A play-by-play on how to manage tail spend in a way that leads to full spend visibility and increased cost savings for your organization.
Let's Talk Tail Spend: The Hidden Costs You Can't Afford to Ignore
Tame tail spend and increase cost savings.
A comprehensive guide designed to help you manage tail spend in a way that leads to reduced risk and increased cost savings.
Table of Contents
KEy takeaways
- Overlooked tail spend can quietly erode budgets and introduce risks to organizations of every shape and size.
- Achieving full visibility of tail spend is crucial in order to successfully identify spending patterns and savings opportunities, and ensure compliance.
- Rogue purchases can disrupt procurement process - put an end to them as quickly as possible.
- Automation, AI, and machine learning can streamline workflows, identify savings and flag risks.
- Tail spend management doesn't have to happen in a vacuum - consider outsourcing to a group purchasing organization to simplify the process, reduce costs, and improve efficiency.
Why Tail Spend Deserves Your Attention
Tail spend typically refers to the many high-volume, low-value transactions that take place in an organization that are typically unmanaged by procurement.
These low-value purchases often take place on third-party websites, or via email and phone, which means they are unclassified and “invisible” to the procurement team.
Tail spend, often encompassing nearly 80% of your supplier relationships, usually flies under the radar. It is buried under one-off purchases, low-value transactions, and decentralized buying. Left unmanaged, it can quietly erode budgets, introduce risk, and waste your procurement team’s valuable time.
Bringing tail spend under control means opening the door to increase cost savings and value that otherwise would've been left on the table. Economic uncertainties mean businesses are fighting for every dollar and effectively managing tail spend is a guaranteed way to enhance your bottom line.
This guide is your starting point for getting tail spend under control. We’ll break down what tail spend actually is, why it matters more than most realize, and how procurement leaders are tackling it today with the help of strategy, technology, and data.
Let’s dig into the hidden costs - and opportunities - of tail spend.
Procurement Spend Categories
Before we get too deep, let’s review some of the different transactions that happen within a business and how they may be categorized:
Direct Spend
Indirect Spend
Maverick Spend
Tail Spend
Direct Spend
Direct spend encompasses everything that goes into the products (or services) a company creates.
This spend typically includes your top 20% of strategic suppliers and where procurement spends most of its time. Transactions are carefully controlled and monitored to keep costs in check while ensuring business continuity.
Direct expenditures may include:
- Wages paid to employees involved in production
- Raw materials
- Packaging and shipping costs related to delivery of a product
Indirect spend
Indirect spend describes the purchase of goods and services that do not become part of an organization’s final product or service.
This could be anything that contributes to the organization’s day-to-day operations and might include:
- Utilities, including gas, electric, and water
- Fulfillment centers, warehousing, or office space
- Office supplies, furniture, IT equipment, and support services
- Marketing costs such as PR and creative agencies
- Outsourced services such as 3PLs, freight brokers, consultants, IT support, office security, and delivery drivers
- Manufacturing expenses such as maintenance costs
- Employee training sessions
- Travel expenses including meeting with suppliers overseas
While procurement typically channels most of their efforts towards the optimization of direct spend, indirect procurement strategies have shown to have a significant impact on an organization’s bottom line.
Better manage indirect spend by establishing clear and easy-to-follow policies, promote a cost-conscious culture, and consider working with a group purchasing organization to gain visibility.
maverick spend
Maverick spend refers to purchases made outside established procurement guidelines.
It impacts an organization’s financial health, exposing it to various risks, and undermines cost-saving initiatives.
Maverick spend can cause a bunch of headaches for procurement teams:
- Unapproved purchases lead to messy invoices and payments and creates more work for accounting teams
- Without proper oversight, there’s a higher chance of the business being exposed to fraud
- Going off-script can break contracts and raise compliance concerns
- Companies can lose out on millions each year because these purchases often skip negotiated discounts and contracts.
- Time spent chasing down mavericks could be better used on more important projects
- Maverick spend usually happens outside your e-Procurement platform which means you’re missing spend data for things purchased in-person, by phone or via email.
Effective strategies for managing maverick spend include investing in e-Procurement systems, clarifying and defining purchasing roles, providing training and education, and engaging with employees to better understand their motivations.
tail spend
Tail spend typically refers to the 80% of suppliers that account for 20% of your total spend. It’s typically left unmanaged by the procurement team as these transactions are considered too low-value and too difficult to manage.
