Tail spend management: Unlocking the secrets of tail spend

Until recently, finance and procurement leaders lacked the time, resources, and mandate to prioritize managing tail spend. There's nothing more time-consuming than counting pennies. 

But as modern businesses shift to buying more indirect goods and services, those pennies start to add up fast. In anticipation of a recession, the pressure is also on for finance and procurement teams to buy responsibly, stabilize cash flow, and account for every cent.

This is where tail spend comes in. Because tail spend spans across so many categories and vendors but represents comparatively little spend, most businesses fail to optimize this low-hanging fruit. A high concentration of one-off purchases or high-volume, low-value transactions makes managing tail spend inherently more complex than traditional processes. That's why many finance teams haven’t prioritized the effort.

If businesses want to maximize profitability and employee productivity, they should approach their tail spend with the same energy they use for sourcing strategic spend. When paying attention, business leaders can achieve 5-15% savings in this spend category. 

How does this happen if you have a high volume of low-value purchases but few resources to address them? New strategies and the right tools will completely change the game.

In this article, we'll define tail spend, discuss how to get a handle on it, examine the benefits of effective tail spend management, and explore the tools you can use to streamline tail spend right now.

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What is Tail Spend?

Tail spend is the segment of a company's external spend that is not strategically managed by procurement or finance. It typically consists of high-volume, low-value transactions or one-time purchases for indirect goods and services.

Also called B-material and C-material, tail spend makes up roughly 80% of all transactions but accounts for only 10%–20% of a company's total spend (a clear illustration of the Pareto Principle).

Often, employees make these purchases outside of contracts with approved vendors, sometimes without the knowledge of procurement. While in the past this type of rogue or maverick spending was largely untracked, the threat of an economic downturn and inflation have caused companies to take a closer look.

Tail spend management is the act of consolidating, normalizing, and eliminating transactions that make up 20% of total spend. Tail spend management impacts operating margins and can positively influence a company's financial performance, improving its bottom line.

At times, tail spend management can consist of items or services that were formerly managed as core spend but were renewed without reviewing or re-negotiating the contract. This can have negative consequences that ripple throughout the company. These types of big purchases that are conducted outside of a vendor contract expose your business to the risk of non-compliance and fraud.

While this is a general definition of tail spend, the categories and types of purchases that it includes will slightly differ from company to company. Yet, no matter the context, these unmanaged areas are missed opportunities for a company to save.

Prime Examples of Tail Spend

In order to effectively manage tail spend, procurement professionals must be able to identify it. What are some everyday examples of tail spend? It can fall into several different types of spend categories and is often distributed across multiple business functions, like:

• Shipping - printing and packaging
• Marketing - social media management and web development
• Business services - IT, HR, etc.
• Office supplies - paper, snacks, equipment
• Signage and display - flyers, banners, and signs
• Gifts and premiums
• Contractors - Accounting, content writer, SEO

Getting a Handle on Tail Spend

Having tail spend under control can grant you a key competitive advantage, introducing more savings opportunities. For example, if the economy makes a downturn, a business can free up cash and safeguard profitability by reducing or eliminating expenses that are trapped in the long tail. Teams must realize where the procurement system controls can be tightened the most for optimal cost-saving. 

Tail spend management is the name of the game and includes mapping purchase expenditures for all non-strategic suppliers. This allows a business to achieve better insight into expenditures and begin the process of rationalizing the supplier base. The key first step to getting optimizing tail spend is to obtain better spend visibility.  

Unfortunately, it's typical for procurement departments to lose track of spend visibility for transactions falling under the "indirect spend" category.

Controlling Maverick Spend

Maverick spending happens when something is purchased outside the company's procurement policies. Additionally, the business will not benefit from pre-negotiated pricing, early-payment discounts (or other cost reductions), quality standards, or supplier credibility. Maverick spend increases the risk of compliance issues and can result in lost opportunities.

What causes maverick spend? 

• Lack of a documented spending policy
• Few resources for self-service or guided buying tools
• Lack of education on approved purchasing processes
• Need for a centralized procurement intake system
• Staff convinced they found a better supplier 

Examining the maverick spend in your business helps identify easy areas for cost savings. An in-depth analysis will help identify potential compliance issues, purchasing redundancies, and opportunities to renegotiate with existing suppliers.

Organizing Internal Processes and Policies

The best management strategy for tail spend is to segment spend types by frequency and criticality in order route stakeholders to the appropriate buying channel for their purchase requests. 

