Hello and welcome back to Smart Consulting Sourcing, the only podcast about consulting procurement.
I’m Helene, and today I’ll be talking about Tail Spend in consulting
But before we get into that, let me give you a recap about our previous episode.
In last week’s episode, We had two special guest, Eli Peleg and George Hemingway: both of them are very different consultants.
We discussed about what consultants do and how they work with their clients and procurement groups?
Companies often hire consultants to help them find clarity and a path forward when they reach a roadblock in their business.
And hence, developing a clear business case is important to justify the expense to the top management or the board of directors.
And this business case has to be based on quantitative value, either on the top line or the bottom line, or even the valuation of the company.
We also discussed their relationships with procurement, and without surprise, my guests have very little experience with procurement, even though things have been different recently.
They explained their process of working with a client from the first contact to the end of a project, including the interactions with procurement.
They both recognized that having a specialized consulting procurement person would definitely be a good thing for their clients!
So, in order to know more about all on this, feel free to listen to my interview with George and Eli!
But today, we’re gonna talk about Tail Spend in Consulting.
So let’s start with the basics.
What is Tail Spend in consulting?
We’ve all been there. You’re minding your own business, working away on a project when suddenly you realize you need something that you don’t have. So you go out and buy it, no big deal right? Wrong.
Let me give you a tiny refresher on tail spend. When it comes to business spending, there’s the strategic spend and the tail spend.
The strategic spend is what most people think of when they think of business spending: it’s the big-ticket items, the strategic purchases that are essential to keeping the business running.
The tail spend, on the other hand, is made up of all those small, one-time purchases that add up over time. Tail spend is often overlooked because it seems like such a small part of the overall budget.
But in reality, tail spend can make up a significant portion of a company’s total spending (up to 25% actually). And if you’re not careful, it can also be a place where cost savings go to die.
Tail spend is often fragmented and low-cost, which makes it easy to let expenses slip through the cracks. But because those expenses can add up over time, tail spend can be a major drain on your bottom line.
To get a handle on your company’s tail spend, you need to take a closer look at where those costs are coming from.
Once you know where your money is going, you can start to make strategic decisions about how to cut costs and save money. With a little bit of effort, you can get your tail spend under control and start generating real savings for your business.
The Tail Spend is the part of the spend that is not actively managed in a given spend category. Even then, it still has an impact on the performance of the Company through the Cost of goods sold (COGS) or Sales and administration (S&A).
It may represent a small portion of the spend (usually less than 20%) but may involve a many suppliers, sometimes 80% of the entire pool of suppliers that the company works with.
Tail Spend Management is a well-known source of savings for Procurement groups. With the constant pressure on cost reductions and sustainable savings, many companies are starting to notice their Tail Spend, even for the Consulting Category.
So, what does the tail spend look like for consulting?
So, are you are managing your tail properly? Can you answer these two questions: “How big is my tail? And what is in it? “. If you don’t know, let me give you a few pointers.
Mismanagement of tail spend, independently of the category, usually involves a scattered supplier base, and also a decentralized customer base where they buy directly, and procurement is not involved. There’s no performance evaluation and suppliers have minimal qualifications. And often no category management.
And Consulting is no exception to that, however, contrary to other indirect categories, the absence of comparable elements and the diversity of the projects combined with the importance of interpersonal relationships can make it difficult to optimize and control.
Indeed, companies tend to neglect the small consulting projects contracted directly by the business line managers. However consolidated at the Company level, they can represent up to 20-30% of the Consulting Spend.
Not much, you might say. But when the Consulting Spend can be 0.5% to 3% of the total revenue, any savings on this front can significantly improve your bottom line and delight your CFO.
But beware of going too far, as you can see on the right side of the screen. You don’t want to take over the category entirely to the point that you become the bottleneck and don’t meet the needs of your internal clients.
Sometimes some projects can masquerade as a necessary purchase, so it’s important to be able to tell the difference between the non-strategic and the unnecessary spend.
Unnecessary spend or nice to have spend doesn’t really have a long-term impact on value creation for the company. In other words, it’s just wasted money.
And this part of the tail spend is going to be your goldmine for cost-saving.
Usually, the tail spend in consulting is made of extensions of strategic spend in the form of sequels, duplicate projects, and repetitive programs.
Sequels are the continuation of previous projects. But we all know that guy who is asking his consultants to cut their projects into smaller projects to stay under the threshold. You know these 5 projects at 49.5k€ with the same supplier in the same year?
Duplicate projects happen when different business units run the same project with different suppliers.
Recurring projects are projects that are launched several times a year, sometimes with different suppliers.
Since these projects are not managed systematically, they end up in the tail spend category. Since they are mostly duplicate in nature, you can easily get rid of them and save a significant amount.
How to tackle your tail spend?
To efficiently clean-up your tail spend, here are a few pointers:
– First off, gather data on the previous projects.
When it comes to tail spend, the main challenge for most companies is clearly identifying the projects that fall into this category.
