Squeezing the Last Drop - Managing Tail-End Spend

While strategic sourcing continues to grow as an increasingly integral part of the overall procurement footprint, new cost reduction methodologies, such as increasing efficiencies in procurement processes, are gaining traction. In particular, tail end spend is gaining new respect.

Traditionally, explains Rajeev Menon, at global BPO firm Genpact, companies have looked to address the top 80%-90% of spending, while paying little attention to the remaining 10-20%, which was uncategorized, unstructured and decentralized. The proportionally large investment of time and resources needed to control this "tail end" spending was not justified by the relatively low potential for increased savings. However, as procurement outsourcing evolves, companies are exploring the idea of outsourcing higher end activities, such as sourcing and spend analytics, especially in the indirect spend area.

In most cases, tail-end spending comes from one-off purchases or from contracts which have been renewed without re-negotiating. In general, resource costs are used to justify such renewals. In most of these contracts, however, savings could be driven without complex negotiations or e-sourcing technology because the level of commodity knowledge required is much lower than that needed at the top end of spending.

What Works Well

What Does Not Work Well

The procurement vendor should be an extended arm of the existing sourcing organization Treating the procurement vendor as a standalone entity
Well defined communication channels Procuring large commodities too early in the engagement
Assign commodity managers at the customer end to manage and track progress Very high contextual knowledge
Regular reviews and updates Lack of flexibility / scalability
Mutually agreed annual buy leaves and gradual increases in addressable spend Complex language requirements