By streamlining the intake-to-procure process and automating low-value purchases, procurement gains the extra time needed to consolidate fragmented spend. This allows them to negotiate better pricing and payment terms from preferred vendors. 

Organizing, classifying, and analyzing your company's spend data will lead to more informed purchases, greater spend awareness, and better decision-making.

A 24/7 third-party sourcing intake management solution can act as a universal dashboard for all sourcing and acquisition inquiries. You can set this program up with agreed-upon spend parameters and service levels, where every sourcing inquiry coordinates with either the client's in-house sourcing team or existing vendor agreements.

Using Tail Spend Analysis

How can you effectively manage a program if you don’t have end-to-end spend visibility? Tail spend analysis allows a business to form a baseline for cost-reduction strategies and gives you a complete, 360-degree view of metrics like:

• Number of suppliers or categories
• Percent of on/off-contract spend
• Percent spend under management
• Purchase order coverage
• Purchase price variance

Spend analytics classifies and identities savings opportunities from  all sources of spend data within an organization by business unit and across the enterprise. 

This process also improves data quality, centralizes access to that data, applies standard classification, and groups the data by supplier parent name. The analysis provides insight into what you’re doing right and what you could do better.

Consolidating Suppliers

Another critical aspect of effective tail spend management is the consolidation of your supplier base. Businesses are using multiple vendors for the same items or services, tail spend analysis identifies opportunities to standardize on a single supplier and obtain volume discounts.

This also creates efficiency benefits, since teams are able to focus on a smaller number of suppliers and manage those supplier relationships more deeply. 

Tail spend management facilitates supplier onboarding workflows and records that vendor management teams need to maintain. This creates operational efficiencies and reduces complexity for requestors, who can be routed to preferred suppliers automatically, instead of creating new vendor requests. 

A consolidated supplier base also means fewer expenses for individual supplier freight charges. You can eliminate the internal process costs for managing large-volume transactions for both procurement and accounts payable employees. 

Fewer vendors also significantly reduce the chances of delay or non-delivery on orders. The smaller the circle, the more likely suppliers will understand your business requirements and work harder to keep the higher order volume you are sending them.

Tail Spend Management Software

According to a recent survey, procurement teams that use technology to manage tail spend can cut annual expenditures by up to 10%. Gain a competitive edge by taking a proactive approach to tail spend management with intelligent procurement intake management software. End-users gain increased spend visibility and create more comprehensive controls on purchases. These platforms offer automation as a way to manage tail spend, saving your business time and money.

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What are the Benefits of Well-Managed Tail Spend?

Some of your most significant time and cost savings can come through strategically managing low-value, high-volume spend. Creating more opportunities for procurement teams to negotiate cost reductions via strategic sourcing can help you consolidate and manage your tail spend, resulting in greater efficiency, less risk, and additional benefits like:

Cost Savings

Studies show that when a business focuses on managing tail spend, it can realize a one-time average savings of 10-20%. After that, a rate of 2-5% of annual savings can be expected.

A key driver of such savings beyond consolidation is the standardization of pricing with suppliers. When stakeholders make rogue purchases, they may purchase the same item or service from the same supplier, who might be charging different prices. In some cases, suppliers are charging as much as 30% price differences while buying the same product. 

Improved Supplier Relationships

Fragmented, uncontrolled tail spend is not just bad for buyers: it hurts suppliers, too. 

If your business is consistently sending high volumes of orders for items that could be consolidated into a catalog or blanket purchase order, that means the supplier incurs operational costs to process, send, and bill those orders. 

Managing tail spend by simplifying your purchase intake and approval process means suppliers get streamlined orders and reduce the time they spend maintaining data like bank account payment information. 

This makes your business a customer of choice, which can lead to preferential pricing and prioritization when supply chain disruptions limit stock availability. 

Increased Productivity and Efficiency

Tail spend management helps a business consolidate its supplier base, limiting rogue outsourcing and increasing efficiency. Downsizing the number of suppliers procurement has to deal with will reduce costs and allow staff to spend more time negotiating larger contracts that add value. Better catalog coverage and self-service features enable non-procurement employees to focus on their jobs rather than purchase compliance. Spend approvals, purchase order creation, and invoice processing can be automated with the right kind of technology.

Compliance and Security

Standardizing tail spend management practices helps to improve compliance and mitigate cyber security risks for both the business and the vendor. By preventing the rogue selection and onboarding of suppliers, intake-to-procure solutions accelerate vendor onboarding while reducing regulatory and cyber breach risks. It also makes the procurement process more transparent by providing visibility to stakeholders of request status and approval requirements. 

