As much as we try to engage in procurement best practices like strategic sourcing and supplier consolidation, tail spend persists.
The truth of the matter is that as businesses grow, they develop more diverse needs that not all vendors can meet.
You can’t buy your office toilet paper from your advertising agency, for example.
Tail spend, as seemingly avoidable as it is, does come with some problems, however. It increases administrative costs, impacts spend visibility, and can even open up some compliance risks.
In short, you need to keep a keen eye on it. In this article, we’re going to show you how.
We’ll explain what tail spend is and what it looks like, discuss how it impacts procurement costs, and dive into five important strategies for identifying, managing, and reducing tail spend.
What is tail spend?
Tail spend is the portion of your overall company’s spending that isn’t covered under the umbrella of strategic spend.
Your strategic spending — the procurement of goods and services absolutely necessary to maintaining ongoing business operations — usually makes up the majority of your overall spending but comes from a small number of suppliers.
Tail spend is the opposite.
It's relatively small compared to the company’s total expenditure (especially when considered on a per-expense basis) but comes from an overwhelming majority of vendors.
Tail spend is made up of non-strategic, low-value purchases, which, while accounting for only a small percentage of total spend, make up the majority of your transactions.
What does tail spend look like?
These are the typical characteristics of tail expenditure:
- Non-strategic purchases: Routine or one-off purchases that aren’t tied to the core business strategy (e.g., a new laptop).
- High supplier count: A large number of vendors supply the goods and services involved, leading to fragmented purchasing.
- Low visibility: Because tail spend typically involves smaller transactions and is less strategic in nature, businesses tend to give it less attention, reducing spend visibility.
- Diverse categories: Tail spend is found across a wide range of spending categories, from marketing to office supplies to vehicle maintenance services.
- Lack of negotiation: Tail spend purchases often lack any strategic spending or negotiation effort as a result of their perceived insignificance.
Types of tail spend
So, what are some common types of tail spend?
Here are a few of the most common categories to keep an eye on:
- Petty cash items. Things like company lunches, emergency milk runs, and taxi reimbursements are all classic examples of tail spend.
- Office supplies. While many recurring supplies may be under a managed contract, certain purchases that are less common, such as printing supplies, can fall into the tail spend bracket.
- Software spending. Because software is so easy to purchase and often falls under purchase thresholds due to monthly subscriptions, it often goes unmonitored.
- Professional services. Some one-off professional services, such as legal advice or building maintenance, may be a culprit for tail spend.
How does tail spend impact procurement costs?
Tail spend, as insignificant as it may be compared to the amount of funds being spent on strategic purchases, still has an outsized effect on overall procurement costs.
Let’s explore.
Increased administrative costs
Tail spend involves a large number of transactions.
Though they may be small in amount, each comes with administrative costs like purchase order matching and payment processing.
Additionally, because limited attention is typically paid to tail spend, there often is no emphasis on automation and streamlined processes.
There’s also an opportunity cost to consider here.
More time spent managing multiple low-value transactions can pull accounts payable and procurement professionals away from more strategic activites that would yield greater benefits to the organization.
No access to economies of scale
Tail spend often involves smaller and often irregular purchases, typically from multiple vendors who supply similar goods or services.
Both of these elements reduce your company’s ability to access economies of scale and negotiate bulk pricing discounts, increasing operational costs.
Lack of supplier management
Because vendors are many, and the total expenditure with each small, many small businesses put no focus at all on managing vendor relationships.
Doing so also comes with some important challenges, such as difficulties managing onboarding, communication, contractual compliance, and service levels.
Maverick spending
Maverick spending (or rogue spending) is any purchase made outside of established procurement processes.
A large number of tail spend purchases also fall under the umbrella of maverick spend, which can result in quality and compliance issues and higher than necessary costs.
Risk and compliance issues
Given that tail spending is rarely given much attention, it's only natural that some of these purchases put the company at risk.
Tail spend can expose a business to risks related to quality and supplier reliability, as well as legal risks as it relates to regulatory compliance.
Challenges of tail spend management
What makes managing tail spend such a difficult task for small businesses?
As it turns out, there are a few important reasons.
Lack of spend visibility
The biggest challenge is that most SMBs just don’t have visibility over their spending. They don’t have a strong understanding of where cash is going, whether it falls into strategic or tail spending.
A good spend management software platform easily solves this, allowing business leaders to easily categorize and analyze spend as well as put controls and approvals processes in place.
