Despite its seemingly low value, tail spend can be a significant source of inefficiency, leading to hidden costs and missed savings opportunities. Managing tail spend effectively is crucial for procurement managers and finance executives who aim to optimize spend and increase transparency across the organization.
According to Deloitte, tail spend is traditionally considered the weak link of spend management. This is mainly because purchases in the tail account for only one-fifth of total spend but constitute the vast majority of its volume. However, with innovative solutions now available, companies can enhance their tail spend management with minimal effort, leading to potential P&L savings of up to 20% of total spend in scope.
This guide will explore the importance of managing tail spend, strategies for improving spend visibility, and benefits of leveraging modern tools to unlock cost savings.
What Is Tail Spend Management?
Procurement spend is generally categorized into two main categories: direct spend and indirect spend. Tail spend falls under indirect spend and is often described as the “long tail” of procurement.
- Direct spend refers to expenses directly related to the production of goods or services a company provides – raw materials, manufacturing components, and anything else that’s essential to the company’s core operations.
- Indirect spend covers all non-production-related expenses, such as office supplies, maintenance, repair, and operations (MRO), utilities, and marketing services.
Tail spend typically accounts for a small portion of the total spend—around 20%—but involves a disproportionately high volume of low-value transactions.
Examples of tail spend include office supplies, basic maintenance services, and MRO parts – transactions considered low-risk and low-priority. Collectively, they can have a significant impact on an organization’s overall budget if left unmanaged.
According to industry experts, firms that use digital tools to manage tail spend can reduce their annual expenditures by 5% to 10% on average. On the flip side, unmanaged tail spend can lead to fragmented supplier bases, a lack of visibility into expenses, and missed opportunities for cost savings.
Figure 1: Tail Spend (y axis) vs. Supplier (x axis) (Source: Deloitte)
Read more about effectively managing direct and indirect spend in our blog.
Common Challenges and Misconceptions About Tail Spend
A common belief about tail spend is that, because tail spend only makes up around 20% of the total budget, it doesn’t warrant significant management effort. However, while the dollar value is relatively low, the volume of transactions in tail spend can lead to inefficiencies and hidden costs.
Additionally, tail spend is often spread across many small suppliers, which can result in a lack of transparency and visibility into where money is being spent. This fragmented approach creates an environment where maverick spending – or uncontrolled purchases – can thrive, leading to unnecessary costs and compliance risks.
Many procurement teams may also lack the tools or resources to properly address tail spend, leading to the perception that it’s too complex to manage effectively.
Types of Spend & Their Risks
The tail spend management framework is designed to help organizations categorize and manage their spend by focusing on two key dimensions: risk and value. Here’s a breakdown of the different types of spend and associated risk:
- High-Risk, High-Value Spend: Critical procurement categories, such as direct production materials or strategic partnerships, where close management and negotiation are crucial.
- Low-Risk, High-Value Spend: Recurring purchases or essential services that aren’t critical to production but still require careful management. An example might be IT software contracts, where significant savings can be achieved through strategic sourcing.
- Low-Risk, Low-Value Spend: This is where tail spend fits in. Transactions such as office supplies, basic maintenance services, or MRO (Maintenance, Repair, and Operations) parts are often overlooked because they are individually insignificant but collectively represent a large number of transactions. These categories are ideal for automation or outsourcing to reduce the administrative burden and capture savings.
- High-Risk, Low-Value Spend: Less common but can include specialized goods or services that have a high risk of disruption but do not represent a significant financial outlay.
This framework provides insight around how to allocate resources more effectively, ensuring that high-value, high-risk transactions receive the attention they require, while low-value, low-risk transactions (which often make up tail spend) are managed more efficiently through automation or streamlined processes.
Benefits of Optimizing Tail Spend Management
According to Deloitte, by 2025, more than 20% of B2B transactions will be procured through marketplace and/or consolidator solutions – and this could expand well outside the tail spend category. As such, it’s extremely important to address tail spend through automated solutions, to capture cost savings and improve efficiency.
Using a powerful procurement or spend management solution to effectively manage tail spend has major benefits for example:
1. Reduce Manual Purchase Orders (POs): Managing purchase orders (POs) manually is time-consuming and prone to errors, particularly when dealing with high-volume, low-value transactions typical of tail spend. By automating PO creation, organizations can streamline the procurement process, reducing the administrative burden on teams.
For example, a company using an automated PO system for office supplies no longer needs to manually generate and approve each purchase. Instead, POs are created automatically when stock reaches a certain threshold, saving time and minimizing errors.
2. Automatic Invoice Handling: Tail spend transactions often generate a high volume of small invoices, which can bog down accounting departments. Automating invoice processing allows organizations to handle large numbers of invoices without manual intervention, speeding up the payment process and reducing the risk of errors or late payments.
If a retailer dealing with thousands of small suppliers implements automatic invoice matching he can reduce manual effort, allowing the accounting team to do higher-value financial tasks.
3. Electronic Invoice Management: Electronic Invoice Management (EIM) centralized invoice processing into one digital platform, ensuring all invoices are captured, processed, and stored electronically. This eliminates the need for paper invoices and manual tracking, while providing visibility into all invoices in the system, enabling faster approvals and audits.
A healthcare company shifted to EIM to handle tail spend in office maintenance. With all invoices processed and stored electronically, they can cut approval times by up to 50% and reduce storage costs.
4. Spot Buying and Competitive Pricing: Spot buying involves making unplanned or ad-hoc purchases, often at market prices. By leveraging digital procurement platforms, organizations can source tail spend purchases more strategically through competitive pricing or auction mechanisms.
