Tail Spend Management in 5 steps

Cost reduction is a clear priority for most procurement teams. The focus is often on the strategic categories, and rightly so, as these categories represent around 80% of the spend by value and this is where most of the potential savings lie.

But what about the other 20% of the spend, the so-called long tail? How can tail spend be tackled?

Tail spend is often ignored and can easily go unmanaged. It can include costly one-off purchases and high-volume, low-value purchases that involve many suppliers.

Purchases are usually indirect and non-core but still essential to the smooth operation and the financial success of an organization.

According to the Boston Consulting Group, tail spend has the potential to deliver cost savings of 5% - 10% if it is actively managed.

There is no one-size-fits-all approach, but it is becoming increasingly important. Here’s what we will cover in this article:

• What is tail spend?
• Challenges tackling the long tail
• Benefits of a tail spend management program
• How to manage it in 5 steps
  
  

What is the tail?

Tail spend is widely recognized in procurement as the amount an organization spends on purchases that make up approximately 80% of transactions but cover only 20% of total spend.

What exactly is it made up of?

Every procurement team will have a different perspective on what a spend tail is. What it constitutes in one organization or within one spend category may be different from another. It can include:

• spot or one-off purchases,
• maverick or “rogue” purchases outside contracts,
• purchasing card buys and petty cash items
• E-catalogue spend
• any other low-value purchases that bypass procurement processes

Learn more about analyzing spend in our guide Spend Analysis 101.

Challenges tackling the long tail

By its nature, spend is complicated. The effort and time required to manage high volumes of data, combined with the lack of strategic importance in the tail, can make it a low priority for procurement teams, despite the opportunities it presents.

The biggest challenge in managing it is the lack of data visibility. Reasons for this are many: multiple in-house or proprietary systems in use, departments or divisions working in silos, poor supplier master data, and decentralization of purchasing activities.

Benefits of a tail spend management program

With accurate spend classification in place, you can begin to tackle tail spend more systematically and analytically. 

A strong tail management strategy can provide a competitive advantage for an organization. Some of your biggest cost and time savings can come from your smallest purchases.

Additional cost savings

Need we say more? If you're interested in delving deeper into cost-saving strategies in procurement, read our ultimate guide!

Increased efficiency and productivity

Consolidating the supplier base increases efficiency and frees resources for more productive work. When the number of suppliers is reduced, more focus is on key suppliers and more productive tasks. Likewise, extending self-service procurement facilities for end-users frees up expensive resources.

E-catalogs or other automated buying channels allow spend to be moved from unmanaged to managed. Additional high-value spend can also be incorporated into strategic purchasing activities if spot-buying can be redirected there.

Reduced supplier risk

Tail spend management programs control, monitor, and track transactions. They are highly effective at preventing rogue spending and limiting unethical purchasing behavior. Removing obsolete and unreliable suppliers from the database reduces risk and provides a more transparent procurement process to prevent and detect fraud.

Improved stakeholder satisfaction

Internal customers need clarity on the rules and their spend limits. They want easy-to-use, intuitive tools and processes that can be delivered within a well-thought-out strategy. A rationalized supplier database for tail spend reduces errors and speeds up cycle times for everyone.

Even more benefits: 

• Improved data quality and internal reporting 
• Better compliance with contract and service level agreements (SLAs)
• Increased productivity per employee

Now, let's explain the 5 steps you can do to start managing your tail spend.

How to manage tail spend in 5 steps

Once you have evaluated the scope and opportunities of your challenge, you can bring a more systematic process for managing it. 

1. Identify your tail spend

Decide what tail spend means in your organization. Only then can you take the appropriate steps to effectively manage and optimize it. If the idea seems too daunting, you could make a start by understanding what it is in one division or department where there are obvious issues.

2. Streamline internal processes 

It is vital to have clear procurement processes and ensure they are properly communicated and enforced. Involving stakeholders throughout the process of identifying target areas and managing the tail provides continuing support.

End-user enthusiasm may be low for such improvement projects if the reasons for managing the tail are not explained and the benefits for them are not visible.  

3. Organize the data

Once you have decided on the scope and identified the business systems and sources that store the data, the next step is organizing the actual data. Cleansing, classifying, and analyzing spend data will lead to greater spend awareness on which informed business decisions can be made. Cleansing includes standardization of field formats such as dates and currencies and normalizing supplier names. New and innovative digital software solutions that extract, analyze, and track your spend provide support for this step.

4. Actually use the insights

Reports resulting from a formal analysis process can provide both numerical and visual representations of the information in a dashboard format. Using suitable software tools, output reports are customizable, providing insights into consolidation and cost-saving opportunities e.g., industry sector, division or location, and by commodity. Now execute!

5. Monitor the benefits

Monitoring the success of your tail spend management program requires deciding on key performance indicators (KPIs) and suitable review periods. Examples of KPIs are:

• Cost savings achieved against a pre-agreed benchmark or savings targets
• Productivity improvements – actual time saved per activity, reduction in the number of quotes requested, % of tail spend through e-catalogs, % reduction in the number of non-contracted suppliers.
• % of spend under strategic management vs unmanaged

Conclusion: don't tackle it alone

Managing long-tail spend is challenging for many procurement teams and not always a clear priority. To get the best results, companies can create a dedicated team or project group that focuses on it using clearly defined metrics.

Tail spend management can be time and resource-consuming. Consider how much of the work can be done in-house and how much can you rely on experts utilizing automation techniques, such as artificial intelligence-driven spend classification. The latest analytics software solutions provide visibility into the depths of the data that is not possible to achieve manually. The best results are often achieved when you don't tackle tail spend alone.

For more information and best practices read our popular guide Spend Analysis 101.