Tail Spend Management: What is it and how to manage it?

It’s a well-accepted maxim that in business, every penny counts! And more so, when it comes to procurement. Every spend is a strategic decision that shapes the trajectory of a business. Every business creates an annual budget to be fiscally responsible, but when a series of small purchases get missed, it creates a substantial drain on financial resources. The impact is not just monetary; it’s systemic.

Types of spend in procurement

While a company carefully plans its core procurement needs much in advance, there are many types of spend that can make a dent and affect the financial planning of an organization:

Direct spend, or direct procurement:

Is the acquisition of goods and services that are directly tied to the production process. For most organizations, direct spend constitutes the most significant percentage of the total annual spend.

Indirect spend:

Covers the purchases necessary to maintain and develop business operations but not directly linked to production.

Maverick spend:

Is unmanaged or non-compliant spending that bypasses established procurement processes.

Spot buying:

Refers to one-time or infrequent purchases made on an as-needed basis, often at a premium due to the lack of planning.

Tail spend:

Also known as tail end spend, is smaller, less frequent purchases that cumulatively can account for a significant portion of a company’s transactions.

What is meant by tail spend?

Tail spend, often overlooked in procurement, refers to the lower-value transactions that, while not strategically managed, cumulatively can represent a significant portion of an organization’s overall spend. Tail spend is often ad-hoc, decentralized, and harder to manage efficiently. Tail spend often includes miscellaneous purchases that fall outside the purview of regular procurement practices. Managing tail spend is important for organizations to reduce costs.

In a pyramid representing a company’s expenditure, the top is made up of direct spends, these are bigger, strategic purchases that constitute the bulk of procurement activities. The lower part of the pyramid, the long base, consists of numerous small-scale purchases – these are known as the tail spend. Tail spend comprises low-value, one-off or infrequent purchases that may seem inconsequential when looked at individually, but collectively they amount to a substantial portion of a company’s procurement activities.

What constitutes tail spend?

Tail spend ranges from indirect goods and services to one-time purchases and ad-hoc expenses. Software subscriptions, office supplies and stationery items, lunches and catering services for company events are some examples that constitute tail spend. It encompasses ad hoc spending, infrequent purchases, and transactions with uncategorized suppliers that are not managed due to their perceived low value or volume. While these transactions may seem minor, their cumulative impact can affect a company’s bottom line.

How is tail spend calculated?

To calculate tail spend, you need to collect and analyze procurement data meticulously. Identify transactions that fall below a predetermined threshold (often varies across businesses) and those are your tail spend.

The Pareto principle is commonly used to calculate and explain tail spend. Also known as the 80/20 rule, the Pareto principle states that roughly 80% of effects come from 20% of causes. Consider the many smaller, less frequent purchases. They may seem like inconspicuous transactions, despite individually representing a smaller slice of the overall spend pie—typically around 20%, wield a significant influence and encompass a whopping 80% of total procurement transactions. This imbalance presents both a challenge and an opportunity for businesses to tighten their fiscal belts and enhance procurement strategies.

What are the challenges associated with tail spend?

Tail spend can create a fragmented procurement ecosystem, with valuable resources scattered across minor transactions, leading to inefficiencies, missing out on potential cost savings, and a lack of an understanding of spending patterns. Managing tail spend is crucial for organizations aiming to optimize their procurement strategy. It presents an opportunity for cost savings, often in the range of 5% to 10% of the total spend.

Several critical challenges can emerge when organizations fail to control their tail spend:

Hidden Costs

Companies often find themselves paying higher prices for smaller products that could be obtained more affordably through better planning and negotiated pricing.

Quality Compromised

Unplanned purchases can also compromise product quality control, increasing the risk of inferior quality products, and potentially harming the company’s reputation.

Compliance Conundrum

Suppliers and contracts outside the organizational purview can lead to compliance risks, particularly in regulated industries.

Productivity Drain

Unnecessary transactions that add no value can lead to a significant loss of productivity for everyone involved in the process.

What is tail spend management?

Tail spend management is a strategic approach to identify, analyze, and optimize the innumerable smaller transactions that make up tail spend. A tail spend management strategy uses data to gain visibility into these transactions, categorize them, and implement targeted steps for cost optimization, efficiency enhancement, and risk mitigation.

The end goal of tail spend management in procurement is not just to control costs but to also steer these minor expenses towards strategic value. Tail spend management can convert decentralized, low-value transactions into opportunities for organizational efficiency and responsible financial spending.

What is the need for tail spend management?

Businesses need tail spend management because of its direct relation to cost savings. The right tail spend management strategy allows organizations to redirect their resources towards core business activities and high-impact initiatives. Implementing streamlined processes and leveraging technology for better visibility into tail spend enable businesses to control the ad-hoc and smaller transactions more effectively, thereby enhancing operational efficiency. Tail spend management improves the overall procurement process, leads to strategic resource allocation, and informed decision-making.

What are the benefits of tail spend management?

Businesses are often unsure about devoting time and resources towards tail spend management. But unmanaged tail spend can lead to inefficiencies, suboptimal vendor relationships, and an obscured view of the overall procurement strategy.

Here are some significant benefits of a tail spend management strategy:

1. Increased Savings:

A strategic focus on tail spend management can lead to significant one-time savings and recurring annual savings.

