Good old Pareto is right almost every time. 80% of your spend is typically with 20% of your vendors. That leaves a piece of spend (often referred to as tail spend) which can represent 80% of your vendors. This can represent a major imbalance in operational costs.
Even with full automation, these suppliers represent back office invoice processing, payment processing, exception handling, issue management and resolution. This all has cost attached to it.
One way organizations tackle this problem is through vendor consolidation – taking the vendors that represent this tail spend and having them invoice through one vendor. This is also known as sub-tiering – a fairly common contingent workforce management practice.
Consolidators charge the vendors they manage a fee which covers invoice processing and issue resolution. But is that enough to expect out of a consolidator? In one word no. You should calculate the pool of money created by the consolidation fees, agree on a reasonable margin with your consolidator which will leave a pool of service money. Back out the cost to provide the basic service and their should be a budget left for additional services. Examples of these services could include Data Analytics, market research and vendor score-carding just to name a few.
If you haven’t addressed your tail spend, then consolidation is a great way to quickly gain benefit. If you are already using a consolidator you might think about what your getting in total value from your provider
