A New Take on Tail Spend Management
We sat down with Billhop’s CFO to discuss how corporations manage their tail spend and why it has become such a ubiquitous issue today....
Here’s what we’ve observed. It takes around 6 to 18 months and anywhere between €200 to over €1500 to onboard a single supplier to a company’s Enterprise Resource Planning (ERP).
These disheartening figures are applicable across the board - even to one-time, low-spend vendors.
Unsurprisingly, most enterprises view these transactions as more trouble than they’re worth and cannot justify dedicating their resources to properly managing them.
Left unchecked, these purchases are left to accumulate and ultimately morph into a major pain point that becomes increasingly difficult to dismiss.
There is no catch-all term that perfectly defines tail spend, also known as long tail spend or indirect spend. As with procurement, the tail spend for every organisation varies.
With that said, a company’s tail spend is generally made up of 80% of transactions that cover only 20% of its total spend volume.
Essentially, tail spend consists of many high volume, low spend suppliers. They’re usually purchases made outside of contracts or with petty cash.
Due to the sheer amount of time, manpower and resources required to properly manage tail spend, it often falls by the wayside as companies continue to prioritise their strategic spend.
It thus comes as no surprise that 63.5% of all controllers cite accounts payable as a crucial area for improvement.
Interestingly enough, when the total spend per supplier is plotted against the number of suppliers, the graph for every corporation looks identical.
This demonstrates that despite having different perspectives on what constitutes tail spend purchases, corporations invariably end up distributing their spending—whether intentionally or not—in a similar manner.
The issue of scalability remains a primary preoccupation for companies aspiring to achieve sustainable growth. As a company expands, it becomes imperative for its internal processes to adapt and evolve in order to ensure the organisation can function seamlessly.
However, the need for more sophisticated internal processes with multiple payment approval steps poses a whole new set of problems ubiquitous to large organisations - the lack of visibility and control over ad-hoc payments that aren’t essential for daily operations or business-critical functions. These include anything from office supplies and services to temporary labour.
Moreover, the challenge of consolidating tail spend is compounded when a corporation has many entities across the globe.
These organisations tend to have various decision makers, stakeholders and existing relationships with local suppliers. Gathering data from all these entities in order to consolidate and analyse spend is tedious at best and a fruitless pursuit at worst.
In recent years however, businesses have begun to view their much-neglected tail spend in a more favourable light.
Instead of an unmanageable accounting nightmare, it is now seen as an opportunity, an untapped gold mine that when handled successfully, can drastically boost a company’s cash flow and result in increased Return on Investment (ROI) for the company.
A crucial reason for this shift in attitude can be attributed to the emergence of straight through processing payments companies like Billhop that can effectively tame the beast that is tail spend.
While it can be a painstaking process, here are several effective methods for managing tail spend.
As previously mentioned, the lack of transparency is one of the largest stumbling blocks to effective tail spend management.
Understanding areas of spend is crucial for consolidating supplier bases in order to negotiate better terms, as well as reducing unnecessary expenditures.
There are various softwares and third party companies that can help identify opportunities to streamline the supplier count and enhance rate negotiations.
However, these solutions are often impractical for large companies to implement due to their numerous global entities, each with distinct spending patterns and supplier bases. Additionally, these entities often work in silos and have different accounts payable processes and systems.
An often under-emphasised method is taking a more strategic approach to managing tail spend purchases.
Corporations frequently invest months or even years in extensive research and negotiation to establish optimal partnerships with their strategic suppliers.
Corporations can instead foster synergy by establishing strategic partnerships with suppliers in certain sectors, such as Travel and Entertainment (T&E), where exclusive deals with specific hotels lead to streamlined booking processes for their staff.
While this approach can yield significant savings, it may not be suitable for every supplier as there is still the need for some degree of flexibility, especially when it comes to procuring smaller items like stationery or even stocking up the office pantry.
Overly restrictive processes can lead to a stifling work environment and unmotivated employees who lack a sense of autonomy.
Instead of having layers of approval procedures just to make inexpensive, ad-hoc purchases, corporations can look into streamlining their internal processes in order to cut down the amount of time and manpower required to pay a single invoice.
One of the ways this can be done is by circumventing the need to onboard suppliers to a company’s ERP system.
In many cases, the cost associated with onboarding a single tail spend supplier can surpass the actual cost of the invoice.
This is where Billhop’s card payment platform comes into play.
Billhop’s incorporation of proprietary technology into existing card payment rails elegantly caters to growing enterprises’ pressing need for alternative procurement processes - Processes distinct from their existing procedures that mainly targets strategic spend.
Billhop is a leading B2B payment platform that allows large corporations to pay any supplier invoice with their existing credit and purchasing cards.
With Billhop, businesses can pay all tail spend suppliers without onboarding them to existing ERP systems. By the same token, suppliers will not be required to make any changes to their existing receivable process as they will be paid by means of a regular bank transfer.
For instance, a fortune 500 company that uses Billhop to pay its tail spend suppliers saw a 30% reduction in processing cost and had a net annual savings of €2 million. This was on top of the massive rewards and points that were racked up while charging such large purchases to their chosen credit card.
Perhaps the greatest benefit of paying with credit cards is the extensive remittance data they provide, which is crucial when it comes to reconciliation and reporting. Large corporations will have the same level of control and transparency over payments made by credit card as they will over those in their ERP systems without the hassle of having to onboard hundreds, if not thousands of suppliers.
With the considerable amount of time, effort and costs that can be saved by consolidating all tail spend into a single billing cycle, there is no denying that Billhop offers the optimal solution when it comes to tackling any company’s unruly tail spend.
Take the next step toward effective tail spend management. Fill out this contact form to discover how Billhop can benefit your organisation today!
