Tail spend, the long-tail of a company’s procurement expenditure which has become increasingly important in recent years as companies seek to optimize their procurement processes and reduce costs.
Often representing over 80% of total transactions, tail spend includes low-value purchases that are fragmented across multiple departments and suppliers, making it difficult to manage and control. The rise of digital procurement platforms and technologies, along with the need for greater supply chain resilience, has also brought tail spend into focus.
Efficient management of the tail spend offers the potential for significant cost savings and improved procurement efficiency.
Gartner’s Procurement Diagnostic Suite survey showed that procurement teams that managed indirect spending (such as tail spending) delivered an ROI of 6.88x and a savings rate of 6%, whereas teams managing only direct spending delivered an ROI of 5.46x and a savings rate of 4%.
In yet another report, Boston Consulting Group showed that 27% of companies that optimized tail spend achieved annual savings between 5% and 10%, while 30% of such companies saved at least 10%.
Although these percentages may seem small, they can translate into millions of dollars in savings for global companies with large expenditures. In addition, engaging with small and innovative suppliers can lead to game-changing ideas that could give a business a competitive edge, such as environmentally friendly solutions or diversifying the supply chain.
What is tail spend?
Tail spend refers to the portion of a company’s procurement spend allocated towards purchasing goods and services from a large number of suppliers, each with relatively small individual spending.
These purchases typically account for roughly 80% of total transactions, but only make up about 20% of the company’s spend by volume. However, there is no one-size-fits-all definition for tail spend across different businesses or within the same organization. Each organization and business unit’s spending is unique, and what is considered tail spend in one category may not be the same in another.
Tail spend can have various definitions, ranging from maverick spend to misclassified purchases. The low-value, non-core, and non-strategic purchases may be typically classified into four types:
- Petty cash and expense items are at the bottom of the tail spend chain, comprising day-to-day expenses that an organization needs to operate, such as lunches, taxis, fuel, and travel-related sundry items.
- The next type of spend that is up the chain is marketplace spend, which comprises standard and repeatable purchases that organizations make regularly, such as paper clips, staplers, notepads, IT equipment, coffee and snacks, and office furniture. Maintenance, Repair and Operations supplies like nuts, bolts, and screws, and marketing materials like business cards, brochures, janitorial, and cleaning supplies like soap, paper towels, etc. fall under this category.
- Custom spend involves catalog-based purchases that are specific to the organization, such as power tools for a manufacturing business, where the shop floor department will care about access and cost.
- Tactical buys are purchases that are known only to the user and represent around 15-25% of an organization’s spend; an example is forklift batteries – only the user can recognize their use.
Some other tail spends that fall under multiple categories include temporary staffing services for administrative, customer service, or other support roles, freight and shipping expenses for small packages and parcels, professional services like legal, accounting, and consulting services, and utilities and telecommunications expenses like phone, internet, and electricity bills.
Need for tail spend management
Procurement professionals are typically trained to handle high-profile/high-value purchases that align with the corporate vision and are essential to the company’s growth. This leaves minor purchases to be less controlled with procedures that vary from department to department, creating compliance risks.
As a company grows, managing tail spend can be a daunting task due to the high number of suppliers involved and the low value of purchases. The old way of tracking tail spend through Excel spreadsheets can be tedious and time-consuming.
In the absence of a methodical tail spend management process, employees may improvise and purchase items without proper training or experience, leading to additional compliance and cost risks.
Robust tail spend management approaches are particularly important in light of the recent pandemic and market volatility due to geopolitical events. Lack of proper tail spend management can result in various negative impacts on a company.
- Firstly, companies may end up paying higher prices for small products that could be obtained much cheaper through pre-negotiated pricing by the procurement department, resulting in the loss of potential savings of around 20-30% of total indirect spend.
- Secondly, it could lead to a lack of product quality control, potentially harming the company’s reputation.
- Thirdly, unmanaged suppliers can increase the risk of compliance issues, especially in regulated industries, as contracts and payment terms could conflict.
- Finally, unnecessary transactional buying activities that do not add value to the company can result in the loss of productivity, with research indicating that organizations can lose up to 40% in buyer and requester productivity by chasing such purchases.
How to manage tail spend?
As mentioned earlier. tail spend purchases are often too small to go through procurement and are not frequent enough to be included in cataloged systems. Therefore, it is crucial to identify what tail spend means for your organization and define the length of the tail relative to your company’s core, strategic vendors.
Here are five actionable steps that organizations can take to build a strategic framework to manage tail spend:
1. Conduct a Baseline Assessment
Define tail spend and understand the current system used for it. Since tail spend is a broad term that encompasses various categories, it is crucial to identify specific categories. The spend may be hidden tail, which comprises big-ticket spends with large suppliers that may still contain non-compliant spend despite a negotiated contract. Depending on what percentage of the total spend that is not strategically managed is classified as the head (a higher percentage of the total spend), middle (next level) and tail of the tail spend. For example, for a million dollar company, a spend that is not strategically managed and ranges from $50,000 to $200000 a year could be categorized as the head, $2,000 – $50,000, the middle and less than $2000 could be the tail of the tail. Procurement managers must compare expenditures across categories, business units, and suppliers to understand the spending per subcategory. The assessment will develop a baseline to build benchmark KPIs.
