“Tail Spend” refers to all of the high-volume, low-cost expenses a company incurs that aren’t typically managed, let alone optimized. Tail spend examples include purchases that are often too small to go through procurement, such as basic office supplies or employee gifts. Because purchases are small, they usually fall through the cracks, making it tough to gauge your overall spend.
Tail spend in procurement is important, but is seldom discussed compared to other procurement and supply chain processes. By implementing tail spend analysis or a tail spend management framework into your process, you can ensure your spend data is accurate and whole.
Read on to learn more about tail spend examples, what tail spend is, how to manage tail spend, and how to optimize tail spend using analytics.
What Is Tail Spend?
Additional examples of tail spend include professional services and purchases that fall outside of the goods needed for the direct line of business. Tail spend can account for up to 80 percent of transactions yet only makes up about 20 percent of a company’s total spend. Tail spend can differ by industry and across specific companies, and there’s no set template for tail spend management solutions. Because of this, it’s important to take a comprehensive, step-by-step approach when defining a plan to manage your tail spend.
1. Identify Your Tail Spend
Keep in mind that tail spend encompasses many purchases and definitions. For example, tail spend can be called “misclassified purchases”, “maverick spending”, “rogue spend” and more. There are no set definitions, but tail spend is:
- Based on spend threshold. This means you have annual spend below a certain number. Depending on the business and its spending practices, this can vary widely.
- The 80/20 or Pareto principle. As previously mentioned, tail spend accounts for about 80 percent of transactions but 20 percent of a company’s actual spend.
- Spend that is not actively managed. This describes any vendor not strategically or actively managed in procurement.
Since most of these purchases are small and don’t go through procurement, they are easily neglected in accounting. That’s why identifying these purchases is an important first step in defining your tail spend management solution.
Tail spend examples of this kind include maverick spend (rogue spend
), which means the purchase. This can contribute to a company becoming very financially bloated.
2. Centralize Your Data and Internal Processes
The second step to optimizing your tail spend with analytics is to get your data centralized to enable tail spend consolidation. Data can often be stored in different software or locations, or there may be subgroups within the organization, which can make it difficult to identify tail spend.
- Implementing the right software. This is vital when using analytics to optimize your tail spend. Features should include the use of AI, automation, structured data, and machine learning.
- The right solution will give a holistic view of spend, making classification and categorization easier.
- Implementing centralized processes within your organization. This gives you cleaner data and can lead to more strategic buys once you’ve effectively managed your tail spend.
Once you’ve selected the right software, centralize all your data, then you can run analytics to start extracting actionable data.
3. Make Changes Slowly
Once you’ve identified your tail spend, the question becomes “how to manage it?”. Once you’ve run analytics, choose one area to work on first by categorizing it and implementing a spend management strategy around it. Make sure automated sourcing platforms are connected to your P2P or ERP platforms.
Once you’ve worked on one area, slowly begin using automation to manage tail spend categories throughout the organization. Automation and the right software are less labor-intensive, and your team can work on more strategic tasks.
Effective tail spend management will lead to these benefits:
- Cost savings
- Improved SLA and compliance enforcement
- Increased productivity per FTE
- Improved reporting and data quality
- Reduced risk
Simfoni understands that no two businesses are the same when it comes to sourcing and procurement. We’ll help you get started on a tail spend strategy that works for you. Contact us today for a consultation.