The Pareto Principle goes both ways.
Also known as the 80/20 rule, business leaders and productivity gurus extol the virtues of focusing your energy on the 20% of the business that is responsible for 80% of the value.
But what happens to the other 20%? And what if that 20% generates 80% of your administrative responsibilities?
If your procurement department isn’t asking those questions, it’s ignoring – and mismanaging – 20% of its budget.
And while the percentages may vary for your business, the principle still applies.
That ghosted gap in your budget is your long-tail spend. And the businesses that manage long-tail spend effectively are rewarded with drastically increased efficiency, cost reduction and time saved.
After reading this blog post, you’ll know the answers to the following questions:
What is long-tail spend?
Why do many companies fail to properly manage it?
What are the benefits of managing long-tail spend?
And how can my business manage long-tail spend?
Let’s jump in.
Long-tail spend is the sum of your company’s “invisible,” or unmanaged, spending.
Typically, long-tail spend is made up of a large volume of small purchases – especially corporate payments, one-off purchases from unfamiliar or non-preferred suppliers, and maverick spend.
Maverick spend relates to the non-authorized and non-compliant purchases employees sometimes make on their corporate cards. And, unfortunately, these often slip under the radar of procurement processes.
Long-tail spend has three characteristics that make it hard on large corporations:
Its transaction volume – often around 80% of a business’s total transactions – far outweighs its actual impact on the budget.
Purchases tend to scatter across several categories, making purchases difficult to categorize – and plan for.
Infrequent or one-off suppliers account for the bulk of long-tail spend.
A lack of data visibility and steep administrative difficulty, intensified by the decentralizing and siloing effects of an increasingly online, remote world.
Because it takes a lot of time, energy, and input to tackle massive volumes of data – including as many as thousands of invoices from thousands of suppliers – it’s easy for procurement teams to convince themselves the juice isn’t worth the squeeze.
It is. Especially now that solutions exist to make managing long-tail spend simple, automatic en viable.
Companies have a lot to gain from long-tail spend management:
Visibility
For a lot of organizations, calling their long-tail spend disorganized is an understatement.
Managing long-tail spend allows you to:
Collect, catalog, and simplify your long-tail spend
Extract meaningful data
Visibility is the name of the game. Instead of leaving 20% of your budget in the dark, companies that utilize long-tail spend management solutions increase their capacity to know, think, and act in equal proportion.
Many companies don’t think things through carefully when it comes to cutting costs. Whether they’re feeling pressure from stakeholders or forced to adapt to an economic downturn, the first places many companies look are business-critical, like labor or direct spend.
Instead, businesses should set their sights on their long-tail spend. Oftentimes, a business’s long tail is bloated with unnecessary purchases or missed opportunities like discounts and rebates – particularly in organizations with siloed spending.
Procurement and accounting departments can spend significantly less time dealing with invoice chasing, processing and reconciliation, freeing up more time for activities that actively promote business growth.
In addition, long-tail spend management can produce invaluable data – which companies are leveraging to reduce annual expenses by as much as 10%.
When Steve Jobs pitched the first personal computer, he described it as a “bicycle for the brain.”
Proper long-tail spend management is equal parts strategic leadership and automation. An automated payment solution will help you increase visibility, gain insight into your long-tail spend, and take care of procurement processing for you.
You need a payment solution that works like a bicycle for your business.
Here are the three steps to long-tail spend management:
To manage long-tail spend, you must first know what comprises your long-tail spend. Identify your ad hoc purchases, recurring payments to non-preferred suppliers, and the requisitioners that may contribute to your long tail.
Centralize all invoices, contract data, and supplier data with an automated solution that can handle all processing, reconciliation, and data collection. Ensure all payments are processed through this solution.
With more data visibility and more time to take action, you’re well positioned to make better decisions, negotiate better terms with suppliers, and increase cost savings.
Remember, your goal is to turn an invisible aspect of your budget accounting for around 80% of your administrative burden into an advantage for your business.
The key, then, is a combination of centralized payment information and efficient process management. Long-tail spend is complicated by nature, and emphasizing both of these will help to simplify procurement from end to end.
Sign up now to join us on the 24th of November from 14:30 - 15:30 PM CEST for an online expert discussion on "The secret to payment innovation in 2023: effortless solutions, driven by technology". During this one-off special event AirPlus will be joined by Coupa, Mazepay and THL Pay!