WHY TAIL SPEND MATTERS: MY FIRST 9 MONTHS AS CEO

As I think back on my first 9 months as FairMarkIT CEO, I am reminded of the idiom “the devil is in the detail.”  But why are we having a ‘tail spend,’ devil is in the detail discussion?  Well let’s start by first defining what ‘tail spend’ is:

  • Considered low priority
  • Individually small dollar value transactions
  • Generally, equates to 20% of your total spend across all categories
  • With those transactions spread across 80% of your supply base
  • The spend is typically unmanaged resulting in challenges with data clarity and integrity

Why is ‘tail spend’ important?  Let’s do the math – I’ve spent 2017 on hundreds of conference calls and in-person meetings with CPOs, VPs of Procurement, Heads of Sourcing and Purchasing from large organizations with spend under management ranging from $2B-$80B annual spend.  Using that as my baseline, if we consider 20% of the $2B in spend under management that would then represent a tail spend opportunity valued at $400M.

During my conversations the one question that I ask every time is ‘how do you currently manage your tail spend?’

CPO Profiles

I’ve identified 3 different profiles of answers. First, the CPO with minimal time who doesn’t really care:  they’ve identified that anything under a specific threshold is too small to focus their time and the trivial purchase size will limit its risk to the business.  Second, the CPO that knows it’s an important problem to address, but has no idea where to start. The procurement of these small purchases is decentralized, untracked, and spans across so many categories that it feels like trying to boil the ocean.  Finally, the CPO that has established an initiative and is taking strategic, incremental steps to gain control and optimize unmanaged spend.  The third type of CPO seems to always be looking for new innovative ways to challenge the status quo and has no problem shaking up legacy processes (it is no coincidence that most of them are also thought leaders within the procurement space).

Different for Everyone

So, which executive is doing the right thing for their company? Should all CPOs care about tail spend purchases?  Based off our meetings, the first question should actually be ‘what is considered a tail spend purchase?’ We’ve found that every company has their own policies and mindsets around what gets tossed into that bucket.  For some companies, it’s anything under $1M, for some it’s under $100K, for others it’s under $5K.  There’s one label that everyone agrees with, small to medium purchases make up a procurement department’s tail spend.

Bigger Than IT Spend

As I sit in some of these meetings and hear procurement leaders describe tail spend as an inconsequential area, it blows my mind.  But I’m always eager to learn more about why and how people have acquired this mindset; looking at tail spend strictly from a business perspective, it doesn’t seem logical that teams would neglect to try and manage 20% of their budget. Trust me, I understand people’s initial smirks when you think about trying to better manage the procurement of a $10 stapler, but this tail spend can range from the $100 purchase of 10 staplers, to the $200K order of supplies for your facility.

Let’s look at it from a different angle, on average, large enterprises spend under 10% of their budget on IT.  As you go further up the Fortune 500, that percentage declines.  However, the 80/20 rule of managed versus unmanaged spend remains the exact same. So, the money in tail spend purchases adds up, the next hurdle is to understand what’s the impact of status quo to my business?

Risks

It boils down to risk.  The current process to source tail spend purchases is typically informal, un-monitored, and lacks analysis, which allows people to make decisions at their own discretion.  And if spend isn’t monitored, there are the dominant outcomes:

  • People take the easy path to buy the product with little to no concern about getting the best price (Price Risk)
  • The initial purchase may have reflected the best price but the business doesn’t track pricing, so no one in the organization knows how susceptible different products are to fluctuations in price (Time Risk)
  • If the purchase is completed below the radar it may not have been properly vetted (Operational Risk)

Price Risk

The most obvious is the risk of overpaying for a product or service. Those familiar with the world of B2B selling or purchasing know that pricing is not standardized and tends to be more like the Wild West. It’s no secret that companies pay varying amounts for the exact same B2B products, and if they’re not intelligently sourced, the risk of overpaying dramatically increases. I fully agree that not all tail spend purchases fall victim to this, as there are some categories and vendors that do hold consistent price discounting levels, but, without tracking and reviewing the data, how can you even begin to identify your largest areas of risk?