A manufacturing firm that previously purchased MRO parts through various small suppliers at inconsistent prices can leverage a digital procurement platform to compare offers from multiple suppliers, achieving a 15% reduction in procurement costs.
5. Focus on High-Level Tasks and Sourcing Projects that Add Value: When tail spend is automated, procurement professionals have more bandwidth to dedicate to high-level strategic initiatives, such as negotiating large contracts or improving vendor relationships. These tasks add significant value to the organization, as they directly impact cost savings and operational efficiency.
6. Eliminate Maverick Spend: Maverick spend occurs when employees make purchases outside of approved channels, often resulting in higher costs and reduced visibility. Tail spend automation standardizes the procurement process, ensuring all purchases go through approved channels, thereby reducing maverick spend and improving compliance.
For example, a logistics company that implements automated procurement for all tail spend categories may see maverick spending decrease by 20%, as employees are required to use approved suppliers – a process that ensures better pricing and compliance with procurement policies.
A catalog-based buying experience streamlines procurement by allowing users to easily browse, select, and purchase from pre-approved catalogs within an eProcurement platform, promoting efficiency and cost control. For more details, check out the eProcurement datasheet.
Strategies for Effective Tail Spend Management
Starting a tail spend management initiative involves a thorough assessment of current practices, along with a strategic plan to centralize, standardize, and automate the procurement process. Here are some key strategies for success.
Centralization and Standardization of Procurement Processes
Consolidating procurement through a centralized platform improves visibility, control, and compliance. Standardization ensures that all low-value purchases are processed through the same channels and according to company policies, reducing administrative overhead and maverick spend.
Automation and Technology
Automation is essential to streamline tail spend management. eProcurement tools help organizations automate processes such as purchase order creation, invoice matching, and spend analysis, reducing manual effort and improving procurement efficiency.
Supplier Consolidation and Strategic Sourcing
Reducing the number of suppliers serving tail spend categories allows for better pricing negotiations and stronger supplier relationships. Consolidating suppliers into strategic partnerships simplifies procurement while unlocking potential discounts and cost savings.
Spend Management and Compliance Policies
Ensuring adherence to procurement policies is critical for managing tail spend effectively. Implementing clear policies and monitoring compliance helps to reduce maverick spending and ensure purchases align with business objectives. It also helps to maintain process consistency.
Catalogs or Other Automated Buying Channels
Using pre-approved catalogs simplifies the buying experience by providing employees with access to pre-negotiated products and services. This reduces the likelihood of unauthorized spending and ensures all purchases are made at negotiated prices.
For example, Ivalua’s eProcurement platform offers an Amazon-like buying experience, providing users with easy access to catalogs of approved suppliers and products. This streamlined approach to purchasing not only boosts compliance but also ensures competitive pricing across all tail spend categories.
According to Deloitte, “Catalogs or other automated buying channels enable procurement teams to move certain categories from unmanaged to managed spend, leading to more sustainable and significant savings.”
Case Study: Körber – Digitization Across Direct and Indirect Spend
Ivalua customer Körber, an international technology group with about 10,000 employees and more than 100 locations worldwide, successfully tackled challenges related to tail spend and maverick spending through Ivalua’s Source-to-Pay (S2P) platform.
By implementing Ivalua, Körber centralized and standardized their procurement processes, significantly reducing maverick spend and improving supplier compliance.
The platform’s automation capabilities empowered Körber to gain better visibility into their spend, streamline workflows, and optimize supplier management, ultimately leading to improved cost savings and procurement efficiency.
Read the full Körber case study to discover how they effectively manage tail spend..
Choosing the Right Spend Management Software
Below, we outline several criteria to focus on when evaluating and selecting a procurement spend management software for managing tail spend:
- Comprehensive Spend Coverage: The software should manage all types of spend, including direct, indirect, assets, products, and services. This ensures full visibility and control over procurement activities across the organization.
- Procurement Process Efficiency: Shifting the bulk of invoices from 3-way matching to 2-way matching for invoice processing, tail spend management, and PCard (Procurement Card) management. Streamlining this process speeds up workflows, reduces manual errors, and increases procurement efficiency.
- Ease of Use & User Experience: An intuitive, centralized eProcurement experience is crucial for driving adoption across the organization. Solutions like Ivalua offer an “Amazon-like experience,” where users can easily browse approved catalogs, place orders, and ensure compliance with procurement policies.
- Holistic Supplier Management: The software should provide a unified platform to manage all suppliers, ensuring transparency and compliance. Effective supplier management is critical for reducing maverick spend and fostering better vendor relationships.
Ivalua’s Source-to-Pay (S2P) software offers a comprehensive solution for tail spend management, providing a centralized eProcurement experience that spans all types of spend and processes. Watch our demo to learn more.
Future Trends in Tail Spend Management
AI and automation will play a big role in revolutionizing procurement processes in the coming months. AI-driven tools can analyze procurement data to uncover trends and automate tasks like purchase order creation and invoice processing, reducing manual work and ensuring compliance. This helps to control maverick spend and improve cost savings.
Predictive analytics is also becoming a key tool, leveraging historical data to forecast future needs and uncover savings opportunities. This proactive approach helps procurement teams negotiate better deals and manage risks more effectively, further enhancing efficiency and decision-making.
Manage All Spend With Ivalua
Effective tail spend management is crucial – and digital solutions such as Ivalua’s Source-to-Pay platform can help you centralize and standardize procurement while providing a user-friendly, “Amazon-like” buying experience.
Take a moment to assess your current tail spend management strategy. Are inefficiencies costing your organization? Explore Ivalua’s Source-to-Pay platform to learn how it can help you optimize your procurement processes, improve visibility, and drive significant savings.
