Tail Spend Management: Definition, Benefits, Examples and Strategy

Procurement teams around the globe are striving to enhance their purchasing practices. However, amidst the focus on optimizing strategic spend, the crucial aspect of tail spend management is often overlooked.

Tail spend refers to the high-volume, low-value purchases made by organizations. Despite their seemingly insignificant monetary value, these purchases can actually contribute up to 20% of your annual expenditure. Consequently, optimizing tail spend presents an opportunity to unlock a significant portion of your cash flow.

Understanding tail spend management: The Pareto Principle

The Pareto principle, commonly referred to as the 80/20 rule, serves as a fundamental concept in comprehending tail spend. This principle suggests that roughly 80% of outcomes can be traced back to a mere 20% of the causes.

In the realm of procurement, tail spend encompasses 20% of a company's expenses while encompassing a staggering 80% of the vendor base. This emphasizes the substantial number of cost-saving opportunities and compliance concerns that often go unnoticed. Consequently, effectively managing and optimizing tail spend becomes paramount in minimizing inefficiencies within your procurement operations and maximizing savings.

Benefits of tail spend management

Managing tail spend can provide multiple benefits to your organization and improve your book-closing process. Here are a few:

More saving opportunities

Effectively managing your petty expenses can open up a plethora of saving opportunities for your company. Research conducted by Boston Consulting Group (BCG) reveals that firms that adopt digital tail spend management practices have successfully reduced their annual expenditure by 5 to 10 percent. Such savings can be strategically allocated to enhance your company's end product, thereby fostering overall growth.

Reduce compliance risk

A substantial portion of tail spend comprises spot buying, which entails making immediate purchases to fulfill urgent requirements. However, vendors involved in this process may not always undergo standard compliance checks, leading to potential noncompliance and suboptimal deals in terms of cost-effectiveness. These issues can create complications during audits and year-end closing procedures.

By implementing a tail spend management policy, you can ensure that every small purchase adheres to your standards and mitigate the risk of encountering legal complications.

Improve team efficiency

Consolidating your vendor base can significantly streamline the operations of your procurement and finance teams, saving them valuable time and effort. By reducing the number of vendors involved in tail spend, your teams can concentrate on cultivating robust relationships with critical suppliers, expediting vendor reconciliation processes, and enhancing your strategic spend management.

Furthermore, this consolidation enhances visibility for other business units when making purchases. It empowers them with the knowledge of which vendors to consider before initiating a purchase, ensuring better decision-making throughout the organization.

Gain better insights into your spending patterns

A significant proportion of your transactions is associated with tail spend or petty expenses. Gaining visibility into your tail spend empowers you to gain a deeper understanding of your company's spending patterns and behaviors, facilitating precise budgeting and expense forecasting.

Furthermore, these valuable insights are readily available to relevant stakeholders, fostering shared visibility and collaboration between procurement and finance teams.

Examples of tail spend management

To better understand what might constitute tail spend, here are a few examples: 

• Office supplies: Common office supplies like printing material, paper, pens, and other stationery, and cafeteria items such as napkins and paper cups might come under tail spend. 
• IT supplies: Computer accessories like cables, cameras, and monitors also come under tail spend.
• Employee expenses: Employee expenses like travel, food and refreshments, gifts, and entertainment also come under this category.
• Professional services: Some ad-hoc consulting services or business services are considered to be tail spend. 
• Maintenance and repair: Maintenance and repair costs such as plumbing, and electrical repairs are also included.
• Other small purchases: Some small software licenses or plugins and marketing collateral such as business cards also come under this category.

Challenges with tail spend management

Like any business function, tail spend management comes with its own set of unique challenges. Let's explore some of the key challenges associated with tail spend management:

Lack of data visibility

Managing small expenses can pose challenges as these transactions often take place through phone calls or emails, resulting in undocumented or inconsistently recorded information across various business units within the organization. Acquiring and comprehending this data can be a demanding and time-consuming task for data analysts.

Furthermore, different individuals may record this data in non-standardized formats or overlook crucial information, exacerbating the challenge and making the process predominantly manual.

Lack of spend control

When purchases are made outside of established procurement policies, it is commonly known as Maverick spend. Effectively managing Maverick spend within tail spend becomes challenging in the absence of proper guidelines and approval policies. Additionally, employees may find ways to bypass established policies, further complicating the task of managing such spending and inhibiting the realization of potential savings.

