What is tail spend management? Benefits, Strategies & Challenges

Sourcing and procurement teams face increasing pressure due to supply chain disruptions and ever-changing commodity prices. But they only look at larger purchases to cut costs. 

Even smaller-value purchases that happen in large volumes, known as tail spend, can add up to be a large component of the company spend. 

Tail spend is challenging to identify and control because of its large volume and low dollar amounts. However, via automation, companies can deal with this spend category.

What is tail spend?

Tail spend is a term used to describe the smaller, often scattered purchases that occur outside an organization's primary procurement process. 

While each of these purchases may have a relatively low individual value, they constitute a significant portion of the overall expenditure when aggregated. 

Every company defines tail spend differently because their spending pattern is unique. What is considered tail spend in one category may not be so in another one. 

There are three ways in which tail spend can be classified:

• Based on spend threshold - The company may define tail spend as any spending below an arbitrarily set threshold, which could be anything between $100K to $1 million.

• Based on the Pareto principle or 80/20 principle - Procurement departments tend to focus on larger value, longer-term contracts because the savings realized are also large. However, this causes them to ignore 20% of their budget. 
  
  A traditional definition of tail spend is 80% of the transactions that comprise 20% of the company spend. This principle is also tweaked to 90/10 or 70/30 based on the company’s spending patterns. 

• Based on spend that is not actively managed - Some companies define tail spend as any vendor that is not being actively managed by procurement. 

A more advanced approach to defining your tail spend would involve the following steps:

1. Create a visual representation of cleansed, normalized spend information.
2. Add risk stratification so that you know what type of spend to focus on and what the potential cost savings are.
3. Consider industry-specific dynamics, too, to determine which category of spend to define as tail spend.

Tail spend ranges from common office supplies to specialized equipment. Other items include:

• Packaging supplies
• Employee expenses on business trips
• Temporary labor for a short-term project
• Non-routine maintenance
• Food and beverages for office events
• Advisory or legal fees.

Challenges in tail spend management

Tail spend involves purchases that are usually indirect and non-core but are essential for the smooth functioning of a company. Some of the challenges of managing tail spend include:

1. Decentralized purchasing practices

Decentralized purchasing leads to fragmented spending, making it difficult to track tail spend accurately or negotiate favorable terms with vendors. It takes time and considerable manual effort to consolidate data from different operating systems.

Moreover, adopting a centralized approach offers enhanced control over procurement activities, which reduces the likelihood of inefficiencies and suboptimal spending decisions. 

2. Lack of integration between systems 

When systems don’t speak to each other, it prevents you from identifying patterns, trends, or opportunities for cost savings. 

Without a comprehensive view, it's like navigating in the dark. You know there are expenses, but the details remain obscured. This limited visibility prevents you from taking informed financial decisions.

3. Impact on financial health

Hidden costs associated with inefficient processes, unnecessary purchases, or suboptimal vendor relationships can accumulate over time. These seemingly minor expenses, when unchecked, can erode profitability. 

4. Lack of spend control

Making purchases without approval from procurement is called maverick spend, and is a common occurrence in tail spend. 

When procurement processes and policies are not defined, employees tend to make smaller or irregular purchases outside of typical procurement processes. 

This causes uncontrolled spend and deviations from the budget. 

5. More sub-categories

Tail spend is known for its high number of sub-categories, huge item costs, and a large number of vendors. 

The large volume of ordered line items and a long list of vendors complicates spend analysis despite the low value of these items.

Benefits of tail spend management

Tail spend analysis is not just about numbers; it's about identifying hidden opportunities for reducing costs and improving efficiency. 

Here's why tail spend analysis should be on your radar:

1. Additional cost savings

By moving tail spend to a centralized platform, you can reduce annual expenditure by 5% to 10% on average. This is a significant amount for global companies with expenditures in billions.

Analyzing tail spend reveals various ways to reduce spend, which include the following:

• Identifying and dealing with maverick spend
• Reviewing purchasing requirements to decrease unnecessary spending
• Consolidating vendors and deliveries to negotiate better deals 
• Implementing reverse auctions to reduce costs
• Set up clear policies and processes for buyers.

2. Total spend visibility

Procurement teams should be able to move tail spend out of invisible channels like spreadsheets, emails, phone calls, and disconnected procurement systems and on to a centralized procure-to-pay platform. 

This will enable procurement to have visibility over tail spend and reveal more opportunities to reduce costs and identify risks. 

