As much as we try to engage in procurement best practices like strategic sourcing and supplier consolidation, tail spend persists.
The truth of the matter is that as businesses grow, they develop more diverse needs that not all vendors can meet.
You can’t buy your office toilet paper from your advertising agency, for example.
Tail spend, as seemingly avoidable as it is, does come with some problems, however. It increases administrative costs, impacts spend visibility, and can even open up some compliance risks.
In short, you need to keep a keen eye on it. In this article, we’re going to show you how.
We’ll explain what tail spend is and what it looks like, discuss how it impacts procurement costs, and dive into five important strategies for identifying, managing, and reducing tail spend.
What is tail spend management?
Tail spend refers to the portion of an organization's procurement budget involving numerous low-value transactions across many suppliers.
Unlike strategic spend, which typically accounts for 80% of total procurement activity from just 20% of suppliers, tail spend follows the opposite pattern. It represents approximately 20% of total spending but involves 80% or more of your supplier base.
This concept derives its name from visual spend distribution. When you plot spending by supplier, strategic suppliers appear as tall bars on the left, while tail spend creates a long, gradually declining "tail" extending to the right.
What does tail spend look like?
These are the typical characteristics of tail expenditure:
- Non-strategic purchases: Routine or one-off purchases that aren’t tied to the core business strategy (e.g., a new laptop).
- High supplier count: A large number of vendors supply the goods and services involved, leading to fragmented purchasing.
- Low visibility: Because tail spend typically involves smaller transactions and is less strategic in nature, businesses tend to give it less attention, reducing spend visibility.
- Diverse categories: Tail spend is found across a wide range of spending categories, from marketing to office supplies to vehicle maintenance services.
- Lack of negotiation: Tail spend purchases often lack any strategic spending or negotiation effort as a result of their perceived insignificance.
Common examples of tail spend
The most common examples of tail spend include:
- Office supplies: Paper, pens, cleaning supplies, and everyday necessities
- Minor maintenance: Small building maintenance services and equipment repairs
- Professional services: One-time consulting or specialized expertise
- Software subscriptions: Individual team licenses for productivity or project management tools
- Marketing materials: Promotional items, printing services, and event supplies
These examples are often small-value items that don’t go through a standardized, strategic procurement process.
What are the common strategies for tail spend management?
Successfully managing tail spend requires a comprehensive approach that balances control with convenience.
Visibility and analysis
The foundation of effective tail spend management is understanding where your money goes. Modern spend analysis tools aggregate data from multiple sources, including purchase orders, invoices, credit card transactions, and expense reports, to provide a comprehensive overview.
Consistency is key. The data must be clean and standardized with consistent supplier names and purchase categorization, while eliminating any duplicate vendors.
Automation
The manual processing of high-volume, low-value transactions is inefficient and error-prone. Specialized procurement platforms automate purchase order creation, approval workflows, and invoice matching, reducing errors and accelerating processing times.
Virtual cards and P-cards provide another powerful automation tool. These corporate cards give employees controlled spending ability while automatically capturing transaction data. Every transaction will adhere to the policy, as unique cards with preset spend limits and expirations can be generated for each vendor.
Process standardization
Inconsistent procurement processes mean inefficiency and increased costs. Consider providing employees access to pre-approved suppliers and products at negotiated prices in a catalog format to streamline purchases within approved channels.
Standardizing approval workflows ensures appropriate oversight based on purchase value and risk. Low-value purchases in specific categories might require only a single approval, while higher-value items route through multiple reviewers.
Supplier consolidation
Having too many suppliers for similar goods reduces purchasing power and increases administrative overhead.
Start by analyzing tail spend data to identify categories where multiple suppliers provide similar products. You may find you have five to ten suppliers for items that could be sourced from one or two.
When consolidating suppliers, negotiate agreements that cover the needs of multiple departments. These agreements leverage total purchase volume to secure better pricing, payment terms, and service levels.
Policy enforcement
Clear policies backed by appropriate controls ensure that changes to your tail spend management achieve results. Develop procurement policies defining authorized purchasing methods, approval requirements, and preferred suppliers. Back your policies with controls (like virtual cards and automated approval processes) that prevent non-compliant purchases rather than detecting them after the fact.
Benefits of effective tail spend management
The primary benefit of effective tail spend management is cost savings, but the positive impacts extend beyond that.
Cost savings
Organizations reduce their tail spend costs through supplier consolidation, better terms, and eliminating maverick spending.
Volume discounts from consolidated suppliers can significantly reduce unit costs. For example, consolidating office supply purchases under a single vendor could qualify you for volume discounts based on your higher quantities.