Time Risk

Time is frequently viewed by a CPO as a team’s most valuable resource.  Forget for a second trying to source tail spend purchases to many suppliers, even the current process to source small to medium purchases is to email or physically call 1-2 suppliers, explain the product or service being purchased, and then collect and organize the returning bids. This is a very, very manual process. Now fast forward that process across 10s of thousands to 100s of thousands of small purchases (depending on the size of the company) that are made every single year.  If you do want to increase the number of suppliers participating to use competitive forces to drive pricing down, you’re just tacking on additional minutes, hours, days, months to your annual sourcing process.

Operational Risk

Finally, in our meetings we’ve heard from several CPOs about the risk of fraud, playing favorites, supplier exclusion and cybersecurity. Whether you’re in the public or private sector, the door is always open to operational risks.  These risks range from procurement fraud to showing favoritism and excluding qualified suppliers to potential cybersecurity concerns.  If you’re not tracking or managing 80% of your purchases, how can you expect your buyers to intuitively know which businesses can supply what products at the best price, that mitigate the foregoing operational risks.

Addressing Tail Spend Today

If I were to sum up the answers I receive when asking CPOs why tail spend purchases aren’t being managed, it would be ‘because it’s really hard.’  The tools and resources available are designed and built for the 20% of large purchases and 80% of spend.  The CPOs that are bold enough to dip their toe into tail spend immediately face the massive challenge of identifying from their numerous purchases, what the starting point is to get at the low hanging fruit.  Some individuals have taken the next step forward by using internal or external catalogs (Grainger, Amazon B2B, Staples…etc.), but they still are not encouraging true competition,  guaranteeing the best price, or providing internal management of tail spend.

Thought Leaders

Listed above are reasons I’ve heard as to why CPOs aren’t focusing on tail spend and its impact, but I also wanted to share how the thought-leading CPOs are breaking down this procurement challenge, and influencing solutions in the marketplace, e.g., FairMarkIT.com.

Customer Driven Platform

At FairMarkIT we’ve been asked to help quantify the problem by reviewing client data sets to help to determine areas of large savings opportunity and high-risk categories, products, and suppliers (accepting that not all tail spend is created equal and some areas will have to remain as is…for now).  Next, those CPO thought leaders have emphasized the need to collect and standardize all the data associated with tail spend sourcing across their centralized or decentralized teams in a structured format.  Most importantly, they’ve coached us on the need to bring benchmarking, analytics, and automation to ensure they can streamline the sourcing process from a large pool of qualified suppliers (3.5M suppliers in our database), benchmark internally and externally to ensure they’re getting the best price (10M transactions in our database), deliver predictive analytics and trending to ensure CPOs have the controls to influence buyer and supplier outcomes, and accomplish all this in less time than the current mode of operations.

Business Results

That sums up our mission at FairMarkIT; we are addressing and continue to advance our platform every waking minute (our technical team doesn’t sleep).  Based off our early findings, bringing innovation and intelligence to optimize the tail spend space has proven a 10X ROI. The ROI is seen through increased supplier competition, decreased purchase prices, 15% time savings across buyers, increased participation from SMBs and disadvantaged enterprises, and providing CPOs with the knobs and levels to de-risk the 80% of purchases that are not strategically managed today.  Interestingly, after reviewing the data we’ve identified that the magic number for bidding most tail spend purchases is 5.  If a requisition receives 5 unique bids, that purchase has over a 70% chance of achieving a lower price point than previously acquired, and less than a 10% chance of the price going up. If you’re in a procurement leadership role, I’d challenge you to think about how many bids your team typically receives for purchases under $50K or $100K (if you’re thinking 1, sometimes 2, and at the very highest 3, you’re not alone).

Forward Thinking CPOs

To tie this all together, to many CPOs tail spend management feels like a black box that’s almost impossible to crack, and without taking the first step to manage it, it’ll never be flagged, contested, or deemed an urgent initiative because the positive or negative impact to the business can’t be measured.  I fully understand that the status quo is undisputedly the path of least resentence; however, we’re excited at FairMarkIT.com to meet and work with procurement leaders that see the tail spend management challenge as a business opportunity that with the right technology and procurement perseverance can deliver value back to the organization.

Call to Action

Whether you have a tail spend initiative, just want to discuss the space, or strongly disagree with this overview of my last 9 months and want to walk through your personal insight and experience, I’d love to connect with you.  We’re a Boston based startup that’s laser focused on developing the most intelligent cloud-based platform for small to medium sized purchases to help you get to the best price, in less time, and with much less effort.

