Why Procurement’s Future is in the Long Tail
There may be no better example of the 80/20 rule than company expenses. List a firm’s vendors and the amount spent with each, sorted from largest to smallest, and there’s a good chance that the top 20% of vendors will represent at least 80% of the expenses. Graphically this maps to the familiar arc falling steeply from the vertical axis, turning gradually leftward, and then extending almost horizontally with the “long tail” of smaller suppliers and related expenses.
Tail spend represents the final 20% of total spend and is often unrecognized by companies as a cost savings opportunity.
It’s no wonder that the high-spend vendors get the most attention from procurement teams. Given limited resources, culling through tens of thousands of purchases that collectively represent a small fraction of a company’s expenses has been too much work for too little payoff.
An estimated 15% of indirect goods come from one-off purchases, resulting in:
- Inefficient purchasing
- Reduced transparency
- Higher transaction costs
- A growing long tail of one-off suppliers
Source: “Shining a Light on One-Off Purchases, Procurement Leaders, 2016
Where does the long tail come from?
The procurement long tail is often a mixture of small purchases that are poorly managed and leave money on the table. For example:
- One-off purchases for ad hoc needs not met by existing, preferred, on-contract suppliers;
- Off-contract, also known as “rogue” or “maverick” spend, that bypassed the corporate contract;
- Purchases made via corporate or p-card and on employee expense accounts; and
- Invoices received without POs where POs are required
This is a partial list – but these are big contributors to the tail spend challenge.
Long Tail Spend Seen As An Opportunity for Procurement
Attacking tail spend is widely seen as a challenge and a priority, according to Spend Matters’ Pierre Mitchell, who wrote in Fix the Tail to Propel Procurement: Attacking the Tail Spend Problem in B2B. Mitchell notes that “tail spend, which includes lower-value and non-recurring purchases, is the worst nuisance area and a stated priority of 35% of procurement groups.”
But how to you rationalize applying resources on suppliers that represent less than 5-10% of business value?
That calculus is changing, however, and the difference maker is artificial intelligence.
New AI Procurement Tools Present New Opportunities
With improved data capture and quantum leaps in processing horsepower, AI in procurement solutions can bring even the smallest vendors and purchases into view. This is revolutionary – according to Deloitte’s 2018 CPO Global Survey, nearly two-thirds of all CPOs have little visibility beyond their top tier suppliers.
Of course, the goal isn’t just to see where the money goes but to improve purchases and decisions throughout the organization. Here’s where working with the long tail may provide results far beyond the size of the transactions. For procurement teams aiming for a more strategic role in their companies, AI solutions applied to the long tail may be the best approach yet.
The First Benefit for Procurement: An Overdue Cleanup
The long tail is a bit like the floor of a kitchen that hasn’t been cleaned in a month. You know it’s dirty, but once you start sweeping you realize there’s more there than you thought.
Rogue and Maverick Spend
The first among usual suspects are off-contract and off-policy purchases. Often called rogue or maverick spending, this perennial procurement headache is estimated to add 2% to total indirect spend, according to the Hackett Group. Fixing it would bring a bottom line boost, but higher compliance requires first finding and then correcting behavior.
AI solutions can comb p-card, accounts payable, and T&E records line-by-line, use industry data to match vendor names to likely categories and contracts or policies, and then marry employee and manager data to send gentle reminders to the errant buyers. The days of sourcing analysts playing forensic detective and killjoy tattletale can soon be relegated to the past.
Candidates to Prune
While some purchases beg optimization, others should be eliminated outright. When medium and large companies scrutinize smaller transactions they typically find a host of loose ends, such as:
- software subscriptions that haven’t been used in years
- service fees for retired equipment
- instances of software tools that are already covered via an enterprise license, and
- even utility bills from abandoned office locations, among others.
For example, at my auditing firm in the mid-2000s, we found an installed phone that our client had been renting from the local phone company for well over 30 years. We calculated they had paid nearly $10,000 for a $50 phone because the monthly fee was small enough to escape notice.
These are Ben Franklin’s proverbial small coins when he advised: “Worry about your pennies and your dollars will worry about themselves.”
The Higher Benefit to Procurement: Greater Influence
With AI procurement solutions unleashed like a virtual army of low-cost analysts, procurement teams can bring meaningful savings to the surface and enforce buying policy. But leaders would be remiss to see AI as simply a tool for compliance and control. The greater opportunity is strategic, because influencing more purchases means influencing more purchasers.
While the biggest vendors may represent the bulk of spending in an enterprise, they represent very few decision-makers. In contrast, long tail expenses span every employee with a company credit card. You could draw an inverse curve over the long tail showing that as the spend decreases, the number of employees increases.
Procurement Changing the Culture
Access to the long tail brings the potential for procurement to influence from the bottom-up, instead of just top-down. When leadership monitors and shapes small purchases, it signals an attention to detail that will build engagement for all purchases. Employees will see evidence that stewardship and economy are core values of the company in matters large and small.
This level of oversight isn’t without potential downsides. At worst it could foment a “big brother” paranoia throughout the company. More likely it can simply perpetuate a negative brand for procurement as Oscar Wilde’s definition of a cynic: people who know the cost of everything, but the value of nothing.
On the other hand, enterprise-wide communication is a platform for procurement to reposition its brand to be the strategic, user-focused center of excellence that most CPOs envision.
The Brand You’ve Always Wanted
Making the most of AI and its reach will require some imagination. Consider your favorite electronic user experiences: Netflix, Amazon, or maybe even your cell phone carrier. Those firms use AI to communicate in a way that is efficient but also high-touch (“Here’s a new show you might like” or “Will you be traveling outside of the country again soon?”).
Your sourcing team may not be able to offer new comedy specials, but what if you could provide value and even personality beyond enforcing the rules? An AI-enabled nudge to the long tail could look something like this:
- Your team is among the leaders in terms of using approved vendors – as a result, we’d like to buy you all a pizza lunch!
- Did you know that our agreement with this software company includes free training? Here are some upcoming webinars that might help you get more from the tool…
- If you’ll be traveling next month, here’s the link to our booking app.
Long Tail in Procurement: The Tail That Wags the Dog
Historically, procurement and sourcing has done its best work with the largest-dollar vendors. The big wins deliver double-digit savings, innovation, and quality relationships. Those benefits will always be prized, but as procurement faces pressure to evolve and deliver more it must expand its reach to vendors and purchasers both. With AI solutions, forward-looking procurement teams can now dig deep into the long tail to not only capture savings but communicate, educate, and influence more than ever before.
Let me know your thoughts. What experiences do you have with the long tail in procurement?
Jack Quarles is a 20-year sourcing veteran and author of the bestselling books Expensive Sentences, Same Side Selling, and How Smart Companies Save Money.
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