Who’s Managing These Tail Spend Expenses, Anyway?
We’ve frequently discussed in recent years how leaned out procurement departments are increasingly vulnerable to attack by their indirect suppliers, on a range of fronts.
Perhaps the most acute vulnerability facing these departments in 2023 is the inability to engage in any sort of actual expense management whatsoever, especially within burdensome indirect/tail spend categories. At Fine Tune, we can recall a time—pre-Great Recession—when procurement departments were staffed sufficiently to not only put contracts in place, but to monitor suppliers to promote adherence to those contracts.
Today, that is a pipe dream.
Indeed, for every category manager who is engaged in the “joust” with their suppliers over the money being spent after contracts get signed, there are ten other category managers who don’t even know what they’re spending, or with which suppliers.
Take, for example, these real exchanges with clients and prospects in recent months:
- “We spend $3MM/year with our national waste hauler.” Then a day later: “Wait, no…it’s $6.3MM.”
- From a buyer who is responsible for five different indirect categories: “One of my categories is guard services. I don’t know who we use or what we spend. What suppliers should I query to try and pull spend info?”
- “I’m pretty sure that uniform contract is month-to-month. It expired last February.” (In fact, it automatically renewed last February for FIVE additional years.)
- “We don’t do any business with [waste hauler X].” (Whereas upon gathering our baseline data, we found spend of over $2MM with said hauler.)
It’s not their fault. Like nearly all category managers these days, they’re being asked to do the work of three people in comparison to pre-Great Recession staffing levels.
But let’s be 100% clear: when it comes to corporate purchasing/procurement/strategic sourcing departments, expenses simply aren’t being managed the way they were in years gone by.
So, it’s incumbent upon the C-suite, finance, and procurement leadership to encourage these departments to prioritize more than just contracting, but actual spending, too.
This starts with fixing flawed incentive plans. The “rules of the game” in corporate procurement rarely promote optimal P&L impact, and this is perhaps the greatest flaw in the system. To improve results, procurement’s incentives must be tied to actual spend rather than projected “savings.”
Now, fixing incentive plans won’t magically cure the very real problem of departmental resource shortages, but it will encourage category managers to…
- …Prioritize actual spend over the longer term rather than (often flawed) short-term projections;
- …Implement strategies to continuously audit, monitor and manage indirect suppliers, especially in complex categories most prone to spend escalation;
- …Pursue overcharging and past monies owed by indirect suppliers, when far too often these monies go unrecovered because category managers aren’t affected when their “savings initiatives” fail to materialize as intended.
As for those departmental resource shortages, abundant solutions are available for augmenting the in-house capabilities of lean procurement teams. This arena exists and is rapidly growing no doubt because of an acute and growing need.
To be blunt: if your organization isn’t actively utilizing firms in this space to aid in an overall expense management strategy, 1) you’re a dinosaur and 2) you’re hemorrhaging .
My advice to finance and ownership-minded procurement leaders wanting to deliver value to stakeholders?
Pick any particular indirect service and take a look at its life cycle within your organization, paying particular attention to the post-contracting activities. As you do so, remember that the suppliers providing these services have a wide range of levers they pull and buttons they push to grow margins after deals get signed; and remember that these suppliers have figured out how to penetrate the meager defenses of broad enterprise systems. It will likely become apparent to you that your bottom line is vulnerable to attack by these suppliers—no matter how capable and diligent your corporate resources may be.
After all, this is the norm in 2023: expenses simply aren’t getting truly managed.
And it’s time to do something about it.