What is Tail Spend Management: How to Manage and Improve it?

Tail spend is an important part of procurement that is often overlooked. It includes the various low-value and high-volume transactions in your company.

While tail spend mostly represents a small portion of your procurement budget, its influence on your bottom line is anything but small. Consequently, managing these insignificant expenses becomes significant. 

You must be wondering– what is tail spend management? And more essentially, why is tail spend important? But first, it is essential to understand the concept of tail spend. Please read the article to learn more about it and how to manage tail spend.

What is Tail Spend?

Understanding the tail spend is nearly impossible without discussing the Pareto principle. Simply put, tail spend is based on the 80/20 rule or Pareto curve.

In procurement, this rule implies that about 80% of the total spend involves only 20% of the vendors. And the remaining 20% of the spend uses 80% of the vendors. The 80% means several vendors make a significant number of transactions and create an unmanageable tail.

Now, let's learn what tail spend means!

Tail spend can be defined as the one-off, low-value, high-volume transactions that are not accounted for as a part of procurement policy. These spending are scattered across different suppliers, categories, and departments. As a result, it becomes complex to track and manage them.

Why is Tail Spend Important?

Many organisations do not do tail spend management because these uncategorised purchases are low in volume or value. However, a business demands constant savings and cost-cutting strategies in procurement and sourcing. No matter the size of your business, tail spend involves many risks. Managing it can help you sidestep the following:

1. Excessive Spending

Tail spends are not negotiated properly. The chances are you could be paying more than needed for the purchase.

2. Loss of Quality

Tail spends are fragmented and unclassified. It increases the risk of purchasing low-quality products and can impact the flow and quality of internal processes.

3. Lack of Control

Vendors who are a part of tail spend do not go through formal procedures and verification. You may risk your brand reputation if your vendor lacks responsibility and exercises unethical behaviour.

Need for Tail Spend Management

Now that you know why tail spend is important, learning the need to manage it is essential. The reasons your business may need a tail spend management are:

1. Process Optimisation

• Better quality data and processes.
• Improves the contract reliance and coverage to minimise business risks.
• Eliminates trivial and low-value suppliers.

2. Increased Savings

• Improves the visibility of low-value spend.
• Presents opportunities for sourcing savings.
• Decreases the number of transactions and associated costs.

3. Effective Management of Tail Spend

• Offers execution support to manage tail spend.
• Diversifies the supplier base.
• Compliance with external laws and internal policies.

How to Manage Tail Spend?

Once you know the need for tail spend management in your company, you can frame a systematic management process. Here is a small procedure on how to manage tail spend.

1. Identify your Tail Spend

The first step to tail spend management is thoroughly examining your procurement process. Look into the historical data to identify transactions below a predetermined limit. Categorise them as potential elements of the tail spend. This evaluation will highlight the overlooked expenses and lay a foundation for targeted management efforts.

2. Streamline Internal Procedures

Simplify and improve internal processes to get a clear picture of your tail-end spend. Speed up processes for easy tracking, establish clear procurement rules, and enforce them. It will help cut unnecessary expenses and negotiate better payment terms with suppliers, promoting strategic buying across departments.

3. Analyse Tail Spend

Perform a tail spend analysis to learn patterns and optimisation areas. Seek opportunities for process improvement, consolidation, and vendor negotiation. Data-driven insights into tail-end spending can help in decision-making.

4. Use the Insights

Analysis reports represent the information in a dashboard format. Customise the results to gain data for consolidation and cost-saving opportunities using suitable software tools. Next, execute the practices.

5. Measure Performance

Monitor the success of your tail spend management strategies. You can use KPIs (Key Performance Indicators)  to decide whether the program works. Common KPIs include:

• Percentage of spend under strategic management vs. unmanaged
• Achieved cost savings against the target
• Improvements in productivity.

What are the Benefits and Challenges of Managing Tail Spend?

There are various reasons why adopting tail spend management strategies is no longer a question of choice. It is a must-do strategy. However, tail spend optimisation comes with challenges. Here are the benefits and associated complexities in managing tail spend to help you make an informed decision.

Advantages of Tail Spend Management

A few benefits of tail spend management are as follows:

Increase Savings

Tail spend management can help enterprises realise significant savings when spending is addressed first. Thereafter, enterprises realise additional savings annually.

Better Satisfaction

Internal and external parties are more at ease when the systems are simple. Tail spend management defines who is responsible for what and who the contact person is for specific issues.

Improved Compliance and Reduced Risk

Tail spend management digital systems effectively prevent rogue spending and present detailed insights into spending behaviour. It ensures that the purchases that your enterprise makes comply with policies.

Increased Efficiency and Productivity

Managing tail spend can help you consolidate the supplier base. And it, in turn, reduces the number of suppliers procurement has to handle and boosts efficiency. Consolidated management also gives time to focus on larger and more valuable contracts.

Challenges in Tail Spend Management

Poor data quality is the primary challenge in tail spend optimisation. Incorrect supplier and material names, duplicate data, data linkages, and junk data are common reasons that may lead to inadequate data processing and results. Other notable challenges also include:

Inefficient System Integration

Poor integration between contract management and procurement systems complicates off-contracted and non-contracted data isolation.

Working in Silos

Engaging in silos with decentralised processes and policies makes it harder to consolidate data from various systems.

Lack of Performance Metrics

Assessing the value of your smaller purchases can be challenging when there are no metrics to track their performance.

No Negotiating Ability

Consolidating various tail-spend purchases with a preferred vendor provides negotiation leverage. However, having numerous vendors can limit the ability to negotiate effectively.

Focus on High-value Transactions

Procurement teams often neglect low-value and high-volume transactions and give more attention to high-profile purchases.

How to Improve Tail Spend?

Tail spending varies in each organisation and represents a significant part of the procurement budget. You must identify your tail spend to take the necessary steps. However, tail spend management is still not mainstream automation and can be outdated compared to strategic spend technology advancements.

Embracing automation can double the benefits of tail spend management. While the process requires a human element, digitising the non-strategic steps can pay significant dividends. For instance,

Automating Data Capture and Analysis

A major part of tail spend management automation involves setting up a system to collect purchasing data. Procurement and finance teams can establish automatic transaction approvals within certain budget restrictions and compliance controls. 

Implementing such procedures can improve data quality and internal reporting. It will allow you to capture and visualise real-time spending and make informed decisions.

Automating Supplier Management

Supplier management is another area in which you can add automation. It includes many repetitive and simple tasks that can be managed with the right data. You can utilise various automation tools to enter data from invoices and send them to designated departments.

The automated workflow will enable effective fraud detection and prevention. Ultimately, it can help you remove obsolete and unreliable vendors and enhance the procurement process.

Long-tail spend is not always a priority and is often challenging for many procurement teams. This is mostly because the process can be time- and resource-consuming. Your enterprise can consider how much of the work your in-house team can perform and how much you can rely on artificial intelligence-driven spend classification and other automation techniques. Use the latest analytics software solutions to seek visibility into the data that is impossible to achieve manually.