Feel free to shoot me a note so we can get introduced – Kevin@fairmarkit.com

Kevin Frechette

Co-founder & CEO, FairMarkIT

Combating Debt: 3 Things The Public Sector Can Learn From Private Organizations

The national debt, which has grown to almost $20 trillion in recent years, has been a topic of conversation for decades. What many Americans aren’t aware of is the looming debt crisis with many state and local governments. In 2013, the Census Bureau estimated that $1.13 trillion of the debt is on a state level and about $1.82 trillion is local debt. As you can imagine, this is just the tip of the iceberg…as the American population grows and ages spending will as well, especially with retirement, healthcare and education.

In order to combat our growing debt, government entities and agencies can benefit by taking a few tips from the private sector:

  1. Take advantage of emerging technologies. Automating antiquated processes takes an initial capital investment but the benefits and cost-saving in the long term far outweigh startup costs. In the long run better technology means greater efficiency and happier customers.
  2. Utilize available data to find the best solutions. The modern procurement officer has the tools to be smarter than ever, with the quantitative and qualitative resources available these days there’s no reason the public sector can’t get competitive prices like their private sector counterparts.
  3. Be held accountable. While the public sector doesn’t have shareholders to hold them accountable, they have taxpayers who expect that they will make good financial decisions. Researching all available options before making a decision is key.

The bottom line is government budgets are consistently getting reduced or cut, but they’re still asked to accomplish the same goal with diminished resources. By operating more like a corporation and leveraging innovation to maximize returns they can increase productivity and save taxpayer dollars in the long run.

Year-End Procurement Trends

As we near the end of 2017 there are a couple of procurement trends that have stood out above the rest.  What’s obvious is that technology is changing the way IT professionals do business and it will continue to in 2018. So, what advanced procurement in 2017 and how will we keep progressing in 2018?

Trends of 2017:

Big Data. It doesn’t get much buzzier than that…but this year we’ve seen that there is big value in big data.  Not only has data become more plentiful and easily accessible but it is also high quality and extremely valuable in terms of decision making. As technology continues to progress, big data and artificial intelligence will improve the speed and efficiency of the procurement department.

Technology Adoption. Procurement departments are integrating sourcing, purchasing and procurement technology. This centralizes processes and allows more departments to utilize the data generated by the procurement function. Utilizing technology makes everyone’s job easier by keeping procedures streamlined.

Greater Transparency. One advancement that we hope isn’t a trend is transparency; due to the accessibility of data and social media, companies are increasingly being held accountable. With all this information at our fingertips, not being transparent about your product, pricing, practices and expectations can you hurt you as both a buyer and a seller.

Trends for 2018:

Centralized Purchasing. As more companies create procurement departments to improve their spend tracking, decisions and profits, decentralized purchasing will continue to decline. Centralized purchasing decreases risk, prevents duplication of efforts and allows organizations to share knowledge.

Tracking Tail Spend. Procurement departments often have more incentive to focus on the large, multi-year contracts but due to this mentality almost 20% of companies’ spend can go un-tracked. By improving data visibility and analysis of the smaller purchases, procurement can discover some of the less obvious cost-savings opportunities and boost profits in the long run.

What direction do you think procurement is headed in 2018? Feel free to drop us a note in the comments box or send an email to Kevin@Fairmarkit.com.

5 Things You Should Know About eSourcing

In the past, the most crucial skill a procurement officer had was the competence to negotiate price and the terms of a contract. Once negotiations were concluded and the contract was signed, the job was done. Currently, the job isn’t so easy which is why eSourcing is an extremely critical tool, enabling procurement and sales departments to expedite and simplify the full life-cycle of the procurement process. If your team has yet to take advantage of this collaborative technology, here are 5 things you should know.

eSourcing…

  • Reduces Risk. The standardized approach of eSourcing gives companies control over their call for bids and an audit trail to remain compliant.
  • Improves Vendor Relations. Through increased transparency and openness between buyers and suppliers, you can significantly improve vendor relations.
  • Must Be Easy To Adopt. If your team isn’t actually using the eSourcing platform then you can’t save the time or money that was intended. In order for your platform to be adopted it needs to be easy to use and effective.
  • Levels The Playing Field. For startups and smaller companies who have more modest sales and procurement departments, it can provide a platform to demonstrate the value of goods or services.
  • Saves Time. You can shorten the procurement cycle with supplier management, RFX templates, streamlined order processing and many other features. At the end of the day the procurement cycle is the time it takes to find the technology you need and at the price you want, any improved efficiency is going to save you time and money.