Tail spend is:
- Low in value, high in volume
- Often decentralized and managed by individuals outside procurement
- Frequently under the spend threshold for procurement oversight
- Indirect purchases
- Challenging to track and analyze
Tail spend may not feel urgent but when it’s neglected, it becomes costly and risky fast.
Why Tail Spend is Often Ignored
Most procurement teams prioritize strategic suppliers and large contracts (and rightfully so). The top 20% of strategic supplier relationships is often where the clearest impact can be made.
Even the largest organizations can’t actively manage or oversee the hundreds or thousands of suppliers that live here. The same situation applies in smaller organizations and lean procurement functions where it’s even more important to direct your limited resources where it matters most.
We know procurement teams can’t do everything. And, put simply, tail spend is messy so it often gets left behind.
The Challenges of Managing This Spend
The number-one challenge companies face when trying to manage tail spend is the lack of data visibility. When transactions are taking place by phone, email, on third-party websites, or hidden in random spreadsheets throughout the organization, its nearly impossible to capture or track down.
Procurement professionals are more apt to spend their time focused on larger strategic initiatives that better align with company goals rather than tracking down seemingly low-value spend amounts. Building strong relationships with a handful of prominent suppliers is easier than managing thousands of vendors who don’t appear to bring anything to the table.
Here’s another problem: certain procurement systems and policies are rarely designed to handle the thousands of micro-transactions taking place in the spend tail.
The missed opportunities in this overlooked area can be significant:
- Uncontrolled spend
- Compliance risks
- Missed savings
- Supplier inefficiencies
The Pareto Principle
The Pareto Principle or 80/20 rule provides a useful guide for understanding tail spend:
- An organization’s top 20% of suppliers typically account for 80% of total spend and are considered strategic.
- The remaining 80% of suppliers combined only account for 20% of total spend, are considered tactical, and thus belong to the spend tail.
While understanding the concept helps, it doesn’t tell the whole story. Strategic value exists outside of spend size especially when risk, supplier diversity, or innovation potential come into play.
What Counts as Tail Spend (and Why it Matters)
Procurement leaders need to draw the line somewhere to determine how much the procurement team will manage centrally and how much will be decentralized to the business. This is called a spend threshold and can vary significantly depending on the size of the company.
For example, a small organization might have a spend threshold of $10,000, while the procurement team in a major organization such as a bank may only focus on transactions over $1 million.
In practice, this would mean that employees are authorized to make sub-threshold purchases such as booking a hotel, but if they need to make an above-threshold purchase such as a 10,000 photocopier, the task will be handed over to procurement.
Anything below that threshold, purchasing is decentralized. That’s where tail spend lives.
Other examples of sub-threshold purchases include:
- Travel bookings
- Office supplies
- Marketing materials
- One-off vendor services
Procurement teams often create policies and procedures for decentralized buyers to follow, like requiring them to source three quotes before choosing a supplier or directing buyers to purchase certain categories only from an approved catalog. Procurement software can also help block maverick spend or thwart buyers who don’t follow the rules set by procurement.
However, these transactions can still impact brand reputation, employee safety, or operational efficiency. That’s why having some level of procurement visibility and influence is essential - even below the threshold.
The Benefits of Managing Tail Spend
It takes time and resources to bring unruly tail spend under control.
Is it worth it?
Yes! Actively managing tail spend is filled with benefits and would allow your organization to:
Improve Spend Visibility
Tail spend is often scattered across spreadsheets, emails, and unconnected systems. Without central visibility, you can’t analyze, optimize, or control any of it. Bringing tail spend into view is the first step before being able to extract any value.
How? Ultimately, the goal is to move all tail spend out of invisible channels (emails, phone calls, spreadsheets, and disparate procurement systems) and onto a centralized purchase-to-pay system. This will require change management at first, along with staff training, and plenty of patience, but gaining visibility of total spend enables spend analytics and its many associated benefits.
Also, choose procurement software powered by artificial intelligence (AI) and machine learning (ML) that can learn how to group and categorize spend through advanced analytics and process automation.
Unlock Hidden Savings
Small savings multiplied across thousands of transactions quickly adds up. Research from Boston Consulting Group shows that digitizing tail spend can reduce costs by 5% to 10%.
How? Analysis of the spend tail will reveal multiple ways to cut costs including:
- Ensuring you have clear policies and processes for buyers to follow. For example, all buyers could be required to source three quotes before making a purchasing decision.
- Creating online catalogs for categories such as stationery or business travel.
- Identifying and addressing maverick spend.