Early payment discounts represent another savings opportunity. Consolidation means processing fewer payments, reducing the time-to-pay, and unlocking discounts.
Increased efficiency
Effective tail spend management dramatically reduces time spent on low-value transactions, allowing procurement teams to focus on strategic initiatives.
Automated workflows accelerate processing times and give employees the autonomy to get what they need when they need it. This speed benefits both your organization and your suppliers, who receive payments faster.
Improved supplier relationships
Consolidating your supplier base helps strengthen vendor relationships. Larger, consistent order volumes make vendors more willing to provide favorable terms and priority service. This could mean better service, better products, and better terms for your organization.
Better compliance and risk management
Centralized procurement processes keep purchases compliant with policies, reducing fraud risk. Switching to a digital system helps by capturing transaction details, categorizing purchases, and creating clear audit trails.
Consolidating vendors also reduces risk as you work with a smaller, better-known supplier base. A smaller group of trusted suppliers helps keep risk to a minimum.
Challenges in managing tail spend
Despite clear benefits, many organizations struggle to manage tail spend effectively because of these challenges.
Identifying unmanaged tail spend in organizations
The first challenge is recognizing the full extent of unmanaged tail spend, which gets lost across accounts and payment methods.
This fragmentation of data makes comprehensive analysis difficult. Tail spend often occurs through purchase orders, procurement cards, expense reports, and even employee reimbursements from transactions on personal credit cards.
Inconsistent categorization compounds visibility problems. Different departments might code similar purchases in their own way, making it difficult to identify consolidation opportunities.
There’s also maverick spend. Maverick spending is when employees work around official procurement channels.
Resource constraints
Procurement teams need to balance the competing priorities of being thorough in their processes, but processing a high volume of transactions.
Typically, procurement professionals will prioritize high-value strategic spending, leaving tail spend perpetually unmanaged. Without automated tools, managing tail spend requires significant manual effort that strains efficiency.
A lack of visibility
Decentralized purchasing authority creates information silos where nobody sees the complete picture. If systems aren’t integrated, the reporting isn’t unified.
The result is having to check in on multiple systems to review different channels of organizational spending. Without real-time visibility, teams need to put in manual effort to consolidate reporting before making tactical decisions on tail spend.
Employee compliance
The difficulty of a lengthy procurement process could drive employees to find workarounds, using unauthorized suppliers, or using personal payment methods and an employee reimbursement process.
Pair a painstaking procurement process with insufficient training, and unapproved procurement will occur no matter how much effort you put into getting it under control.
Three steps to managing tail spend
Implementing effective tail spend management follows a simple, logical progression.
1. Identify tail spend vendors and transactions
Begin by collecting spend data from all systems where procurement transactions occur. Cleanse and normalize the data by standardizing supplier names and assigning consistent category codes.
Take this opportunity to define what constitutes tail spend for your organization using criteria like the 80/20 rule or spend thresholds. Segment tail spend into manageable categories based on commodity type, purchasing behavior, or risk level.
2. Streamline purchasing processes
Outline your existing purchasing workflows to identify bottlenecks and inefficiencies. Consider deploying procurement cards with appropriate controls for decentralized purchasing on low-value, low-risk categories.
3. Analyze the spend data
Establish regular reporting cadences for key metrics like total tail spend percentage, supplier count, compliance rates, and cycle times. Leverage your analytics to identify consolidation opportunities, inconsistent pricing, and maverick spending.
Monitor adoption of new processes to ensure they're working as intended. You may need regular training or review sessions with employees to ensure everyone is compliant.
Tail spend management best practices
Organizations that excel at tail spend management consistently apply these best practices.
Developing an effective tail spend strategy
Start with clear objectives aligned with your business priorities. You may prioritize cost reductions, efficient processes, or improved supplier relationships.
To ensure everyone is compliant, balance complete control with user convenience. The best solutions make doing the right thing the easy thing.
Investing in appropriate technology like procurement platforms, P-card programs, and analytics tools can empower your new policies.
Prioritizing tail spend categories
Assess categories based on total spend volume, supplier count, transaction frequency, and strategic importance. Categories with high spend distributed across many suppliers often offer the best consolidation opportunities.
Consider risk factors when prioritizing. Some tail spend categories carry significant compliance or safety risk despite small dollar values.
Continuously improving and monitoring techniques
Establish key performance indicators (KPIs) providing insight into program health—both outcome metrics (savings, compliance) and process metrics (adoption rates, cycle times). Collect user feedback through surveys and feedback sessions.
