Tail Spend

What is Tail Spend?

Tail spend refers to the portion of a company’s procurement spending that goes toward ad-hoc purchases and uncategorized expenses. It represents a large volume of transactions but accounts for a much smaller portion of total spend — commonly cited as 80% of transactions representing only 20% of total spend.

What falls into tail spend can vary greatly between organizations. It might include:

• Petty cash (one-off purchases like team lunches, Ubers, fuel, miscellaneous on-the-job expenses)
• E-marketplaces (repeatable purchases such as office supplies, basic tools, laptops, and furniture)
• Custom catalogs (e.g., lab supplies, uniforms, and specialized power tools)
• Tactical buys (low-frequency purchases of previously-purchased items from an established vendor or vendor base)

Since it encompasses the non-strategic and non-core purchases, tail spend comprises low-value items bought from a wide range of suppliers. These transactions are tough to control because they fall below a certain approval threshold, don’t require a standardized procurement framework, and are generally scattered across departments and catagories.

Synonyms

• Indirect spend
• Tail-end spend
• Unmanaged spend
• Off-contract spend
• Dark purchasing
• Tail spend in procurement

The Importance of Managing Tail Spend

The idea that “small things add up” isn’t just about the $5 coffee you buy every morning instead of making it at home. With tons of small, uncontrolled purchases happening across an organization, tail spend quickly becomes a significant source of overspending and inefficiency.

There are several risks associated with uncontrolled tail spend:

• Unmanaged tail spend exposes organizations to compliance risks. Purchases made outside of approved vendors or through non-standard processes don’t always adhere to regulatory requirements or internal controls, leading to legal and financial repercussions​.
• Relying on a large, unvetted pool of suppliers for tail spend items introduces risks related to supplier reliability, quality, and performance. Lack of visibility into these suppliers’ operations may result in supply chain disruptions and quality issues that affect business operations.
• Uncontrolled procurement spend opens the door to fraudulent activities and maverick spending. Where employees make unauthorized purchases higher costs and potential breaches of trust and security within the organization​ follow.
• Procurement teams spend disproportionate time on low-value transactions. This misallocation of resources can impede the organization’s ability to achieve its strategic objectives.

According to research by The Hackett Group, companies who actively manage their tail spend can see savings of 7% or greater on their overall procurement spend. If you spend $1 million on indirect purchases annually, that’s an extra $70,000+ in savings.

The main reason for this is that unmanaged tail spend leads to missed savings opportunities. Spend leakage occurs when purchases bypass established procurement policies and negotiated contracts. Plus, each transaction carries its own processing costs that accumulate, leading to inefficient procurement processes that strain resources and inflate overall expenses​.

Benefits of Effective Tail Spend Management in Procurement

Effectively managing your tail spend helps you uncover opportunities to negotiate better terms, leverage volume discounts, or consolidate suppliers to reduce costs​. It also:

• Increases transparency and control over all spending processes, reducing the risk of non-compliance and fraud.
• Enhances data visibility by centralizing all purchase information, allowing for better analysis and informed decision-making.
• Optimizes procurement processes through e-procurement tools, freeing up resources to focus on more strategic initiatives.
• Enables better supplier relationship management by identifying underutilized or unreliable suppliers and consolidating spend to improve negotiation power.
• Allows for better tracking and reporting on financial statements, audits, and budget planning.
• Streamlines administrative tasks, like invoice reconciliation and expense tracking.

Assuming you take a structured approach to managing tail spend using advanced analytics and spend management software, you can also better identify and mitigate supplier risk, operational risk, and market risk. You’ll have insights into spending patterns, supplier performance, and potential vulnerabilities, enabling proactive risk management​.

Challenges in Tail Spend Management

Since it is so diverse and decentralized, tackling tail spend presents unique challenges. Some of the most common obstacles to implementing an effective tail spend management strategy include:

• Defining tail spend
• Distinguishing it from rogue spending (when employees actively bypass procurement processes)
• Identifying all low-value purchases across different departments and categories
• Obtaining accurate data for each purchase (e.g., item description, unit price, vendor)
• Integrating producrement and contract management systems
• Minimizing this spend category overall while incorporating it into procurement budgets

To overcome these challenges, organizations can take several steps. Most importantly, you need to define tail spend and establish clear criteria for identifying it. You should then analyze your current procurement processes, map out the entire purchase-to-pay cycle, and identify areas where tail spend occurs.

