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In most organisations, procurement teams are under pressure to keep costs low. But, while their focus is often on bringing down the cost of large, strategic purchases, there’s another area that’s often overlooked: tail spend.
Tail spend is all of the low-volume, low-value purchases that go on outside of your organisation’s agreed contracts with suppliers.
While the cost of each of these transactions may not be much on its own, they soon add up. And, because these purchases often happen outside of official procurement channels, they also carry a risk of fraud and non-compliance.
If you’re struggling to get your tail spend under control, don’t worry. In this article, we’ll share practical tips to set up a tail spend management strategy that brings that uncontrolled spending out into the open — plus how to overcome some common challenges.
What is tail spend management and how can you build a strategy for it?
Tail spend refers to purchases that businesses make outside of their normal procurement channels. The rule of thumb is that these purchases make up 80% of a company’s transactions, but only 20% of its total spend. Because tail spend is typically made up of many low-value purchases, it’s often overlooked when a business needs to cut costs.
But unmanaged tail spend can add up to a lot of wasted money over time, particularly for large organisations. And, since these transactions happen outside of the company’s contracts with approved suppliers, they’re often invisible to the procurement team.
Managing tail spend in 5 steps
A well-thought out tail spend management strategy can help you to control costs, reduce supplier risk and increase efficiency and productivity. Here are five steps to reduce tail spend in your organisation.
- Identify your tail spend
Every business defines tail spend differently. And the first step to getting it under control is to identify what it looks like in your organisation.
For example, some companies count any purchases from vendors with an annual spend below a certain threshold as tail spend. Others define it as any spend that is not actively or strategically managed by the procurement team.
Of course, the nature of tail spend means that it’s not always easy to track. But the best way to start is by gathering spend data from different departments, and then analysing it to find out how much tail spend is happening.
- Streamline your internal processes
The key to controlling tail spend is to move as much of it as possible into the strategically managed category. Ideally, you want every purchase to go through an approved system and to be made with a supplier from your approved list.
While getting this to 100% is difficult, making your procurement processes as simple and user-friendly as possible can get you a long way. After all, the more complex your processes are, the more likely it is that employees will make purchases outside of them.
It’s also a good idea to implement automated systems that gather spend data in one place. This will help you to keep an eye on your tail spend and make sure it doesn’t spiral out of control.
- Work with stakeholders to control maverick spend
Maverick or rogue spend is when people in an organisation make purchases outside of official procurement processes. Because these transactions often involve only small amounts of money, managers and other internal stakeholders might not see this as a big deal — but it can have several risks for a business.
For one thing, it doesn’t allow you to benefit from the preferential rates that you’ve negotiated with your core suppliers. Worse: purchases made outside of agreed contracts can even expose your business to the risk of non-compliance and fraud.
To avoid these issues, it’s a good idea to educate employees on the importance of managing tail spend effectively. As we mentioned above, you should also work with key stakeholders to ensure your procurement processes work for them — making it much more likely that they’ll actually use them.
- Consolidate suppliers and build relationships
Building strong relationships with suppliers is an effective way of controlling costs in an organisation, because it allows you to negotiate better deals. However, this can be tricky when you’re working with a large number of suppliers and only have a relatively small annual spend with each of them.
That’s why it’s important to consolidate your suppliers as much as possible. You can do this by analysing the suppliers you have used over the year and identifying any overlaps. For example, if two departments purchase office supplies from two different suppliers, these could probably be consolidated.
Reducing the number of suppliers you use means that your total spend with each of them will be larger. This makes it easier to build relationships with the suppliers and negotiate with them for the best rates.
- Continuously measure and adapt
Controlling your tail spend isn’t something you can do once and cross off your list. It needs to be continuously and consistently managed over time to ensure it doesn’t get out of control.
To make sure your tail spend management strategy is working, it’s important to define reasonable key performance indicators (KPIs) early in the process. This way, you’ll have a concrete target to aim for, and will be able to tell if your efforts are having the desired impact on your tail spend.
For example, your KPI might be to achieve a certain cost-savings target, or to reduce your uncontrolled spending (tail spend) to a certain percentage of your overall expenditure.
Core challenges in tail spend management (and how to overcome them)
Controlling tail spend is an important way of cutting costs, reducing risk and increasing efficiency — but it’s not easy. Here are some of the hurdles you might have to overcome as you build your tail spend management strategy:
- Lack of data and visibility: The nature of tail spend means that it happens without any central oversight from an organisation’s procurement team — making it hard to keep track of. To overcome this, you should use software that gathers spend data from different departments and consolidates it in one place.
- Fragmentation: Tail spend often involves many small purchases from different suppliers — and managing relationships with each of them can be tricky. Where possible, you should consolidate suppliers, choosing a few reliable ones and negotiating with them to ensure that you’re getting the best rates.
- Internal resistance: If people are used to doing things a certain way, it can be difficult to convince them that change is necessary. For example, managers might feel that filling out a formal purchase requisition to buy something small is a waste of their time. It’s important to provide training and support that helps employees to adapt to your new processes, and emphasises the importance of a controlled tail spend management strategy.
The role of technology in tail spend management
These days, technology plays a huge role in helping organisations to better control their tail spend. In fact, a 2022 study found that companies whose procurement teams use technology more effectively achieve a 2.4x greater ROI on procurement. On average, these companies actively manage 27% more of their total spend than other companies.
Specifically, businesses can use e-procurement software to digitalise transactions, bringing them out of the shadows and into the view of procurement teams. Using this software, procurement can set minimum purchase amounts to discourage employees from making multiple small purchases from different suppliers.
Technology also enables procurement teams to gather data on how money is being spent in different parts of the organisation, and consolidate it in a central location. This gives procurement teams better visibility into their tail spend — which is the first step to reducing it.
Lastly, procurement teams can use technology to analyse spending patterns and identify areas where they could reduce costs. For example, the right tail spend management software can help procurement teams to identify an overlap in suppliers that could be consolidated, increasing efficiency and reducing costs.
How to get started
As we’ve discussed, getting your tail spend under control isn’t easy. By its very nature, tail spend is something that happens in the shadows, out of the view of procurement leaders. But, with the strategies we’ve outlined in this article, you have everything you need to take control over your tail spend.
Need some help? Read about our tail spend management solution or get in touch with our team today.
