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- January 28, 2016
- Sean Park
Is it worth the effort to address the microtail of suppliers and spending?
When it comes to supplier enablement, procurement organizations have long followed the 80/20 rule, which is prioritizing electronic enablement for the twenty percent of suppliers that account for eighty percent of their spend. For these suppliers, transactions are automated and categories and contracts are actively managed.
The so-called tail is made up of many small suppliers and transactions that account for the remaining twenty percent of spend. Many companies automate some part of the tail, but let the rest go.
The rest is the microtail, sometimes called “the tail of the tail.” It’s characterized by lots of suppliers and very small transactions (typically, $50 to $1,000). It’s long been believed that the time and effort it takes to manage the microtail isn’t worth it. However, with modern enterprise tools and strategies, it can be a relatively easy process delivering clear and measurable ROI. Additionally, bringing the microtail of spend under management can help mitigate risk and fraud. In the stricter post-recession regulatory climate, it’s increasingly risky to let the microtail go unmanaged.
Inconsequential – until it’s not
Fraud usually hides in the microtail. Most fraudsters are smart enough to avoid easily identifiable fraud - six-figure transfers and the like. Often the way they do it is by processing many, many small transactions, thinking that this will never be caught because people know that these transactions don’t get looked at very often.
For a really big company, even a tiny percentage of the workforce committing fraud could add up. I know of one large company where three employees were sneaking small fraudulent transactions through travel and expenses that over time added up to quite a lot of money.
Supplier risk is another reason to address the microtail. Let’s say you’re a manufacturer and you spend a small amount of money for a chemical you need in your manufacturing process. It’s such a small amount of money that you don’t enable the supplier electronically. Well, if that supplier is suddenly implicated in an EPA lawsuit, you’ve got a problem, not only from a financial and supply chain perspective, but from a public relations and a regulatory perspective as well.
In a highly regulated industry, such as financial services, even a supplier seemingly as innocuous as the office’s flower shop can arouse suspicion with regulators if their dealings are less than above-board. The potential costs of fraud and compliance risk far outweigh the costs of applying your enablement processes and transactional scrutiny to all suppliers.
Getting your facts straight
There are also operational considerations. Spend in the microtail is usually miscategorized; people drop it into what they judge to be the best fit category, or “other.” Over time, that creates a lot of white noise in the system that hurts data quality and damages the credibility of the procurement organization.
Let's say, for instance, an IT procurement person approaches the chief technology officer and says, "We've got 1,500 suppliers for IT, and we need to do something about that." And the CTO says, "You're crazy. You don't know what you're talking about. I only have 300 suppliers."
The gap in numbers is probably because people have been dropping all kinds of loosely related spend into the IT bucket. That’s the kind of thing that usually happens at the microtail level, where nobody really pays attention to how a supplier is categorized. They figure it doesn’t matter, but in the aggregate it does. It’s hard to manage effectively if you can’t get your facts right.
Getting to perfect
In a perfect world, microtail suppliers would all be enabled and spending would be categorized correctly from the get go, but that doesn’t often happen. Usually you have to go back and do some cleanup. In the short term it costs a little bit of money to correct the problem, but it pays for itself very quickly.
The first step is always to gain sponsorship from a cross-functional team, usually made up of the legal group, the IT group, the CFO, and risk management. Without that, business leaders, operators and senior management will usually buck at this, because they don’t think it matters. But it does.
From there you develop a quick business case. What usually scares people off is the risk of a long process with no clear path to ROI. But when you lay out the cost-benefit from a risk point of view, they get it.
And, it doesn’t have to be a long process. You really only need to go back a year. A year’s worth of transactions should be sufficient to uncover most issues and help you establish a proper taxonomy for categorizing transactions going forward. Going back further than that probably isn’t going to be helpful.
The right tools for the job
Without a modern spend management tool, this is a lot of manual work. But with new tools you can quickly categorize, analyze, and audit your areas of spend.
I worked on an initiative like this that was sponsored and led by the risk management department at an e-commerce company. They were able to reduce their total number of suppliers by 15%, and by their reckoning, cut risk substantially by eliminating many that hadn’t been thoroughly vetted.
In order to prevent the supplier list from popping back up to pre-initiative figures, we also instituted a new supplier add process that directed requisitioners to approved/preferred suppliers first and then a not-too-arduous exception process that at the least categorized the spend correctly, and at best directed spend to approved/preferred suppliers.
Given the cloud spend management solutions available on the market right now that provide supplier intelligence and analysis tools, there's really no reason not to do this. You’ll reduce your supplier risk and cut off potential fraud at the knees. In addition, you'll benefit from reduced white noise in the system, which in turn reduces transactional costs and costs to manage categories internally. Going forward, you’ll be basing your data, initiatives and reputation on well-defined and easily identifiable truth, instead of an inaccurate, miscategorized version of your spending history.
Sean Park is group practice lead for procurement and strategic sourcing at Acquis Consulting Group, a Coupa implementation partner.