Automating the administrative duties of the sourcing and procurement process allows teams to be more focused on their strategy as opposed to labor-intensive traditional tasks. eSourcing empowers procurement teams to progress beyond negotiations and make advances in the world of data analysis and successful supplier management.

Risks of a Decentralized Purchasing Strategy

Today, we break down the procurement risk of operating with a decentralized and poorly managed purchasing strategy. It may seem obvious that there are more benefits than drawbacks to procurement centralization because it increases oversight and guidance to all areas of the organization. The ability to have a managed flow of suppliers and contracts improves efficiency and tracks spend more easily. But looking beyond the benefits, what are the risks of decentralization?

The Risks of a Decentralized Model:

  • Extremely difficult to scale as the organization grows.
  • Knowledge and resource sharing can be lost when there isn’t a shared platform for all units of the organization.
  • Greater duplication of efforts across departments or business units.
  • The responsibility of understanding what is allowed for public funding under federal, state and local laws is left up to each department and manager.
  • Audits become exceedingly more complicated, expensive and drawn-out.

To have a successful centralized purchasing strategy, there should be clearly stated internal processes, with checks and balances, to approve purchases and contracts. Centralized procurement can be bureaucratic, it’s important there are measures in place to avoid being overly concerned with procedure at the expense of efficiency. Utilizing technology makes everyone’s  job easier from an procurement associate to a CPO and also keep procedures streamlined

While recognizing the value of each units’ relationships with their suppliers, successful centralized departments will function as resources across business units, to share knowledge, processes, services and technology.

3 Ways To Drive Value Through Procurement

The procurement function is rapidly evolving, gone are the days of tunnel vision focused on driving down costs and executing contracts. At FairMarkIT we are looking beyond the spreadsheet, here are 3 ways to drive value as a world-class procurement organization:

Use Technology To Empower. Procurement is one of the few departments that impacts almost every role in your organization, by making this relationship user-friendly and utilizing collaborative technologies you’ll be ahead of the trend. According to Gartner, by 2019, 40% of procurement and sourcing suite vendors will modernize their user experience to improve the ease of use and user adoption of their tools and incorporate some cognitive capabilities into their solutions.

Just Say No To Isolation. Utilize solutions that promote collaboration internally and between the procurement team and vendor. Encouraging teamwork and partnership in procurement fosters robust communication and cost-savings to internal teams and vendor relationships. Sourcing and procurement have long evolved from their back-office ancestors of the past, placing these departments at the forefront of your business boosts innovation and increases transparency.

Source Strategically. Continually evaluating and improving your purchasing activities can improve your speed to market, streamline your network of suppliers and ultimately increase your bottom line. Remember to work smarter, not harder – use the resources and technology available to you to make this process easier and more efficient.

What Is Tail Spend And How Can We Manage It?

Tail spend is software, professional services and business purchases that are outside the typical large, ongoing purchases that organizations make. These purchases are often too small to go through procurement and are not frequent enough to be included in cataloged systems. An easy way to think of it is the 80 percent of suppliers that represent just 20 percent of an organization’s spend.

When you boil it down, the most difficult aspect of tail spend management is lack of data visibility. This can happen for a number of reasons such as procurement and contract management running on separate systems within a company, siloed subgroups within the same organization (when they may be using the same vendors and resources), high numbers of vendors and decentralized policies.

How can you better manage this?

Identify Tail-Spend. Since tail spend can include anything from maverick spending to misclassified purchases, it’s important to define what it is and where this is happening within your organization.
Streamline Internal Processes. In order to save money and gather relevant data it is imperative to have centralized processes and that they are enforced. Streamlined processes mean better payment terms with frequent suppliers across departments and can lead to more strategic buyers within your organization.
Use Data. Once you’ve streamlined your internal processes, organizing, classifying and analyzing spend data will lead to greater spend awareness, informed purchases and decisions.

One study conducted by The Hackett Group estimated that 7.1% savings on average can be achieved by better managing tail spend, this means that some of your biggest savings can ultimately come from your smallest purchases.