Optimizing your tail spend management isn’t a one-time activity. Set a regular cadence for updating supplier agreements and reviewing emerging technologies.
Getting started with tail spend management (step-by-step guide)
For organizations ready to begin their tail spend management journey, following a structured approach increases success.
Step 1: Conduct comprehensive spend analysis
Gather data from all spending sources, including purchase orders, invoices, procurement cards, and expense reports. Cleanse and categorize the data using consistent naming conventions and category codes for consistency.
Analyze the data to identify tail spend using your chosen criteria. Calculate what percentage of suppliers and transactions fall into tail spend, then segment into logical groupings based on common characteristics.
Step 2: Define your objectives
Establish clear, measurable objectives for your tail spend program aligned with organizational priorities. Quantify potential savings opportunities by category using industry benchmarks and your data.
Identify key stakeholders and their priorities. Document current pain points that effective tail spend management will address to build support for your initiative.
Step 3: Develop supplier consolidation plans
Review tail spend categories to identify consolidation opportunities where multiple suppliers provide similar products. Research potential preferred vendors based on product range, pricing, service capabilities, and technology, allowing you to negotiate master agreements based on consolidated volume.
Step 4: Implement enabling technology
Select appropriate procurement technology based on objectives and requirements—typically an e-procurement platform, procurement card program, and analytics tools. Integrate new systems like procurement systems and P-cards for seamless data flow.
Step 5: Establish governance and policies
Document clear procurement policies defining how different types of tail spend should be purchased. Define approval workflows based on transaction value and risk, and establish exception processes for unusual needs.
Pair your new processes with monitoring mechanisms to track compliance and identify issues.
Step 6: Train users and launch
Develop comprehensive training materials covering both how to use new systems and why changes benefit everyone. Conduct pilot programs with selected departments before an organization-wide rollout.
Launch in phases by category or department. Provide ongoing support through help desks, super-users, and refresher training.
Step 7: Monitor, measure, and optimize
Track key performance indicators to assess program effectiveness, including savings realized, compliance rates, and cycle times. Gather feedback from users, suppliers, and procurement team members.
Conduct periodic reviews of supplier performance and pricing to identify opportunities for further investment.
Master tail spend management
Tail spend can’t be eliminated, but it can be controlled.
With effective employee education, a focus on supplier consolidation, and the use of some strategic sourcing principles, tail spend will cause you much less of a headache.
A quality spend management solution is a good move as well, as you’ll be able to easily identify and categorize tail spend, use forecasting tools to anticipate, and implement spend and access controls.
Dive into BILL, our financial operations platform, today.
Frequently asked questions
What is a tail spend example?
An example of tail spend is a company purchasing office cleaning supplies from a dozen different local vendors across its locations. Each location is spending $500 to $2,000 annually per vendor. With each location spending up to $24,000 annually across vendors, there could be an opportunity to consolidate to a single vendor to unlock volume discounts.
What is tail spend optimization?
Tail spend optimization is the process of analyzing, managing, and improving low-value, high-volume procurement transactions to reduce costs and increase efficiency. This involves identifying all tail spend, consolidating suppliers where appropriate, implementing automated purchasing channels like procurement cards, standardizing processes, and establishing controls to prevent maverick spending. The goal is to capture savings and efficiency improvements from the 20% of spending that often accounts for 80% of your supplier base and transactions.
How to do tail spend analysis?
Conducting tail spend analysis begins with gathering comprehensive spending data from all sources, including purchase orders, invoices, procurement cards, and expense reports. Cleanse and normalize this data to standardize supplier names, categorize purchases consistently, and remove duplicates. You need to identify what constitutes tail spend based on your chosen criteria. Analyze these categories to understand patterns: which suppliers you're using, what you're buying, purchase frequency, and pricing consistency. This analysis reveals consolidation opportunities, categories suitable for catalog purchasing, and maverick spending areas.
How to reduce tail spend?
Reducing tail spend effectively requires multiple approaches.
First, consolidate suppliers in categories where you have many vendors providing similar products. This could mean moving from ten office supply vendors to two, reducing total spend through volume discounts while cutting administrative costs.
Next, implement e-procurement tools like P-cards that enable employees to purchase from preferred suppliers.
Finally, negotiate master agreements with consolidated suppliers leveraging your total volume for better pricing. You’ll need to establish clear policies about authorized purchasing methods and enforce them through system controls.
Remember that reducing tail spend is a continuous process of monitoring to identify new consolidation opportunities and ensure preferred vendor programs remain competitive.
