Beware of hidden recruitment costs from tail spend

The tail spend of a procurement department refers to the 20% of non-core transactions that are left unmanaged, usually due to a high volume of suppliers or limited in-house resources.

Many of these transactions are either too small or made too infrequently to be handled by internal strategic sourcing staff.

However, these small and 'insignificant' purchases add up and can impact a company's bottom line. Companies are discovering that they can't use the same procurement methodologies for tail spend as they have for their strategic spend.

This spending is far more complex than strategic spend; there are many more suppliers, it's fragmented, and there are a lot more individuals buying. Many suppliers, smaller spend volumes and a perceived lack of economies of scale mean knowing exactly where to focus attention on the tail is a daunting task.

So, who are the tail spend "buyers"?

It's the people in HR, marketing, finance, IT, and so on - ordering goods and services when needed. They are not professional buyers, in the traditional procurement sense, and if the total cost is not surpassing the allowed threshold, they can place various types of orders with whomever and however they want. 

Managing these challenges is something that should be explored. There are several additional inherent characteristics of tail spend that make it hard to optimise. These include misclassified spend, high volume, and low price, one-time spend, maverick and fragmented spend. Other challenges associated with managing tail spend include factors like poor data quality and visibility, perceived low savings potential or lack of a dedicated team to manage it. 

Agencies and Invoice-Splitting

The current talent market is very competitive, an aging workforce combined with a lack of skills across the younger generation means that hiring managers, especially those requiring expertise on time critical projects are considering alternative ways to support their programs. Recruiters have used this 'back-door' for years to make one-off placements or introduce low-level temporary workers for short periods. 

Invoice-splitting is a popular means for rogue hirers to use their favourite suppliers. Invoice splitting refers to the practice of dividing a single invoice into multiple parts, there are a few scenarios where invoice splitting occurs:

Cost Allocation:

If a project has multiple cost centres, invoices are spread across various departments frequently misclassified, or reported as expenses making it more difficult to reconcile. 

Partial Payments: 

Due budget constraints or tighter thresholds these are broken down into smaller payments invoiced quarterly, at specific milestones or at the beginning and end of a project lifecycle. 

Why management of tail spend is important

Effectively managing the tail spend remains both a challenge and opportunity for many procurement departments. Improved process efficiency and better allocation of time and resources for tail spend can result in significant cost savings up to 15%. 

Clients are thinking about what they can do with the remaining unmanaged spend of 20%. After all, the tail is a fertile soil for many activities that can be damaging to a company's reputation. 

With the 80% strategic spend, companies typically have an experienced buyer managing key suppliers. The company knows everything there is to know about their strategic suppliers: whom they work with, their values, their working conditions, who their suppliers are, etc. With unmanaged tail spend, its typical that nobody is looking after these suppliers and companies have no idea who they are buying from, making them susceptible to several risks. 

What are the risks?

The first risk is that unmanaged spend means companies may be doing business with suppliers that violate their own corporate social responsibility (CSR) principles. A second risk is worker misclassification. This is a hidden risk with significant financial penalties if not managed properly. The damage could be irreparable, and the reputational impact alone could severely affect brand reputation.

A third risk that is common of unmanaged tail spend is when companies let staff buy from whomever they want, the chance is they will just buy from a personal connection. This often results in overpaying, but what is worse, they may be violating bribery and corruption regulations and putting the company at risk.

What needs to be done to manage tail effectively?

Using a technology enabled Managed Services Programs (MSP) will define the tail spend, evaluate the opportunities and make a business case comprised of savings, investments and operating models. 

To be effective in managing tail spend, it's important to address the following:

Spend analytics: 

Perform through analysis to identify radical spending and transaction data classification to achieve greater tail spend visibility across your recruitment supply chain. Deep-dive analysis will identify appropriate strategies to tackle the spend at a category or supplier level.

Program Team: 

Full-time support can perform as the one-stop-shop for all sourcing and procurement queries. Pre-agreed requisition spend parameters – anything out of the ordinary would be directed to your sourcing department.

Online supplier marketplace: 

Use a secure, user-friendly interface to a Vendor Management System (VMS), enabling access to an online marketplace of approved suppliers. This provides real-time visibility and control of your labour spend, plus data rich insights into best performers as well as diversity, equity and inclusion data.

Tactical buying: 

For true one-off purchases, quick turnaround benchmarking, tendering and negotiation services that ensure all purchases are done by procurement professionals. Local supply market knowledge. This is important as local supply ticks many boxes, from social value calculations to data that can be used to support bid proposals.