2. Determine Visibility
To enhance visibility, businesses can use digital platforms, automation, and big data analytics to create an overview of the spending baseline. This is important because different procurement processes may be managed by siloed subgroups or on different systems, which can result in a loss of visibility. Regular data refreshes may be necessary to ensure accuracy.
3. Identify Process Optimization Opportunities
Centralizing procurement can lead to cost savings and easier access to important data. Common optimization opportunities include consolidating suppliers, providing education for staff on effective purchasing strategies, using reverse auctions, creating clear policies that are simple for buyers to follow, and using tools that create guided processes for users to follow.
4. Deploy Relevant and Complementary Procurement Applications
Consider how optimized procurement management aligns with current digital capabilities. Catalogs can be effective but infrequently updated, so compliance benefits gained from using a catalog can be carried forward into SAP Fiori applications that incorporate and enforce spending policies through a guided entry process.
5. Measure Performance for Continued Improvement
Procurement teams should regularly assess metrics and KPIs to determine if initiatives are adopted and if improvements have a measurable payoff. It’s important to bring tail spend to the attention of senior leaders and make it a top priority.
Digital technologies provide solutions to the challenges in managing tail spend. Through big data, advanced analytics, and AI, procurement functions can gain better visibility into their expenditures and even eliminate certain areas of tail spend. Automation and platforms can also enhance the efficiency of key procurement processes, such as mass tenders. The potential for cost savings is significant, with a Hackett Group study showing that more than 27% of companies experienced savings between 5% to 10%, while 30% had savings of at least 10%. To effectively manage tail spend, it is crucial to analyze the data behind these purchases. Thanks to digital advancements, companies can now access and assess high-quality data to develop an overview of the spend baseline, which was previously inaccessible and unwieldy.
Benefits of tail spend management
A good tail spend management strategy can provide the following benefits:
- It can help improve spend coverage and generate savings by enhancing the visibility of the 20% of low-value spend, identifying opportunities for sourcing savings, reducing the number of transactions and associated costs, lowering the cost of procurement, and optimizing the supply chain.
- It can improve process improvement and optimization by enhancing data quality and processes, increasing contract coverage and reliance to minimize business risks, eliminating low-value and trivial suppliers, and adopting a global procurement delivery model.
- Effective tail spend management can be achieved by providing end-to-end execution support, increasing supplier base diversity, managing maverick spending, and ensuring compliance with internal policies and external regulations.
Implementing a user-friendly and automated procurement system can simplify and speed up the procurement process for low-value items. This will allow employees to purchase items with ease while still adhering to the procurement framework in place. Streamlining the number of vendors can help effectively manage relationships, enabling the procurement department to negotiate better deals with a smaller pool of suppliers.
Automate tail spend management with Nanonets
Nanonets is an artificial intelligence (AI)-based data extraction platform that can help businesses gain complete control over their expenses, save a minimum of 5% on business spends, and prevent unexpected and wasteful spending.
At the heart of Nanonets is its ability to automatically sync invoices and payment information from any source, including emails, PDFs, and scanned documents. This means that businesses can quickly and easily extract key information such as supplier names, invoice numbers, and payment amounts from a wide range of sources, without having to manually enter this information into their procurement systems.
Once this information has been extracted, Nanonets uses its AI algorithms to keep it ready for review. This means that businesses can quickly and easily identify any discrepancies or errors in their procurement data, and take action to correct them before they become a problem.
To further improve the accuracy of its data, Nanonets includes a range of approval workflows, duplicate alerts, and fraud detection tools. This ensures that there are no wrong spends, and that all procurement data is accurate and up-to-date.
Nanonets offers an efficient payment and reconciliation system that reads transaction information from any source, updates the invoice, and posts it to your ERP. This means that businesses can quickly and easily reconcile procurement data with the financial systems, and ensure that all payments, irrespective of volume and size, are made accurately and on time.
The market for tail spend management solutions or expense management software is experiencing significant growth due to various benefits they offer, including increased productivity, improved efficiency, and enhanced customer experience. These solutions enable procurement teams to focus on valuable contracts while identifying opportunities for continuous improvement.
By adopting such solutions, organizations can improve their procurement functions, leading to up to a 20% increase in productivity. Despite the persistence of tail spend, digital tools like Nanonets can enable proactive management of the inherent complexities of tail spend management. By taking advantage of technologies like Nanonets, procurement teams can transform what was once a challenge into a new source of value for their company.