Why look at tail spend?
While CIOs and technology leaders face expanding requirements (i.e., growth of tech use cases both internally and customer-facing, increased ‘pull’ for storage from the business, mitigation of digital threats, etc), there is often financial pressure to make budgets stretch further. Money saved allows for increased investment into strategic programs and organizational priorities, whether in IT or outside.
Typically, the focus of commercial and operational teams is on the most important suppliers, meaning those that are business-critical. This criticality is often also reflected in the money spent with this cadre of suppliers. It makes sense that the most focus is on where the most value is to be created and maintained. Conventionally, under the Pareto principle, this means that 80% of the focus is on 20% of suppliers. So what should you do with the rest?
Following this logic, the 20% of suppliers getting less focus is distributed across 80% of the suppliers that an organization buys from. We call this “the tail”: lower value, lower criticality, and harder to see into. So, what makes this so interesting.? Well, what if you could deliver a 5%, 10%, 20% saving on your tail expenditure, creating a 2%-4% cost envelope in IT budgets for no adverse operational impact?
In procurement, “tail” is a well-understood term. In technology spend, it typically covers purchases across areas like Software, Networks, Hardware, Security, (or other) and can frequently be a result of one-off purchases that go unmanaged through fear of the knock-on impact of turning off or simply forgetting they were made, leaving them to renew and roll on.
A further nuance or tail spend within Technology, as set against other areas of indirect spend, is that the longer it is left unaddressed, the absolute €/$/£ value of the tail is likely to continue to grow.
In our experience, a challenge Technology teams face when addressing tail spend is a lack of time to focus on low-value spend (as strategic spending takes priority) and a lack of interest in what the low-value products and services do (making it an onerous task). Subsequently, addressing tail spend is put on the back burner for another time – but as we know, that time is hard to find.
Where does Procurement come in?
When done effectively, achieving savings from tail spend is relatively easy, with the side benefit of setting the foundations for greater ongoing visibility and control. The answer to doing so while maintaining your team’s focus on the day-to-day, in part, lies with commercial / procurement. A step removed from the operational relationships; procurement can offer an objective view on challenging technology spend to help realize the full potential.
We see mature Technology functions doing the following five things well when it comes to the tail:
1. SEEK cost visibility and do the basics:
The first step is to understand the makeup of your tail spend. Although typically tail spend can be categorised as the lower 20% of spend, it can vary depending on client maturity and structure. Often, more mature teams have greater concentration of strategic spend, making the tail longer. Start by defining what tail means to you and get to grips with the suppliers within.
This relatively simple piece of analysis will enable you to understand what is being bought from whom and enable you to start challenging if and how that money should be spent. Do you still use and/or need the product/service? Are there suppliers who provide the product/service elsewhere in the business? Could the commercial terms be improved?
There are a lot of levers you can pull, and broadly you will end up taking one of the following four actions:
- Ignore: genuine one-off items and/or very low spend, can simply be disregarded. Putting in place control measures while addressing your tail can prevent uncontrolled one-offs from occurring in the future. Where there is a significant, and ongoing cost of doing business with these suppliers (e.g. onboarding and transaction costs), consider process optimization as a route to reduce operational costs.
- Terminate: somewhat obvious but often overlooked, can you simply turn some suppliers off? How much spend is essential and not just habitual. If you no longer need it, cancel it. We see up to 10% of total tail spend renewing automatically even though the business no longer requires the support, service, or license provided.
- Optimize: often, specifications can be harmonized and aggregators can be used to leverage volumes for better terms. Identify which suppliers across the business provide similar products and services, and identify where you can rationalize SKUs, consolidate to the best deal, and centralize any branch-led agreements.
- Renegotiate: Renegotiating with thousands of suppliers is not realistic. Yet, many will offer a prime opportunity to renegotiate. For the best returns, target contracts with inflationary increases, those with which you can explore multi-year leverage, and those that have continued to roll over unchallenged. You can target some in waves and others prior to renewal.
