many clients claim they get when they outsource to oWorkers. Some of them, especially from the US and Western Europe say they are able to reduce costs by almost 80% and bring them down to a level of 20% of pre-outsourcing costs.
What can be the issue with tail spends?
Why are we discussing it?
The issue that often arises with tail spend is that they can go unchecked. Since each item is small, it could escape scrutiny in a manner that large spends are usually put through, with the result that over a period of time they could add up and become a large number of unchecked or unscrutinized spending. Think corporate gifts. Think office products. Think display material. Think packaging and printing. Think transport. Think entertainment. Think office refreshments. Within each cost head there will be many transactions, of very small amounts.
This is not to say that small items of spending are not important. Quite the contrary, in fact. These items could be as critical to the functioning of the company as the larger items. The difference arises in their individual value, because of which they could escape the due diligence that larger items have to undergo.
With expense approving authorities as well as people responsible for procurement likely to be spending a lot of time and attention on items of high value, and understandably so; after all, it is their version of applying the 80:20 rule to advantage, it is no surprise that tail spends often suffer from inadequate management oversight.
Tail spend presents an opportunity for rationalizing spending and hence needs to be managed. While keeping costs under control is a good management practice in the best of times, when the headwinds of recession buffet the global economy, the relevance of managing tail spend efficiently becomes all the more important.
Led by a team of experts, with over 20 years of hands-on industry experience, oWorkers is geared to address client issues proactively, enabling them to focus on their core business.
Reasons contributing to the complexity of tail spend management
Management usually begins with measurement and tracking. “If it can be measured, it can be measured,” noted management gurus are reported to have stated on more than one occasion. And that is the one area, measurement, which presents significant challenges in the efforts at management of tail spends. The reasons could be many.
For one, the classification is not always consistent. It may be due to the significance, or lack of it, of the amount. Office vending machine supplies could be classified as entertainment expenses in one instance and office supplies in another. And the large number of categories and subcategories does not help.
Large organizations use many different systems. The systems used by vendors and clients also adds to the complexity. Often it is not possible to port data from one into the other application where the consolidation for tail spends might be taking place.
Exacerbating the challenge is another common organizational malaise, that of different units working in their respective silos, with the twain meeting only when forced to.
By consolidating processing with an outsourced supplier, such as oWorkers, many companies are able to reduce the complexity in tail spend management. oWorkers, in a short period of eight years, has acquired several accolades and is now recognized as one of the top three providers of data based BPO services in the world.
Managing tail spends
Whatever may be the challenges with tail spends, not managing them cannot be the solution. An organization, and the people through whom it operates, need to make efforts to squeeze every ounce of value from its revenues as well as expenses, in order that the business operates at its most optimum level.
What are the steps an organization should undertake with a view to better managing its tail spends?
Identifying the spends
Shooting in the dark does not produce good outcomes. The target needs to be clear and visible. Hence, an essential prerequisite to its effective management would be to identify tail spends, a part of the ‘measurement’ requirement discussed earlier.
Tail spends are general classified along the following lines, mostly based on value:
Tail Head – Items that could be classified as significant but not strategically managed thus far. For large organizations, a ballpark range of a million down to about a hundred thousand dollars can be used, assuming above a million will call for strategic management.
Tail Middle – Usually anything above $5,000 will creep into this section of the tail, with a cut off at the number that pushes it into the Tail Head.
Tail End (also known as Tail of Tail) – If you are spending less than $5,000 on a supplier or a certain item of cost, it should possibly classify as being a part of the tail of the tail. In other words, the lowest value items are included here.
Invisible (also known as Hidden) Tail – This consists of the one-off items that are above a million dollars but not being managed strategically.
Having consistently followed a policy of a multi-cultural and multi-national talent pool at work, oWorkers is now reaping its downwind benefit, one of which is an organically developed multi-lingual support team. oWorkers provides support in over 20 languages and can handle global operations for its clients, regardless of geography or language.
Business process improvement
Digital procurement systems are helpful in streamlining processes and ensuring that nothing slips through the cracks. These systems ensure that the transaction does not move forward until all requirements have been fulfilled and the appropriate authorization has been obtained. However, establishing and enforcing systems and processes are equally important. Employees participating in the process need to understand that the process is important.
The resultant could well be a global model of delivery, instead of varied processes being followed by small teams in different geographies. This could also allow the company to invest in qualigies, knowledgeable resources in procurement and tail spend management. In any case, it is expected to usher in an operating environment with superior information and processes.
oWorkers, on account of its positioning as premium employers in each of its delivery geographies, attract the best talent. This affords them the choice of choosing the right resources for various client projects. With the help of an independent training function, these resources are honed into production-ready resources for adding value to client projects.
In a company, an analysis is performed with an objective; usually it is to improve something. In case of tail spends, the objective, clearly, would be to reduce expenses. Analysis is likely to reveal opportunities such as:
- Elimination of certain spends that are not adding value
- Bulking up purchases for the benefit of better pricing
- Entering into contracts with suppliers who are currently not under contract, for better terms
- Retaining the best supplier where multiple suppliers are used for the same or similar products
Such an analysis could release efficiencies from the supply chain while reducing costs through an optimization of the number of transactions and suppliers.
oWorkers has cultivated relationships with a wide cross-section of technology companies.
How does it help?
oWorkers today is in a position to leverage the latest in technology through its partnerships, for deployment in client projects.
Technology is everywhere. Tail spend management cannot be an exception. Digital technologies such as big data and Artificial Intelligence (AI) are diving into financial and accounting systems deeper and faster and unearthing information that was, hitherto, difficult to access. This is true for all spend management, and not limited to tail spends.
Digital support systems also deliver to an organization the ability to respond with alacrity and intelligence in any situation that is emerging that is different from the norm instead of responding in a hurry and trying to recover from the consequences later.
Spend analytics, used wisely, with the help of digital technologies, can significantly aid the process of operational management.
Known for operating out of super secure facilities that are ISO certified (27001:2013 & 9001:2015) keeps client data secure and builds confidence. Add their GDPR compliance and oWorkers becomes a compelling proposition for any project requiring technological excellence.
Tail spend management benefits
The pandemic has not made life any easier for many companies. That being said, it has brought into focus areas of work that were, possibly, not being as closely managed earlier as might have been needed. Tail spends could be one such area that is now receiving due attention. Actively managing tail spends could release benefits like rationalization of suppliers, including increasing the diversity pool, implementation of processes and advanced technologies as well as managing runaway expenses. Identification, analysis, deduplication, cleansing, artificial intelligence (AI) are some of the tools leveraged for creating value.
With a 24×7 operation, presence in major locations around the world, a global client list and exposure to multiple industries, oWorkers is the favored BPO partner for many companies, including large technology companies as well as unicorn marketplaces. We hope you will join them soon.