- Consolidating suppliers and deliveries to increase buying power and negotiate better deals.
- Reviewing purchasing requirements to reduce unnecessary spend and warehouse costs.
- Training and educating staff on effective purchasing to create a cost-conscious culture.
- Implementing reverse auctions to drive down costs.
- Outsourcing tail spend categories to a GPO to unlock volume discounts.
Remember, tail spend adds up quickly. This small portion of spend can still add up to be millions of dollars in certain organizations.
Reduce Risk
Risk mitigation is one of the more compelling reasons to put a focus on tail spend management. It’s also a good idea to have a combination of resources available to help manage tail spend, including guided buying, a low-dollar sourcing desk, and outsourcing tail spend to a group purchasing organization.
How? Use procurement software to monitor and flag unusual spend patterns in real-time – for example, a product or service being purchased for a significantly higher or lower amount than usual.
Some categories with a higher risk-profile may warrant an elevated level of monitoring. Look out for maverick spend that exposes the organization to additional risk.
Tap Into Innovation
Many small suppliers reside inside tail spend - and they can be more agile and creative than larger vendors. By building real relationships instead of transactional ones, you open the door to potential innovation.
Tapping into this network could also help reach ESG objectives by sourcing from more diverse suppliers or purchasing more sustainable products or services.
How? Suppliers in categories such as IT hardware are (obviously) much more likely to be a source of innovation than, say, a stationery supplier. But keep in mind that innovation doesn’t always refer to the latest technology.
It could simply involve making a small change in the way things are done to reduce costs, decrease risk, or increase efficiency. Identify potentially innovative suppliers in the spend tail, start a conversation, and encourage them to approach you with new ideas.
Step-by-Step Guide for Controlling Tail Spend
Do we have you convinced tail spend is worth taming?
Here are five steps you can take to get it under control:
1. Get Full Visibility
Consolidate data into one system. This might mean investing in purchasing software or requiring that all purchases go through a centralized platform. Make sure the software integrates with existing systems to ensure seamless data flow and provide a comprehensive view of all transactions.
By centralizing data, organizations can easily track and analyze spend patterns, identify areas for cost savings, and monitor compliance with procurement policies.
2. Eliminate Maverick Spend
Maverick spend creates its own version of chaos throughout organizations. To cut down on rogue spenders, work to identify non-compliant buying behavior, understand the root causes, and fix it through training, improved processes, or tools that guide users toward approved suppliers.
Keep things simple.
Procurement policies shouldn't be too dictatorial and buying from an approved vendor can't be too complicated and time-consuming. Employees should be given some choice and autonomy in what they are buying, but it’s important that procurement teams set rules and boundaries.
3. Analyze the Data
Once you have visibility, apply analytics to segment suppliers, identify trends, and highlight outliers. Use KPIs that align with your organization’s procurement goals.
4. Leverage Technology
Automation, AI, and machine learning can do the heavy lifting when it comes to identifying savings, streamlining workflows, and flagging risks.
AI-driven analytics, for example, can predict spending patterns, identify maverick spend, and automate supplier negotiations, offering a more proactive approach to managing tail spend. Blockchain technology can provide transparency and security, and smart contracts for automated compliance and audit trails.
There is so much technology at procurement’s disposal. There is no excuse for failing to keep track of all spend, from the biggest strategic sourcing projects to the smallest orders made by employees throughout the organization.
5. Consider Outsourcing
Tail spend doesn’t always have to be managed in-house. Group purchasing organizations (GPOs) or consultants can help streamline categories, reduce costs, and improve compliance.Outsourcing Tail Spend to a GPO.
As a GPO, Una works to obtain volume discounts from suppliers by leveraging the collective buying power of our members. We’re strongest when it comes to managing indirect or non-strategic spend (like office supplies, travel, and logistics), making them a perfect fit for managing the spend tail.
Seize Control Today
Tail spend may seem like an insignificant part of the procurement landscape, but its potential impact on your organization’s bottom line is substantial. By bringing tail spend under control, you can unlock hidden savings, reduce risk, and tap into innovative opportunities that can propel your business forward.
The strategies outlined in this guide provide a comprehensive framework for managing tail spend effectively. Don’t let this opportunity slip away - take action now to transform your procurement practices.
Ready to make a change?
Schedule a no-obligation consultation with Una to discover how we can help you rein in your tail spend and unlock its hidden value.
Let's stop leaving money on the table and start maximizing your procurement potential today.