Welcome to the new year, and to your organization’s new budget. Whether you are leading the procurement charge in the public or the private sector, you can count on one thing—your budget is going to feel tight. This year, in the midst of a global economic crunch, every dollar matters a bit more, and needs to go a lot farther, than it likely ever has before. It’s the New Norm, and for the foreseeable future, it’s here to stay.
Before slicing and dicing spend to survive in today’s New Norm, it’s critical to first identify where to put your knife.
According to a recent study from CPO Agenda, companies today have an average of just 60.6% of their procurement outlays “under management”. Significant savings opportunities exist in each spend classification, the key is identifying in which your organization’s greatest spend management opportunities exist.
There are an overwhelming multitude of ways to slice organizational spend—category taxonomies, spend thresholds, savings potential, transactional analysis, supply risk and many more. While all these different classifications may keep consultants and spend analysis software companies in business for years to come.
But I believe there’s a better way: the Spend Rule of Three. Quite simply, everything comes in threes, including your spend.
The “Spend Three” includes:
Strategic Spend - By far the largest spend category, Strategic Spend generally comprises 80% of an organization’s spend, and is allocated to 20% of its vendors and service providers
Catalog Spend - By far the smallest spend category, Catalog Spend falls at the far end of the supply chain. It is generally comprised of fixed price, transactional “at the moment” buys of simple goods and services, most often purchased through corporate credit lines or P-Cards, rather than large contracts or RFPs.
Third Spend - The final spend category, Third Spend, is comprised of the bulk of an organization’s indirect or tail spend including simple commodity goods and service, larger than Catalog Spend items but smaller than Strategic Spend items. It generally represents 10- 20% of an organization’s spend, and is allocated to 80% of its vendors and service providers.
Purchases between $3K and $300K
Now that you know the three categories, the next thing you need to know is that organizational savings live in unmanaged spend. Therefore, identifying which category offers the greatest spend management opportunity can easily and quickly result in significant savings.
Spend Management Opportunity: Strategic Spend
Traditionally, this is where the vast majority of organizations focus spend management efforts. While it’s true that at the onset, focusing on the largest spend category has the potential to produce the greatest return, most organizations are more than likely already implementing expensive software and external management Strategic Spend solutions. After years of focus on spend management and cost-cutting, many large companies have literally squeezed-out most of the savings.
Spend Management Opportunity: Catalog Spend
While it doesn’t represent a large area of spend, there is certainly still value and in managing procurement in this area. But much like with Strategic Spend, solutions for these low dollar, transactional purchases have already been instituted for the vast majority of organizations via P-Cards and credit lines. It is generally already being well-managed, limiting any additional significant savings opportunities.
Savings Opportunity: Third Spend
Unlike the first two categories, Third Spend, that vast middle section comprising the bulk of tail spend, has long been overlooked, as it was thought to be too difficult to manage, especially with already-stretched resources. Perceived management challenges included poor data visibility, lack of effective controls , seemingly low potential savings and lack of category expertise in the very high number of categories.
But this perception is changing. Fast. New technologies and fully-managed online B2B/B2G marketplace innovations are making it easier and smarter to track Third Spend as a complimentary component to a larger Strategic Spend and Catalog Spend management initiatives and efforts. Organizations large and small, public and private are realizing that targeting Third Spend can add up to big savings—and less cuts—quickly.
Third Spend is where fast and effective spend management savings opportunities exist.
How big of an opportunity could Third Spend management deliver to your organization?
Try this simple formula, applying the 80/20 rule. Examine 20% of your total procurement outlays. If your organization undertakes efforts to better understand the who, what, where, how and when behind compromised tail spend and then takes steps to make those purchases more uniform and more coordinated where possible, you could reasonably expect to save between 5-10% of that amount in terms of lower purchase prices and even more in terms of time saved. For large organizations, this could quickly add up to millions
In fact, Vienna, VA-based fully-managed online marketplace FedBid estimates a company with $10B in revenue and $600M in Third Spend could save as much as $66M+ when purchasing through its marketplace.
Maverick Spend, Misclassified Spend, Fragmented Spend and Unaddressed Spend, among other subcategories, provide a wealth of management opportunities within Third Spend. As Pete Loughlin pointed-out in the recent Procurement Insight article, Supply Chain Finance—Are You Ignoring Your Greatest Source of Savings?, “Ignoring tail spend is potentially leaving huge amounts of money on the table....(as) the significant benefits available from managing tail spend could be a new and as yet untapped source of savings.”
Furthermore, Dr. David Wyld concluded in his recent Reverse Auction Research Center white paper, Managing the “Long Tail”: How Focusing on Tail Spend Management Can Directly Impact a Firm’s Bottom Line, “The size and scope of the potential cost savings and efficiency gains to be derived through better tail spend management makes for an opportunity that stretches beyond procurement to the top levels of financial and corporate management. Today, tail spend management should be a C-level issue, not just for chief procurement officers (CPOs), but for chief financial officers (CFOs) and chief executive officers (CEOs) as well.”
So as you assess how to best use, stretch and track your organization’s dollars in the New Norm, make Third Spend management your organization’s new norm.
About the Author - Mark Walsh FedBid Board Member, President, Chief Operating Officer
Internet and business-to-business ecommerce pioneer, Mark Walsh guides FedBid into new markets as the B2B ecommerce solution. As president and chief operating officer of the company and a member of its board of directors, he is responsible for all aspects of the day-to-day business operation for FedBid. He has over 28 years of management experience in technology, content and interactive-commerce related businesses and has been an active venture and angel investor in start-ups and growth companies. Prior to his position at FedBid, which he assumed in October of 2012, Mr. Walsh was the CEO of VerticalNet, a publically traded company in the B2B ecommerce arena. He was the CEO and cofounder of GeniusRocket, a leading “crowdsourcing” company in marketing, viral video and customer acquisition and was the president of the consumer interactive division of GE. He also was a corporate executive at AOL, running their AOL Enterprise Division, which he founded.