Tail-spend is the 20% of IT budgets that is often ignored, put into the ‘all-too-difficult-to-deal-with’ category. And yet, it can amount to millions. In this blog, we’re going to look at why it’s ignored, why it shouldn’t be, and how to get to grips with it.
The short answer is ... big.
Large enterprises with 5000+ employees typically manage between 500 to 2000 IT contracts. In highly regulated industries like finance, healthcare and governments, this number is often more than 1,500 contracts due to compliance needs. Tech-intensive organizations like software and cloud services may have well over 2,000 contracts spanning SaaS, infrastructure, security and service agreements. And the really large, global organizations could have tens of thousands of contracts.
But, despite the vast number of IT vendors and related contracts they have, most organizations only proactively manage the mega vendors like Microsoft, Oracle, IBM and SAP that consume between 50 to 80% of their total IT spend.
If we apply the 80/20 rule to an organization with 500 IT suppliers, it means that 400 suppliers make up the tail-spend. Individually, each tail-spend contract might be worth anywhere between $10k and $30k annually. Added together, this can amount to millions.
A single IT vendor doesn’t always mean a single contract. Often there are multiple contracts, sub-contracts and addendums that go along with it, and they don’t make for light reading! It can take a person between two and four hours to open, read and extract the relevant data needed per contract.
For sake of illustration, if there are 1,000 contracts across those 400 suppliers, that amounts to approximately 166 days or close to six months to simply understand what lives in those contracts. And once you've done that, your transactions with those suppliers will invariably have changed, and so the cycle continues. If you are a very large organization and have 10,000 contracts, it will take years’ worth of effort just to read and extract the data you need from those contracts.
It’s an expensive and laborious undertaking most organizations simply don’t do because the end doesn’t justify the means. However, your tail-spend is filled with cost-savings opportunities. Once the data is extracted, it can be analysed to spot areas of wastage and areas ripe for optimization.
The question is: how can you do this faster with greater accuracy than a manual contract review? That’s where Livingstone’s Contract Intelligence comes in.
Livingstone has created Contract Intelligence, a service that uses Optical Character Recognition (OCR) and AI combined with human insights, to digitize entire software contract portfolios and make sense of them. We take all your contracts – typically pdfs – and ingest them, digitizing their contents and applying metadata to them. This is done in hours, days or weeks, depending on the contract volumes, rather than months or years a human approach would take.
Once the entire contract portfolio is digitized, we make the data searchable and analyze it to find tail-spend savings opportunities. Here’s how:
All of this can be achieved simply by looking at the contract data to drive cost efficiency, without having to work out an effective license position or looking at consumption data.
But the benefits go way beyond savings in your tail-spend. Contract Intelligence closes in the information gap, reduces risk, improves vendor management and saves your team time. Here’s how:
Contract Intelligence shines a light on an area that few have ever had the chance to look at and provides a single source of truth. Using the digital data, it drives value across legal, contract, finance, SAM and procurement teams.
Livingstone worked with a technology company with $60million in tail-spend, and using Contract Intelligence, identified $4.8m in savings.
We also worked with a manufacturing organization that had a total IT contract portfolio – including the mega vendors and tail spend – of $420m. However, due to its scale, the tail-spend hadn’t been challenged. If an invoice was sent, it was paid, regardless of whether that software was still actively being used in the organization. Livingstone identified $7.1m in savings for that company in tail-spend.
Learn more about Contract Intelligence and take our quiz to find out how much – or little – you know about your IT contracts.
We're hosting a webinar that dives into this subject even further.
Justin Venables is Director of IP Development and Innovation at Livingstone. He is a leader with over 20 years experience in various management and consulting roles in technology.
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