2. Increased Productivity and Efficiency:

Tail spend management facilitates supplier base consolidation, enhancing efficiency by reducing the number of suppliers. This streamlined approach not only cuts costs but also frees up procurement resources for larger, more impactful contracts.

3. Improved Compliance and Reduced Risk:

A tail spend management strategy ensures compliance with business policies and contract terms. By eliminating untrustworthy suppliers, a tail spend management strategy strives to make the procurement process more transparent and shields it from fraudulence.

4. Better Supplier Relationships:

With a tail spend management strategy guiding the procurement process, responsibilities and timelines become clear which fosters a reliable supply chain and better relationships with suppliers.

5. Greater Visibility and Control:

Tail spend management enhances visibility into a company’s total expenditure. By bringing unmanaged spend under control, companies gain a complete picture of their procurement spend, informing better decision-making and offering greater control over financial operations.

6. Enhanced Decision-Making:

Insights and analytics from tail spend management empower companies to make informed decisions about procurement spend. Identifying trends, spotting savings opportunities, and optimizing procurement processes become feasible through strategic decisions.

What are the steps to manage tail spend?

Tail spend management is not a one-time thing but an ongoing effort.

Here are some actionable steps to create a tail spend management strategy:

Conducting a baseline assessment for tail spend identification

Begin with a thorough examination of your procurement process. Dive into historical data to identify transactions that fall below a predetermined threshold. Classify these as potential components of your tail spend. This baseline assessment lays the foundation for targeted tail spend management efforts by bringing the invisible into focus.

Enhancing visibility and streamlining internal processes

Focus on enhancing the visibility of your tail end spend. Streamline internal processes to ensure seamless tracking and monitoring. Establish clear procurement policies to guide the handling of tail spend, reducing the risk of maverick spending and process inefficiencies.

Tail spend analysis for process optimization

Analyze tail spend transactions to identify patterns and areas for optimization. Seek opportunities for consolidation, vendor negotiation, and process improvement. Data-driven insights form the cornerstone for strategic decision-making regarding tail end spend.

Discovering the need for tail spend management solutions

Evaluate the need for dedicated tail spend management solutions. Consider a tail spend management software that offers advanced analytics, real-time monitoring, and automated tracking. Technology can be a powerful ally in tail spend management strategy.

Measuring performance for sustainable tail spend management

Define key performance indicators (KPIs) to measure the effectiveness of your tail spend management strategies. Regularly assess performance against these benchmarks and alter your approach based on the evolving needs of your organization.

Tail spend management platform to manage and reduce tail spend: Features and benefits

A tail spend management platform is a great way to manage and rescue your tail spend. If you are looking to invest in a tail spend management platform, choose a platform that not only meets your current business needs but also aligns with your organization’s objectives and vision for the future. Here are some essential features and benefits to look out for:

Holistic visibility & integration

A tail spend management system provides holistic visibility into your tail spend by seamlessly integrating with your procurement systems, capturing data from each and every transaction, to be able to do effective analysis. It is important for a tail spend management solution to complement your current processes, enhance collaboration, and ensure a cohesive procurement ecosystem.

Advanced analytics capabilities

A robust tail spend management software should possess advanced analytics capabilities to be able to reveal patterns, trends, and optimization opportunities, and empower data-driven decision-making.

Automation for proactive management

You should look for a tail spend management solution that reduces manual efforts and automates data collection, categorization, and tracking. Your tail spend management software should also have real-time monitoring capabilities to be able to make timely interventions in tail spend activities.

Customization, scalability, and user-friendliness

Look for a tail spend management solution that supports your evolving business needs, ensuring long-term scalability and fitment. It should offer customization and be user-friendly for widespread utilization.

Vendor consolidation and negotiation

Having vendor consolidation and negotiation features empowers your organization to optimize tail spend costs and uncover hidden savings opportunities.

Reporting and KPIs

A tail spend management software should offer comprehensive reporting features, allowing organizations to set and measure KPIs (key performance indicators) and track progress. The reports are important as they provide valuable insights for ongoing optimization efforts and contribute to strategic decision-making.

Automating tail spend management: How to reduce tail spend using Procol

Tail spend often represents a significant portion of an organization’s procurement budget. The consequences of rogue spending extend beyond lost savings, affecting supply-base risk, purchasing costs, customer satisfaction, and sourcing leverage. Procol addresses these challenges, offers a comprehensive solution to streamline and automate tail spend management, and maximize savings.

Increased Savings:

Procol’s tail spend management solution goes beyond categorizing low-value spend categories; it tailors strategies based on your procurement goals. Leveraging smart procurement software, organizations can realize savings of up to 20%, ensuring competitive prices on sourced goods and services.

Enhanced Spend Visibility:

Procol’s smart algorithms clean and classify spend data, generating insights that empower procurement managers. By centralizing data in a standardized format, Procol enables proactive cost management for individual spend categories, fostering greater spend visibility.

Improved Operational Efficiency:

Vendor management can be a time-consuming and resource-intensive process, often complicated by multiple channels and manual approvals. Procol’s tail spend management software streamlines vendor interactions and also provides easy access to important data needed for better negotiation.