Tail-end spending remains an often overlooked aspect of budget management. While most of your strategic spending is hyper-focused on the largest purchases and the most impactful contracts, it can be easy to miss out on a small amount at the end of every period. So what can you do to ensure that your finance teams properly manage every contract and transaction your business regularly goes through?
Three out of four procurement leaders consider tail spend a priority within their organizations, and the fact that it takes up 10% of the annual expenditures of a company makes it clear why it’s a growing concern.
Are you interested in contributing significant cost savings to the business budget? Or are you on the hunt for a more robust procurement process? The adjustments you make to address tail-end spend will ultimately benefit your procurement process as a whole, so read on to find out why tail end spend is such a common problem and what improvements to procurement and sourcing you can make to address it.
What Is Tail End Spend?
Tail end spend is the 20% of organizational spending that commonly goes unaccounted for and unmanaged.
You’ve probably heard of the Pareto Principle or the 80/20 rule. It states that 80% of the consequences come from 20% of the causes. For example, 80% of your sales revenue comes from 20% of your customers. 80% of foot traffic in the office ends up covering only 20% of the office floor space.
The Pareto Principle also applies itself to spending management, hence why tail-end spend exists. Even a robust budgeting process will typically only manage 80% of the spending, leaving the remaining 20% as unmanaged or overlooked spend.
How Does Tail-End Spend Happen?
The concept goes by many names: low-value spend, long-tail spend, fragmented spend, off-contract spending, non-purchase order spend, unclassified spend, spot buying, and C-spend (named after C-level suppliers). All of these terms are potentially accurate, as we’ll discuss later.
The 80/20 rule makes tail-end spending nearly inevitable. So whether it’s a lack of time or a hole in procurement policies, 20% of spending ultimately ends up unmanaged. And unmanaged expenditures are an inefficient use of the budget.
How Exactly Do We Identify Tail-End Spend?
Every company has a slightly different definition and makeup of tail-end spend. So while the Pareto Principle holds everywhere, some businesses have specific metrics to define the term.
For instance, some definitions use a hard spending limit. The company measures how much money it pays a single vendor in a year. If that amount is below an arbitrary threshold, it’s considered tail spend.
It’s also important to distinguish tail-end from related procurement concepts like maverick spend and rogue spend. Maverick spend, a type of tail-end spend, is a purchase made without an official contract or formal policy backing it. Rogue spend is similar, except it’s more unpredictable rather than undocumented. Either way, both forms require slightly different procedures to control.
What Does Tail-End Spend Look Like?
Tail-end usually consists of many small transactions for indirect spend procured from many low-value suppliers known as C-suppliers. Some examples include:
- Office equipment and supplies
- Promotional materials like branded T-shirts and brochures
- Employee travel expenses like taxis and meals
- Subscription services like Microsoft Office or Zoom
Any “one-time” purchase is susceptible to becoming tail-end spend. Some companies even include procurement fraud in this category.
While these purchases may seem negligible initially because they’re not high-volume or high-cost, they add up over time and impact the bottom line if left ignored.
Where Does It Come From?
Any source of expenditures in the business might be responsible for tail spend at some point. Departments ranging from HR to IT to marketing contain buyers and stakeholders who might need goods and services on short notice and aren’t involved in formal procurement processes through the procurement department’s procurement system.
These transactions are small enough in value and large enough in volume that most buyers won’t bother running through formal procurement protocols. Tail spenders are not necessarily malicious; they just believe that their purchases won’t significantly impact the overall budget and see contracts as cumbersome.
Unexpected tail-end spend causing problems?
Why You Should Attempt to Manage Tail Spend
Beyond the definition, it’s essential to know how tail-end spending functions in the context of the business budget. By going over the challenges and advantages of managing tail-end spend, we are gaining insight into what changes we can make to address it.
Why Does Tail Spend Management Matter?
Strategic spending in line with your management strategy is ideal and low-risk because you have firm control over your procurement, high visibility into transactions, and quality relationships with long-standing vendors and strategic suppliers. But with tail spend, those luxuries aren’t available, and the risk of poor spend management for non-core items is far higher:
- Overpaying. Tail spend is rarely appropriately negotiated, so you’re likely to pay more than you otherwise would for the same products and services.
- Quality control. Without an approved vendor list for these low-value transactions, end-user tail spenders will likely run into inferior products that could jeopardize internal operations.
- Vendor noncompliance. Supplier risk is also higher, as you have less control over your vendor base. For instance, if one vendor is lacking in corporate social responsibility, then working with it could damage your own reputation by proxy.
Compliance is an even bigger topic in heavily regulated industries. Working with the wrong supplier, in this case, could put you in violation of fair practice regulations and at the risk of legal action.
What Are Some Potential Setbacks to Managing Tail Spend?
It’s clear that tail spend management matters, but why do so many organizations struggle with it?
- The same rules don’t apply. The policies you have for strategic spending for procurement spend rarely apply well to tail-end spend. Tail-end involves a large number of suppliers, more buyers across different departments in the company, and many fragmented purchases to the point where most managers don’t know where to start.