3. Reduced vendor risk

A purchase may be below the company’s spend threshold, but it may still have a high risk profile. Without overall visibility, procurement teams cannot keep track of fraud, unusual spend, or potential ethical breaches.

With a SaaS procurement tool like Spendflo, you can collaborate with your stakeholders from all departments—IT, legal, infosec, and finance—and your vendors under one roof.  

Tail spend management strategies

For many CPOs, the thought of managing tail spend is tiresome, predominantly because the task first requires a massive effort in gathering, sorting, and analyzing spend data. 

To manage tail spend, here are a few strategies to consider:

1. Automation and procurement tools

Automation streamlines the entire purchasing process, reducing the need for manual intervention. This frees up your time and minimizes the risk of errors and maverick spending. 

Additionally, with these tools, you are able to gain better visibility into your spending, making it easier to track costs and make better financial decisions.

2. Policy implementation for tail spend

By implementing specific policies for tail spend, you can ensure that purchasing practices are standardized.

Standardization helps in keeping a close eye on expenditures and makes the process more transparent.

The role of technology in tail spend management

Technology is your ally in optimizing spend because it enhances visibility.

1. Procurement software solutions

Specialized procurement software acts as a central hub for tail spend management. This means all those scattered, small purchases can be consolidated and tracked in one place. 

Real-time access to data on what's being purchased, from whom, and at what price boosts visibility and simplifies the auditing process. You can easily identify where your money is going and identify opportunities for cost savings.

2. Analytics tools for tail spend insights

For a CFO or finance leader, spend analytics means having a comprehensive view and analysis of all your organization's purchases. 

You can identify trends, evaluate vendor performance, and uncover areas ripe for cost reduction. These insights enable you to steer your organization toward smarter financial choices.

3. Automation to streamline processes

Automation streamlines processes by categorizing purchases, enforcing policies, and even flagging unusual expenses. This reduces manual workloads and minimizes errors and compliance issues. 

Best practices for tail spend management

Let's talk about the core principles that can significantly affect tail spend management. 

1. Centralization of tail spend procurement

This practice involves bringing all the purchases within the tail spend category under one roof to improve visibility and control. Thus, you can closely monitor where every dollar is going. This centralized approach also helps you negotiate better deals with vendors.

2. Collaboration across departments

Imagine if your sales, marketing, and IT teams all buy the same office supplies from different vendors. This is where collaboration in procurement is required.

When different departments work together, it's easier to standardize how things are purchased. This not only streamlines the process but also identifies opportunities for cost savings. 

3. Monitoring and continuous improvement

Regularly monitoring and assessing how tail spend is managed is important. You need to ensure that the processes are working effectively and that there's room for improvement. Regular reviews can uncover inefficiencies or areas where you can cut costs.

4. Vendor relationship enhancement

Collaborating closely with vendors often results in better terms and pricing, leading to considerable cost savings over time. It's not just about transactions; it's about fostering relationships that benefit both parties.

5. Policy implementation and standardization

Clear policies and standardized processes ensure that everyone in the organization follows the same rules for purchasing. This consistency reduces the chances of wasteful spending and enhances control. This helps maintain financial discipline and keeps expenses in check.

The future of tail spend management

We anticipate a number of trends in tail spend management:

1. Emerging trends in procurement

Procurement is experiencing a shift towards more strategic and data-driven practices. 

• Vendor diversification: A growing emphasis on diversifying vendor sources ensures business continuity, especially during disruptions in the supply chain or political environment.
• Sustainability and ethics: Environmental and ethical considerations are becoming central in procurement decisions. Sustainable practices align with corporate responsibility and open doors to cost-effective and eco-friendly sourcing.
• Predictive analytics: Procurement is increasingly harnessing predictive analytics to anticipate demand, optimize inventory, and secure better deals, all of which directly impact the cash flow and financial bottom line.

2. Technological advancements for tail spend

• AI and machine learning: These technologies are used to automate routine tasks, identify cost-saving opportunities, and quickly analyze vast datasets.
• Blockchain for transparency: Blockchain's tamper-proof nature enhances transparency and trust in the procurement process, reducing the risk of fraud.

Tail spend management made simple with Spendflo

Managing tail spend involves using data wisely and implementing smart strategies. 

SaaS buying and optimization tools like Spendflo can help you with tail spend management through the Management Hub. The module includes spend analytics, usage tracking, and user sentiment surveys. 

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To learn more, book a demo today!