Michal Sýkora
Larissa Rodrigues answered 1 year ago
The tail spend refers to the part of the money spent by a company that is not actively managed in a specific spending category. This spending can still affect the company’s performance in terms of cost of goods sold (COGS) or selling and administrative expenses (S&A).
It usually makes up a small portion of the overall spending (typically less than 20%), but involves numerous suppliers. Companies often overlook the small consulting projects that are directly contracted by individual business line managers.
However, when these projects are combined at the company level, they can account for up to 25% of the total spending on consulting. You might think that this isn’t a significant amount, but considering that consulting spending can range from 0.5% to 3% of the company’s total revenue, any savings in this area can have a significant positive impact on the company’s profitability and make the CFO very happy.
Moreover, the first question you should ask yourself to see if you are handling your tail correctly is: "How big is my tail? And what does it contain?"
Mismanagement of the tail spend, regardless of the type, typically includes the following:
• Having many different scattered suppliers
• Customers making purchases on their own without involving procurement
• Little effort put into qualifying suppliers
• Not evaluating supplier performance or doing it minimally
• Limited or no focus on managing the category as a whole
This is also true for consulting. However, unlike other indirect categories, optimizing and controlling consulting spend can be difficult due to the lack of comparable elements, the diverse nature of projects, and the importance of interpersonal relationships.
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