Decentralized purchasing authority
While larger organizations often have centralized procurement departments, many small businesses lack the budget or even need for one.
For that reason, multiple employees are responsible for making purchase decisions, leading to a lack of centralized management and oversight.
Absence of knowledge or experience
In many cases, those responsible for making sourcing and purchasing decisions in small businesses lack the experience and understanding around what tail spend is and how it impacts business financials.
A bit of internal training and education — which we’ll dive into shortly — goes a long way here.
How to manage and reduce tail spend: 5 strategies to employ right now
Tail spend is not something that can be eliminated entirely. Some purchases simply are small and infrequent.
Nor is it something we want to do away with entirely.
Businesses need some degree of flexibility and agility when it comes to purchasing. It’s not helpful for the procurement department to spend three months sourcing and vetting an office milk supplier, for instance.
Your goal in addressing tail spend should be to minimize it where appropriate, and beyond that, monitor and optimize it.
Your first step toward that goal is to identify tail spend when you see it and sort it into categories.
You’ll have to put some of your own definitions on tail spend here. Most companies use some kind of spend threshold, where any purchases below a given level are considered tail spend.
An alternative is to measure this on a per-vendor basis rather than a per-purchase basis.
Others look at whether the spending is managed — under procurement’s vendor management program — or not. If spend with a given supplier is unmanaged, its considered tail spend.
Once you’ve determined what falls into the tail spend bucket for your company, you’ll want to examine current spending behaviors and categorize them by:
- Department
- Spend category
- Vendor
- Direct vs. indirect spend
- Regular vs. seasonal vs. infrequent spending
This will help you identify where the biggest focus areas are.
For example, you might find that the marketing department has relatively little tail spend, while the admin team makes up a majority of your tail spending.
1. Focus on supplier consolidation
Supplier consolidation is the practice of reducing and minimizing the number of vendors you’re purchasing from.
The idea here is to analyze your spending to understand when you’re buying the same or similar thing from multiple suppliers.
For example, if software purchasing isn’t centralized or managed, you might have two departments operating on separate project management solutions, something which can be consolidated under one vendor.
2. Consider embracing a centralized procurement approach
As an organization, you can choose between adopting a centralized or decentralized approach to procurement.
Decentralized procurement gives more power to individual leaders, department heads, and branch managers to make purchasing power. It can lead to more relevant purchase outcomes but often increases tail spend.
Centralized procurement is the opposite.
All purchasing decisions are made by a single procurement department or buying committee. This can be a reasonable solution to address excessive tail spend.
3. Leverage modern technological solutions
Identifying, monitoring, and reducing tail spend is all made easier when you implement modern e-procurement solutions.
These powerful software tools can:
- Automate repetitive tasks like invoice matching
- Send notifications and alerts when new tail spend is identified
- Provide insights into how you can consolidate spending and suppliers
- Be used to design custom reporting dashboards
Many of them even have built-in spend and expense management features, like employee spend cards and budget management functions, which can be used to better manage expenditure and prevent tail spend from occurring in the first place.
4. Set up a regular tail spend analysis cadence
Managing tail spend is not a one-and-done process.
Once you’ve completed your initial tail spend analysis and implemented controls to reduce and manage it, set up a cadence for regular reviews.
You might, for example, make it a habit to review tail spend on a quarterly basis, while setting up an automated notification in your spend and expense management solution to trigger a notification if tail spend in a given category or department exceeds a given value.
5. Educate buyers in strategic sourcing principles
Not every purchase your business makes is going to fall under the umbrella of strategic sourcing and involve lengthy vendor vetting, selection, and contract negotiation processes.
But that doesn’t mean that some of the best practices used in strategic sourcing can’t be borrowed from.
Educate your team — that is, anyone who might be responsible for business purchases — in the major principles of strategic sourcing, such that they might employ them in their own decision-making process.
These include procuring quotations from multiple potential suppliers, identifying potential risks, and putting service level agreements (SLAs) in place where appropriate.
Master tail spend management
Tail spend can’t be eliminated, but it can be controlled.
With effective employee education, a focus on supplier consolidation, and the use of some strategic sourcing principles, tail spend will cause you much less of a headache.
A quality spend management solution is a good move as well, as you’ll be able to easily identify and categorize tail spend, use forecasting tools to anticipate, and implement spend and access controls.