- It’s challenging to track. It’s difficult and time-consuming for a procurement team to account for all those for vendors, transactions, procurement categories, and buyers spread across the company. It’s arguably more trouble than it’s worth without the right approach and application of big data analysis techniques.
- Little intel is available. Above all, a lack of data and visibility is the main reason tail-end spend management often fails. For example, if procurement and contract management aren’t on the same page, the job can get messy.
Optimizing tail spend also requires solid internal communication. Each department handles its own tail spend, so getting all of them to work together on non-strategic purchasing unlocks opportunities to consolidate purchasing.
What Benefits Can I Expect from Tail-End Spend Management?
Tail-spend is an elusive yet vital component of any procurement strategy. Rest assured, the benefits are well worth the effort.
- Cost reduction. By increasing the coverage of strategic spending plans, a company expands spend visibility and digs out new opportunities to reduce costs and save money.
- Reduced supply chain risk. Tackling tail-end spend makes you more compliant with procurement policies, boosting transparency and minimizing fraud.
- Improved contract management. Tail-end spend management consolidates the supplier base, reducing the number of contracts going on at a time. The result is a chance to focus on larger, higher-value contracts.
- Better supplier relations. The process efficiency benefits extend to your vendors as well, as it makes the transaction more streamlined on both sides of the agreement.
During your tail-end spend journey, your company will likely pick up new artificial intelligence-powered digital technologies like intelligent sourcing, automatic tracking of tail spend for spend analysis, and real-time KPI dashboard views with trends, which help unlock these significant savings, risk reductions, and efficiency improvements.
How to Address the Last 20% of Expenditures
Sit down with finance leads and department stakeholders to evaluate tail-end spend and find ways to fix it as a new initiative.
Start by identifying the source of tail spend. It’s different for every company; even individual business units might have their own definition and optimization strategy.
Then start redesigning and considering ways to streamline internal processes to address that unmanaged spending and improve spend data quality. Consider new strategies like centralized tail spend data gathering, better payment terms across departments, and enforced strategically managed spend policies.
Like with any significant change to procurement, you want to start small and work your way up. Apply your new policies to a single department’s tail spend before increasing the scope and rolling it out everywhere else.
How Do Data and Transparency Contribute to Tail Spend Management?
Tail spend management was largely unrealistic in the past because of the vast amount of information necessary to address it adequately. But today, we have digital spend analytics tools, automation, and software platforms to make it possible.
Procurement platforms, for instance, can combine all the purchase order data found on separate PDFs across the company into one place for easy reference. They can search and scan through individual items and suppliers and even fill in the blanks for incomplete purchase orders.
It’s easy to perform spend cube analysis with this information, analyzing tail-end expenditures based on procurement and spend category, business unit, or supplier, whereas before, you had nothing to go on.
What Tools and Strategies Should You Consider?
Spend analysis is paramount to developing attack strategies against unmanaged spending at the departmental, supplier, or category level. But some other tried-and-true tools and solutions include the following.
- Value-engineering. This approach to tail spend management encourages individual departments and company projects to define and quantify value metrics. The idea is to get the maximum value from procured goods and services and to tailor spending management towards how much value each transaction produces for the company.
- Purchase bundling. Also known as procurement consolidation, this tactic breaks down silos between departments. Suppose two teams need a similar product or service. In that case, the business can bundle the purchases together to take advantage of bulk pricing and cut down on the number of transactions necessary.
- Purchasing cards. If you struggle with transaction tracking, consider giving your employees purchasing cards to handle tail-end expenditures. Such cards automatically record the details of every transaction and whoever makes them. They help smooth out the ordering process.
There are also a few strategies for handling sourcing needs.
- Company catalogs tell employees exactly what items or suppliers they are allowed to purchase. They give management complete control over product quality and reduce procurement complexity, but they’re unlikely to cover all internal needs.
- A sourcing help desk functions similarly by giving employees one place to make procurement inquiries and have them approved by procurement professionals.
- E-sourcing is another sourcing strategy that runs on electronic catalogs in an online supplier marketplace. It’s the perfect solution for tail-end spending since it standardizes procurement procedures and aggregates all the product categories your teams need.
Not everyone will support changes like these at first. Internal stakeholders might see it as an obstacle to their workflows, so it’s vital to make your intentions clear and communicate the benefits of tail spend management to them.
Take Control of Your Tail-End Expenditures
Tail-end expenditures can be challenging for even the most experienced procurement teams. However, taking the time to identify and manage this process for one-off purchases brings more benefits than just financial savings. You’re also managing vendor risk, streamlining the procurement process with standardization, and applying strategic sourcing to a larger portion of overall company expenditures.
Properly addressing tail-end spending is all about having the right tools, spend management software systems, and policies in place to support this data-dependent task. That’s why digital solutions with built-in data collection and analytics are a must-have for any company looking to accomplish this at scale. Continue exploring the Tipalti Procurement solution for total spend that helps you take control.