Understanding Tail Spend and its Impact on Procurement 

Anything Procurement can do to lower prices and rein in costs is a win for the organization’s bottom line. But in the process of securing valuable contracts, cracking down on maverick spend, and chasing ESG goals, teams can easily overlook the small parts of their spend cube that could add up to major savings. 

In this blog, we’ll explore what tail spend is, what causes it, and how you can address it for an easy boost to your quarterly or yearly savings reports. 

What is tail spend? 

Tail spend occurs whenan organization has 20% of its spending coming from around 80% of its suppliers. Having a significant number of suppliers with low frequency, volume, and value  makesan organization’s spend cube  fragmented and unmanaged. 

Steps toward managing tail spend 

Because tail spend is made up of small, unmanaged purchases, it likely started and grew because its areas of spend weren’t being managed methodically. Therefore, the best way to address it and prevent it from growing is with a step-by-step process. 

1. Identify it 

You can’t identify fragmented spend if you can’t see all of your spend. So, the first step is to consolidate and organize spend by category, sub-category, and supplier. Then, you can conduct a tail spend analysis to determine how spend is distributed across your suppliers. 

However, this approach is manual and prone to error. Alternatively, you can let a spend intelligence solution like SpendHQ automate this process so you can be sure all of your spend makes it into the distribution. 

2. Streamline internal processes 

Once you know which suppliers and categories are producing your tail spend, you can start to find out what’s causing it. There might be several sources, including: 

• Confusing processes 
• Missing purchasing controls 
• Categories without contracts or preferred suppliers 

Supplier fragmentation creates spend fragmentation, so identifying tail spend categories and sub-categories that don’t have contracts is a great way to start addressing it. Maverick spend is another common culprit. Once you have contracts in place, consider setting up automatic controls that limit purchasing to selected vendors.  

3. Leverage data for tail spend optimization 

Data will both reveal tail spend and help you institute solutions. Contracts are a great example. Armed with financial data, you can show suppliers how much additional revenue they can expect from your organization in exchange for certain agreement terms. 

Data can also smooth over change management conversations with stakeholders. When you need to institute spend control measures in their areas of influence, show them the before and after picture and its impact on organizational goals. This approach will feel collaborative and go a long way toward building Procurement’s internal brand.  

Finally, use data to set monitoring thresholds and inform your spend controls. These can include which suppliers should be blocked, which buyers need additional review, and what purchases can be automated. 

4. Implement a step-by-step approach to tail spend management 

Managing tail spend is an on-going process. Once you find the tail spend management framework for your organization, embed it as an SOP. Use it to root out unnecessary spending at the category and sub-category levels. This will keep fragmented spend from becoming a problem in the future. 

What are the benefits of managing tail spend? 

Placing more spend under management is always a win for both Procurement and the wider organization. Outlined below are a few specific examples. 

Maximizing savings through strategic spend management 

Tail spend is made up of little purchases, but they add up. Remember, it usually makes up around 20% of an organization’s total costs. Returning these purchases to preferred supplier agreements can add millions of dollars to the organization’s P&L statement. For private equity firms, cross-portfolio tail spend management savings can be an easy lever for major EBITDA enhancements. 

Boosting efficiency and productivity 

The supplier fragmentation that causes tail spend creates variances in stock, quality, and reliability. If you can manage tail spend and keep purchases flowing through tested and approved channels, the entire organization will function more reliably as a result. 

Enhancing compliance and minimizing risk 

An often-overlooked aspect of tail spend is that it exposes the business to serious third-party risk. When Procurement doesn’t have a chance to vet suppliers, the business may unknowingly work against its scope-3 emission and diversity goals. More concerningly, it may also begin doing business with vendors that present cyber security risks or contribute to human rights violations. With Know Your Supplier laws becoming more popular in the EU, reducing tail spend is more important than ever. 

Improving internal user experience and satisfaction 

Even a single bad sourcing decision can disrupt operations throughout the business. Driving supplier consistency makes work easier for everyone, from the purchaser to accounting and everyone who touches the process in between.  

What are the challenges of tail spend management? 

Of course, tail spend management is rarely a quick fix initiative. Here are a few common roadblocks that slow down teams wanting to mitigate it.

Insufficient data visibility 

Managing tail spend requires you to see everything. Procurement’s data isn’t usually easy to put together and view as a whole, so the sources of tail spend and its very existence can be hard to see. To solve this problem, teams need a foundation of comprehensive, reliable spend data. If that’s in place, tail spend management can become as simple as directing buyers back to the appropriate purchasing channels. 

Inadequate spend control 

Tail spend usually happens when Procurement doesn’t have controls embedded in purchasing processes. If this is the case, improving your controls is the only way to keep spend consolidated long-term.  

Disjointed processes 

Confusing processes are often the cause of tail spend, but they can also get in the way of fixing it. For example, you may have to work cross functionally before you have the authority to make a change. You might also find that a disjointed process created inaccurate demand forecasts that you must correct before doing anything else. 

Solving this kind of issue may take time, but you can ensure success. First, analyze your data to understand the situation holistically. That includes risk, business unit needs, historical trends, etc. Then make sure the right stakeholders are aware of the situation and involved in the decision-making process. Finally, manage the solution in a way that keeps everyone involved. 

Restricted negotiation leverage 

Sometimes, the existence of tail spend can hurt your negotiation power, especially when it comes to supplier contracts. If a supplier feels you can’t guarantee the revenue volume you’re promising, you may have trouble securing the terms you want. In these instances, don’t shy away from your historical data. Instead, focus on the control mechanisms you’re embedding and why you’re confident in their success. 

Lack of performance tracking 

Because tail spend involves small amounts of one-off spend, the causes tend to be niche-relevant to a specific business unit. As a result, they can easily fall through the cracks. Low-visibility procurement performance tracking methods like spreadsheets can impede stakeholder visibility and communication, making it easy to re-embed processes that don’t work for the people using them.  

These same methods can also make it hard to report the savings your tail spend management efforts secured, which works against the internal brand you’re trying to build. 

Difference between maverick spend and tail spend 

Another result of process breakdowns that increases spend is maverick spend, also known as rogue spend, non-compliance, and savings leakage. This is spend that occurs outside of approved purchasing channels, usually with non-contracted vendors.  

While maverick spend and tail spend are different, rogue buying can be one of the causes of tail spend. The good news is that you can manage it easily as long as you can monitor category spending. You can also reduce it with cost controls by restricting or blocking purchases from non-contracted vendors. 

Why is it important to manage tail spend? 

Organizations that actively manage tail spend protect profitability in several ways, such as: 

• Lowering costs by reducing purchase price variance  
• Increasing visibility into fragmentation and supply chain resilience 
• Mitigating third-party risk by allowing Procurement to vet all suppliers 
• Improving and protects supplier relationships by directing spend where it’s promised 
• Improving processes and reduces administrative burden 

In general, addressing tail spend is a key part of procurement maturity. If your organization can lock down purchasing so spend variance stays at a minimum, you’ll be well on your way to becoming best-in-class. 

SpendHQ’s solution to manage tail spend 

Despite its importance, many organizations can’t manage tail spend simply because they can’t see their spend cube as a whole, much less determine if 20% of their purchases occur with 80% of their suppliers. Does that sound familiar? 

SpendHQ solves this problem by using AI to consolidate and categorize all of an organization’s spending into a single spend cube. With the insights made obvious, tail spend management becomes a simple matter of assigning maintenance projects, reporting their results, and then turning to other strategic opportunities.