How to Use Accounts Payable Automation to Manage Tail Spend
- 21 Nov 2018
Tail spend can add up to a significant cost for large organizations. While it is a small portion of overall procurement spend, the accumulation of one-time purchases and non-strategic small suppliers can be sizable. Without accounts payable automation, managing tail spend can become cumbersome due to complex payment processes and poor contract management. With AP automation, the AP department, procurement, and the C-suite feels confident tail spend is manageable.
Understand the Basics About Tail Spend
Organizations make many purchases that are too small to be processed by procurement. Because people outside the procurement department might make these purchases, they may not have negotiated viable deals to get the best possible price. Many of these small purchases are also infrequent, i.e., on-offs, so they are not suitable for management through catalogs in eProcurement systems. Companies may believe they have these purchasing categories under control, but they can add up to hundreds of thousands of dollars in a year, depending on the operations and size of the company. To sum it up, tail spend is a type of spending that is not strategically managed. Gaining control of tail spend helps companies save money and gain more working capital.
Save Time and Labor
Managing tail spend has been historically inefficient. Obstacles such as managing large numbers of small suppliers, various contracts, and unique transactions made tail spend management labor-intensive and time-consuming. Consider some of the common obstacles associated with processing tail spend:
- The number of suppliers in the tail makes it challenging to manage it properly
- Your procurement professionals might be too costly to involve in tail spend
- Procurement professionals are typically busy focusing on high-value strategic categories as a primary priority, and putting out fires along the way, to address tail spend
- Lack of visibility into purchases in the tail make it difficult to manage
- Changes require aligning P2P processes and consumption policies and having IT to support them
- Different stakeholders are impacted in various ways by tail spend problems
The smart use of accounts payable automation can help the finance team find ways to save money and increase working capital, even in one of the primarily overlooked areas where savings could be achieved, i.e., the tail spend.
Automated solutions can help resolve these problems by making it easier to find a non-standard product supplier, and by creating, building and managing a global database of qualified vendors that is faster to use and more transparent. Touchless processing and reports in real-time keep everyone updated and make it simple to track tail spend. Plus, vetting, onboarding and cleaning up the supplier list takes a fraction of the time with AP automation, which maintains an updated database.
Accounts payable automation makes it easier to track purchases, shipments, payments, and returns; increase visibility beyond contracted items to find the lowest prices; and intuitively search for suppliers by using filters, comparisons, and substitutions.
Also, AP automation is a significant boost for compliance, increasing compliance of buying channel and contracts, anticipation and elimination of risks, as well as fraud prevention.
And AP automation solutions can reduce time-consuming and laborious tasks. Up to 70 percent of routine transactional tasks in the procure-to-pay (P2P) process can be automated. The use of pattern recognition and data analysis helps created categorized databases. A simple search yields results such as the products and services a supplier provides. Another option is self-service systems for vendors who are willing to use them. The savvy use of automation improves the process of tail spend and can add up to savings of up to 50 percent for specific processes. The result is a 40 percent boost in productivity, enabling the AP department to become strategic partners who have time to find cost-saving opportunities, such as discounts for early payments.
Getting Beyond the Problems Associated with Tail Spend
Some of the largest corporation in the world, such as Amazon, struggle with tail spend problems. Research reveals procurement professionals spend most of their time on the 80 percent to 90 percent of the suppliers that represent less than five percent to ten percent of spend and business value. Ongoing issues with tail spend mean organization must streamline procedures through the implementation of technologies such as AP automation solutions. Less than 25 percent of the purchases in the above survey were no-touch. Touchless accounts payable automation saves times and reduces the need for AP and procurement professionals to focus on tedious tasks. Automation also improves compliance and reveals money-saving opportunities.
Tail spend represents an opportunity for the AP and procurement teams to be superstars to the C-suite by finding ways to improve compliance, reduce costs, and find the most viable small suppliers. And beyond the internal stakeholders, your suppliers and customers will be happier than ever with reduced process cycle times and up-skilling of procurement resources. The use of accounts payable automation helps the team manage tail spend and eliminate the frustrating challenges often associated with the processing of tail spend.