2. Be a challenger:
In our home lives, we have to justify every €/$/£ that we spend, it’s easy to make a link between money saved on incidentals and more money available to spend on the things that matter. But do we apply that same discipline at work? Should we not challenge everything we spend in pursuit of more money to spend on the things that matter? Of course. We call this instilling a commercial culture.
Adopting a challenger role is about asking questions when it comes to spending, and there are different ways to challenge a purchase. For instance, start by challenging the need to spend at all. Once a basic need is established can you challenge the specification, quantity, service, or support levels, for instance? There is value to be had by challenging assumptions and breaking habits.
Instilling a challenger phase in the buying process will help to encourage a cost-conscious thought process for current and future purchases.
3. Understand your leverage:
Considering the above points, it’s also important to understand your leverage. Some suppliers will offer no incremental value to you in a negotiation. You may be a small client to them, or they may be providing a key product with few substitutes. They will know their leverage, so understanding how you are positioned in response is critical to managing the relationship, ensuring supply, and perhaps, most importantly, not wasting your time in multiple rounds of fruitless negotiation.
That said, markets evolve, and organizations grow – monitoring supplier dynamics is worthwhile for when that leverage starts to tip in your favor. The better the leverage you have, the more likely an opportunity to save.
4. Control your renewals:
Auto-renewals are a big source of value leakage, ‘procurement speak’ for overpaying compared to what you need. Of course, they are common-place in SaaS or support agreements, and often at a pre-negotiated premium price point. Organizations frequently sleepwalk into renewals.
Part of improving spend visibility means understanding your renewal landscape. In more mature organizations, contract management systems track contract periods and notifying relevant business stakeholders when they need to take appropriate action.
A common mistake is not leaving enough time to take that action. For example, if a license has a notice period of 90 days, you should build in at least another 60 days prior, to review and prepare for any supplier conversations.
Not all organizations are in a position to effectively manage renewals. There are alternative solutions to doing this in-house, including:
- Value-Added Resellers (VAR): operating as a sole supplier or via a panel of preferred suppliers, VARs have their own systems to manage the renewal process. VARs can be used to manage some areas of tail spend and be incentivized according to required outcomes.
- Third-party support: engage a third-party commercial expert to inject the capability and capacity required to set up and manage a renewals program while your team manages BAU alongside.
- Marketplace: Utilize your cloud providers’ marketplace solutions to source your software on their pre-agreed terms. This can be an efficient and cost-effective way to source software and can be used to help meet your committed spend with AWS/Azure/GCP.
5. Embrace technology:
While the opportunity exists to make rapid cost improvement from the tail, there is also an opportunity to use emerging technologies to take a more structured, ongoing approach to buying this type of lower-value technology. Typically this means bolting solutions onto or into preexisting ERP to Source to Pay solutions. These solutions might be marketplaces, catalogs, rapid sourcing solutions, or any number of other types of solutions tailored for specific types of buying.
There is no one size fits-all solution, and no organization is likely to buy all available solution types. The right solution will differ by organization, but the principles remain the same; faster and or better than doing it as before.
Stay close to innovation here. Developments in Artificial Intelligence (AI) solutions are driving further efficiencies within tail spend, orchestrating a more efficient and effective process from identifying solutions, through sourcing, negotiating and contracting. Full automation is here in part, it just not yet here at scale. But it will be.
A path to credibility:
Implementing the guidance above enables CIOs and their teams to know exactly where they are spending money, with whom, and on what. This knowledge allows focus and, ultimately, control – and showcases to the wider business that technology leadership is on top of the budget. At a time when Technology budgets are under pressure, CIOs and technology leaders have the ability to potentially do more with less, without impacting their strategic vendor landscape.
Get in touch
At Proxima, we specialise in Technology Sourcing
Working alongside technology leadership and their teams we have a strong track record in driving material value from deals and relationships with technology mega-vendors. If you are interested to understand what you could do and what you could save, contact us.