Difficulty in classifying tail spend

The majority of tail spend is typically classified as indirect spend, meaning it does not directly contribute to the overall cost of the end product. As a result, categorizing and budgeting for tail spend becomes a complex undertaking. Moreover, tail spend often comprises one-off purchases, further complicating the process of accurately budgeting and forecasting these expenses.

Involvement of various departments

Tail spend management often involves multiple stakeholders within the company, which can lead to limited control over the entire process. Insufficient communication among stakeholders can result in duplicate purchases or multiple contracts for the same product, resulting in significant financial losses for the company. Additionally, individual purchasers often lack the necessary context for effective negotiation, resulting in higher costs for goods.

Addressing these challenges effectively is crucial to streamline tail spend management and achieve optimal cost savings and efficiency.

Strategy to improve tail spend management

Having delved into the challenges associated with managing your tail spend, let's now explore some valuable strategies that can simplify this process. It's important to keep in mind that tail spend management is an ongoing endeavor that requires time to fully realize its potential.

Identify tail spend

The first crucial step in enhancing procurement practices is identifying tail spend. The definition and classification of tail spend may vary based on the unique characteristics of your company. Therefore, it is vital to establish clear guidelines and thresholds to determine which expenses fall into this category.

Tail spend encompasses various subcategories, each requiring different levels of attention. Let's explore these subcategories:

1. Hidden tail spend: This category includes significantly larger expenses that may be covered under contracts but could be non-compliant due to unclear contract terms. Proper contract management is crucial to identify and address these expenditures.
2. Head of the tail: This category comprises large unmanaged expenses, typically ranging from $50,000 to $1 million per year.
3. Middle of the tail: This category involves multiple suppliers with expenses ranging from $2,000 to $200,000. Unfortunately, it is often overlooked due to the perceived insignificance of the amounts involved.
4. The tail of the tail: This refers to one-off purchases totaling less than $2,000 annually. These expenses typically involve multiple stakeholders and a significant number of vendors. Unfortunately, they are often neglected in procurement management. 

Understanding and addressing these distinct subcategories is vital to effectively manage tail spend and optimize procurement functions.

Streamline internal processes

In order to efficiently gather and manage tail spend data, it is crucial to streamline your procurement processes. Implementing a streamlined process ensures that all purchase data is centralized in a single location, readily accessible to relevant stakeholders. This promotes transparency and collaboration among departments while minimizing duplicate purchases and maverick spending.

Streamlining internal processes also involves establishing a clear framework for preferred vendors and negotiating pricing. This proactive approach helps prevent non-compliant purchases and curtails excessive spending beyond budgetary constraints.

Analyzing Your Tail Spend

Once you have collected and cleansed your tail spend data, the next crucial step is to analyze it in order to uncover opportunities for process optimization and cost savings. Comparing contracts and purchases against industry benchmarks enables more effective spend optimization. Additionally, leveraging spend analytics tools can help identify areas within your cost centers that require process improvements.

Automation tools play a vital role in this process. Utilizing efficient spend management tools, such as ClearTech, is essential in identifying flaws within tail spend. These tools provide intelligent insights into uncontracted spend, spikes in spend categories and line items, and detect duplicate purchases or zombie spend. 

FAQs 

What is Tail Spend Management?

Tail spend refers to high-volume and low-value purchases of goods and services not managed by the procurement team. Non-strategic tail spend purchases are mostly infrequent, ad-hoc, and scattered across suppliers, resulting in poor visibility into “tail spend.” The monitoring, tracking, and controlling of such spend is called tail spend management. 

Why is Tail Spend Management important?

While seemingly minor, tail spend can account for a significant portion of your company’s spend. Efficient tail spend management can help to achieve 5-10% cost savings by reducing unnecessary expenses. Consolidation of the supplier base also helps improve the productivity of procurement teams. 

Can Tail Spend Management benefit small businesses?

Management of cash flows and spend is crucial for a small business to be able to run efficiently and grow. Tail spend, if unmanaged, can quickly drain a company’s financial resources. Managing tail spend effectively allows such small businesses to detect wasteful spend and predict and control costs.

How can I measure the success of Tail Spend Management efforts?

Tail spend management requires consistently organizing, classifying, analyzing, and tracking spend to maintain visibility and control over these low-value transactions. To simplify this process and measure the success of these efforts, a tail spend management software that performs a complete spend analysis would be helpful. Such software highlights all cost-saving opportunities.