Tail spend management systems control, monitor, and track transactions as they occur. This means that issues can be found right as they happen and addressed in real-time before orders are sent to a supplier. This helps a business prevent maverick spending and provides detailed data and insights on spend behavior. This way, you can ensure that employees always comply with purchasing policies and keep spend on-contract.

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Benefits by Role

For the CEO

Stakeholders Chief executives are primarily concerned with driving growth from current or new business and targeting profitability for investors. With respect to tail spend management, this means CEOs benefit from access to cash freed up from numerous cost savings opportunities, which can be redirected to growth initiatives. 

For the COO

Leaving tail spend unmanaged reduces productivity for all employees, a key concern for COOs. Employees are spending unnecessary effort finding, negotiating, and onboarding suppliers. Procurement and finance teams are stuck reactively handling rogue spend requests or non-PO-back invoices. Maverick vendor selection may also result in the loss of product quality control, which can ultimately harm a brand’s reputation.

All of these unnecessary buying activities can cost businesses a lot of money. Research shows companies can lose as much as 40% in buyer and requester productivity by chasing tail spend transactions. 

It also hurts morale: most employees want to be engaged in their core job requirements, not processing minor transactions. As COOs increasingly focus on not only employee productivity but also engagement and satisfaction — key metrics for retaining employees in a difficult labor market — simplifying and automating tail spend purchases can only help. 

For the CFO

Without the proper tail spend management processes in place, CFOs risk compliance issues, especially when working in a regulated industry. When the business has a large number of suppliers that are unknown or unmanaged, regulatory and cyber-security compliance can become critical issues. It’s worth remembering that 60% of all data breaches happen via third-party vendors, so adopting stringent new vendor approval processes is critical to avoiding costly fines and reputational damage to your brand. 

For the CPO

When tail spend is addressed, chief procurement officers can take advantage of opportunities to negotiate pricing, terms, and other aspects of the supplier relationship. Organizations tend to pay higher prices on small products obtained quickly, rather than a much cheaper cost arranged by the procurement department. Pre-negotiated costs result in significant savings in total indirect spend for procurement.

Procurement productivity is also greatly improved by optimizing tail spend management. Rather than watch their reports spend their days reactively handling purchases requests via email, text or phone, CPOs are adopting intake-to-procure solutions to provide a single front door to the purchase process and reduce time spent processing purchase requests. This time saved allows procurement personnel to focus more on strategic sourcing negotiations, delivering greater savings and visibility for the CPO. 

Company Wide

This is where value spend comes in. Smaller suppliers can be great sources to tap for innovation and more flexible terms than larger vendors. That's because they can respond and pivot faster, implementing new ideas quickly. An SME buried deep within tail spend could be harboring incredible views if only the relationship is nurtured. 

Tail spend management deepens business relationships and unlocks benefits for the entire company. It also offers countless opportunities for socially-conscious procurement, like choosing a minority-owned supplier.

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Managing Tail Spend with Zip

Tail spend can be a goldmine for cost savings. But it requires the right number of resources and dedicated tools: A recent survey found that procurement teams who predominantly managed indirect spend delivered a higher return on investment than procurement functions that worked with direct or hybrid spend.

Most companies know that tail spend is too big of a beast to conquer alone. Technology can open doors in terms of visibility, standardization, and efficiency. When done right, tail spend management strengthens supplier bonds, increases productivity, and gets compliance under control. All it takes is the right tool to manage it all.

Zip is an intelligent intake-to-procure platform designed to control spend and risk while supercharging employee adoption of your procurement process. From tail spend to total spend, Zip simplifies how a business buys and pays for the things they need to operate. Just ask Ivan Makarov, VP of Finance at Webflow.

"Before Zip, it was very manual. Through Slack direct messages, I would get a request from somebody who needed to buy a new tool or needed to hire a contractor for a specific project. I would have to approve it, and I would have to spin up the manual process of getting it fully approved. In the early stages, we did not have legal, we did not have security or IT, so a lot of the things sat with me."

In this case, Zip had a massive impact on Webflow's financial operations and was primarily used for three things: to handle approvals for new spend requests, to track contract renewals, and expedite security and compliance approvals for new vendors. The results were staggering, with a decrease in approval times and mitigated risk for 80% of non-headcount spend now under total management.

Ready to get started on your own tail spend management adventure? Zip can help guide the way. Sign up for a custom demo today.