This can be especially difficult if your organization is decentralized, and you don’t have easy access to clean data. In this case, it may be necessary to get support from different parts of the organization to ensure that you have an accurate picture of what’s going on.
If you haven’t performed a spend analysis in the past, now might be an excellent time to launch one.
By taking a closer look at your tail spend, you can gain valuable insights into where your money is going and how you can improve your overall procurement process.
– Now, assess the performance of the providers.
When it comes to identifying high- and low-performers in Tail Spend, interviews with project sponsors and leaders can be incredibly helpful.
Building a list of preferred providers is a good way to limit the number of suppliers in your tail. And basing this list on the feedback of your internal stakeholders can only showcase your ability to listen and take into account the advice of your internal stakeholders. In return, they will more proactively give you feedback on the consulting firms.
By getting to know the people involved in the project, you can get a better sense of who is excelling and who might be falling behind.
Furthermore, speaking with sponsors and leaders can give you insights into the overall performance of the project, which can help you identify areas that need improvement.
– Develop your knowledge of the local Consulting Market.
Since we have already looked for our preferred supplier, an excellent way to keep control of the tail without spending too much time on the management is to have at hand a list of additional providers. By exploring the local Consulting Market, you will be able to identify potential suppliers and develop relationships. That will allow you to be reactive when one of your business lines wants to launch a one-time project on a given sub-category.
– Focus on regrouping what you can.
Tail spend is often seen as a necessary evil – the recurring and duplicate projects that no one really wants to deal with, but have to be managed somehow. But what if we looked at tail spend in a different light? What if we saw it as an opportunity for strategic management?
A frame contract on coaching or a cross-business-unit RFP for excellence programs or digital transformation are all good candidates for strategic management.
By taking a proactive approach to tail spend, we cannot only save money, but also create efficiencies and improve our overall business performance. So next time you’re tempted to just treat tail spend as the Tail, think again – it might just be an opportunity in disguise.
– Avoid getting caught up in false Tail spend
You’re working away, thinking you’ve got a handle on things, when all of a sudden you realize that you’ve built up a false tail. Tail spend can be a real problem if you’re not careful. But how do you avoid it?
First, you need to set up workflows with the right agile check and balance. This will help you chase the false tail and prevent it from getting out of control.
Second, you need to make sure your internal clients are not working around the demand management principles by cutting projects in pieces and inflating your tail spend artificially. Sometimes a hiring freeze can inflate the tail spend artificially since your business lines are hiring consultants to compensate for the lack of internal resources. This can be a difficult task, but it’s essential if you want to keep your Tail Spend under control.
If you can follow these two simple tips, you’ll be well on your way to preventing Tail Spend from becoming a problem in your organization.
– Last but not the least, Use vendor management systems.
According to a study by the Abernathy Mackay Report, ” Tail Spend” represents approximately 20-30% of an organization’s total procurement spend.
Yet, most organizations do not have a best-in-class system to manage this Tail Spend. This is often because the Tail Spend is made up of one-off supplemental workforce who are not managed by the organization’s full time staff.
Automating the process to find, procure, and manage this external talent can help organizations in full compliance with their policies.
By using a best-in-class system, organizations can avoid the hassle and wasted time and money associated with Tail Spend.
In today’s competitive business environment, every organization should be using a best-in-class digital solutions to manage their Tail Spend. This will allow them to focus on their core business and stay compliant with their policies.
In Conclusion,
So, why am I telling you all of this? Well, because many people confuse Tail Spend with non-strategic spend and vice versa.
Tail spend is often seen as the ugly stepchild of corporate budgeting. It’s the money that’s left over after all the big-ticket items have been accounted for, and it can be hard to justify spending on small-scale projects when there are more pressing needs elsewhere.
However, tackling the consulting tail spend can actually be a major driver of company growth, and it’s important to take a closer look at how this money is being spent.
In many cases, the consulting tail spend is actually going towards essential but low-priority projects, such as small operation excellence or team effectiveness projects. By identifying these projects and killing the low priority projects, you can free up cash and use it to invest in more impactful projects.
Next time you’re thinking about making a purchase for your business, ask yourself if it’s really Tail Spend or if it’s just something that doesn’t align with your company’s goals. Chances are, it’s the latter. And if that’s the case, maybe rethink that purchase before hitting “Add to Cart.”
In consulting, the management of the tail spend is closely related to demand management and make or buy analysis. That’s why I usually recommend to tackle them first, and once it has sunk in, you can start working on the tail.
Another requisite is having visibility on the tail. And that’s a major limitation since many procurement leaders complain about the fact that they are not informed of consulting projects. And that’s where investing in a digital solution can really help you get that information without changing too much the ways of working.
And that marks the end of our podcast. So, keep an eye out for me next week when I return with another fascinating topic.
Till then, stay safe and happy sourcing!
If you have other questions about tackling your tail spend, remember you can always contact me directly on LinkedIn or by email because I am always game for a chat!
Bye and see you next week! Au revoir!
See you at the next episode. Till then, stay safe and stay connected with us through our community on LinkedIn
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Happy Sourcing!
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