As an example, they can implement a spend analytics tool to gain visibility into all purchasing activities, categorize them according to spend type and take corrective action if they need to. Additionally, organizations can implement an e-procurement solution that streamlines processes by centralizing purchases and contracts and automating approvals for low-value transactions.

From an internal standpoint, the most essential step is to educate employees and team leaders. You need clear policies for how those with purchasing power can spend money. And you need a set of guidelines that ensures all purchases go through the proper channels.

Strategies for Managing Tail Spend

There are a few different tail spend optimization tactics you might use at your organization. Depending on your company and current situation, you might need an approach that involves renegotiating contracts with suppliers, centralizes purchasing through approved vendors or preferred partners, or leverages technology to streamline the procurement process.

Let’s dive in.

1. Data Analysis and Segmentation

Understanding and managing tail spend starts with data analysis and segmentation. This process illuminates the spending patterns within an organization and uncovers areas where you can reduce operational costs and improve procurement efficiency.

Putting your data in categories like…

• Production materials
• Maintenance, repair and operations (MRO) supplies
• Marketing expenses
• IT services
• Travel expenses

…can help you identify low-value purchases that fall into the tail spend category. It also helps you distinguish between direct (core) and indirect (tail) spend more easily.

For tail spend analysis to be effective, you have to take a multi-step approach that includes data aggregation from various internal sources, categorization of spend items, and supplier analysis. This information (which should be in your spend management platform) can then be used to create a baseline for identifying opportunities for cost savings.

2. Consolidate Suppliers and Leverage Volume Discounts

Another strategy is to consolidate suppliers, especially for low-value purchases. With fewer vendors, it becomes easier to negotiate better terms, improve pricing consistency, and manage quality control efforts.

Centralizing purchases with preferred vendors can also help you leverage price breaks (for ordering more at once) and bundle pricing (for ordering more than one related item from the same supplier).

There are a few approaches you can take here:

• Establish preferred supplier lists for each category
• Implement a vendor management program to track performance and monitor compliance
• Use reverse auctions to drive competition and negotiate better pricing

Depending on your organization’s size, you might also consider implementing an enterprise resource planning (ERP) system that can help you manage supplier relationships and streamline purchasing processes.

3. Leverage Technology and Automation

Process automation is an easy fix to inefficient procurement spend management if you haven’t already implemented it. Spend management platforms play a crucial role in this regard — they ofer functionalities like:

• Automated data collection and categorization
• Advanced analytics with real-time visibility of your procurement data
• Interactive dashboards for tracking spend categories, supplier performance, and other key metrics
• Integrations with accounting and ERP systems for seamless data flow

In addition to automation, implementing e-procurement software can also help you streamline the entire procurement process. This technology allows employees to request purchases from approved vendors through an online portal with role-based access permissions, improving efficiency and reducing rogue spending.

4. Supplier Collaboration

You might also take a more collaborative approach with your suppliers to optimize tail spend. When you work together, procurement and purchasing teams can identify opportunities for cost savings and process improvements. You might also discuss how to consolidate orders, reduce shipping costs, or negotiate rebates based on annual volume.

You might even form a strategic relationship (e.g., through preferred supplier agreements or partnerships) or engage in joint innovation or development projects with your strongest suppliers. This collaboration can not only help you optimize tail spend but also improve the quality of your products or services.

5. Contract Compliance and Monitoring

Enforcing contracts ensures your suppliers meet the terms agreed upon during the procurement process — e.g., pricing, delivery schedules, and quality standards. This enforcement not only mitigates financial risks but also maintains the integrity of the procurement process, leading to more predictable and manageable spend.

Successfully monitoring and enforcing contract compliance involves a combination of policies, processes, and tools that provide visibility into contract execution and supplier performance.

Here are a few things you can do for your organization:

• Implement contract management software to automate compliance monitoring.
• Schedule periodic reviews of supplier performance against contract terms.
• Establish clear KPIs related to contract compliance, such as on-time delivery rates, quality acceptance rates, and cost variance.
• Use supplier scorecards to rate suppliers on various aspects of their performance, including compliance with contract terms.
• Conduct regular audits of supplier invoices and deliveries to ensure they match contract terms.
• Ensure procurement, finance, and operational teams work closely together to monitor compliance.
• Establish clear escalation procedures for addressing non-compliance.

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