If you have questions about effectively managing your tail spend, please email FairMarkIT CEO Kevin Frechette at kevin@fairmarkit.com.

 

Can We Use Data to Improve Decisions?

If you frequently read the news (or follow FairMarkIT on LinkedIN, Facebook or Twitter…wink, wink), chances are high that you’ve recently seen news sources claiming that data is the new oil, check out Economist, Huffington Post and Fortune to name a few.

The bottom line of these articles is that with the advent of smartphones, the internet and everything from smart TVs to smart cars, data is created at a rate that would have been unfathomable even 15 years ago. Not only is data plentiful but it is high quality and extremely valuable. With data we can learn anything from buyers want, to predicting the unemployment rate and estimating sleep quality from smartphone sensors.  Data impacts what ads you see on Facebook, how companies compete and even the way we park our cars.

So if we’re convinced that data is the new oil, what is an easy way to incorporate this hot commodity into your business strategy? By relying on data instead of your gut to make decisions.

With data-driven decisions you have the ability to be smarter about your customer profile or team, learn what has (and hasn’t) worked in the past and save money in the long term due to more efficient processes. With more data collected and the capability for advanced analysis, decisions can be made with less emotional human error and ultimately drive better outcomes.

Ready for a real world example of how a data-driven decision could have prevented a major crisis? It was recently reported that IMF and the G20 finance executives admitted that they didn’t have the data necessary to make smart policy decisions to avoid the Global Financial Crisis. Just think about how different the past 9 years could have been if international leaders had the data they needed.

So whether you’re in doubt about big decisions, like what software to procure for your team or the ideal neighborhood to buy your next home. Or small decisions, like which route to take home from work, remember that data is an extremely valuable resource and it should not be absent from the decision making process.

 

The Procurement – ROI Relationship

Software Procurement and The Bottomline: Why Quantitative Price Information is Making a Comeback

So let’s talk about Return on Investment (ROI)…but before we scare off all the non-finance majors reading, we want to note that when we talk about ROI in the procurement context it is about the actual value of the procurement department within the greater context of a company. Don’t worry we would give you fair warning before diving into a Tuesday afternoon math lesson.

Beyond traditional cost savings, procurement provides savings in the way of innovation, efficiency and risk management. Harvard Business Review reported that the value of increased business efficiency alone through strategic sourcing could drive ROI up 400%. Additionally, resources like FairMarkIT give internal decision makers the ability to easily and quickly compare prices and quality of options, ensuring that you get the best quality technology at the lowest prices.

According to the Hackett Group, top-of-the-line procurement organizations save, on average, 22% on labor costs. Additionally, they require 29% fewer full-time works to provide the same quality (or better) service as their peers. For a standard company with around $10 billion in revenue, achieving this standard of performance in procurement could mean as much as $6 million in potential annual savings.

To summarize our math-free lesson for the day,  an efficient procurement team supplies greater productivity, strengthens collaboration, can minimize risk and drives long-term ROI to keep the business competitive.

 

What Procurement Teams Really Do

 

Here at FairMarkIT, we’re always talking about procurement – but what do procurement teams do? Strictly speaking, it is the sourcing of products and related services, the negotiation and strategic selection of those products, and delivering those goods and services to the internal department within the company that plans to implement and distribute what has been purchased. Pretty wordy, huh?

Given the complexity of the department, people often confuse it with purchasing, though they are separate teams with different sets of responsibilities. To put it simply, procurement is often the big umbrella that purchasing lives under, when a company needs a new product it will be procured and then purchased. Purchasing deals with the process in which goods and services are ordered and then paid for, which is more of a financial function.

In world class companies, procurement is viewed as a strategic function working to improve the organization’s profitability and productivity. The best leaders and managers not only ensure their organizations are getting the best deals and prices for their purchased products and services. They also guarantee they are using the best-in-breed tools, to enable their entire company to perform better.

The function can vary greatly across industries, often in government or other public sector organizations, procurement is incredibly mindful of its fiscal responsibility and accountability to taxpayers and the use of their funds. These departments in public sector organizations are under intense scrutiny, and must follow very rigid rules and processes. To get a better idea of this, check out Alaska’s procurement department’s responsibilities.

So bottom line, regardless of industry, what do procurement teams really do?! They are a strategic function. They source, negotiate and delivers goods. They empower their company to function more efficiently and effectively.