To arrive at a proper definition of nonstrategic spend, it is best to begin with the most readily accepted definition of strategic spend. Strategic spend items are commonly defined in textbooks as goods and services that are critical to the mission of the organization. By contrast, some individuals or organizations define nonstrategic spend as “anything else.”
Generally speaking, nonstrategic spend is an umbrella term for the items that are not critical to an organization’s defined mission. In many cases, the term is made elastic enough to include “low spend value” as a mandatory requirement for this classification, but this definition is not universally applied or accepted. For example, some people employ this definition to extend the meaning of nonstrategic expenses to include rent payments and administrative costs, because these expenses lack an identifiably strategic element to them since they are not inherently mission-focused.
At times the term nonstrategic spend has even been applied to any monetary resources allocated to pay for unnecessary layers of managerial staff, or even money that pays the salaries of staff members who are unproductive in relation to the financial bottom line of the business.
No matter how subjective the definition of nonstrategic spending may be, particularly with regard to the size of the purchases that fall into the category, one of the true defining features of nonstrategic spend seems to be the insignificance of the purchase’s value to the bottom line of either a company or an individual, usually due to its unproductive nature.
By comparison to nonstrategic spend, tail spend is very specifically defined. Tail spend typically includes the individual or infrequent software purchases, professional service purchases and business purchases that fall outside of the typical large, ongoing purchases that organizations make. Usually, these purchases are too small to go through procurement, and their infrequent nature makes them incapable of being included in cataloged systems.
A simple way to conceptualize tail spend is through the understanding of Pareto’s Principle, which neatly states how 20 percent of causes are responsible for 80 percent of effects, and 80 percent of causes are responsible for only 20 percent of effects. As an extrapolation of this concept, tail spend is the final 20 percent of an organization’s spend that is serviced by 80 percent of that organization’s suppliers. This is in contrast with the 20 percent of suppliers that service 80 percent of an organization’s needs.
When any company’s purchases are categorically grouped and plotted on a chart from largest to smallest, there is a mandatory trailing off in the size of each category and the amount of money that falls within it. Unfailingly, the shape of the trailing purchase categories will take the form of a tail, which is where the term “tail spend” is derived from.
One of the reasons nonstrategic spend and tail spend are confused with one another so commonly is because the two spending categories frequently overlap. In fact, the degree to which the categories overlap is usually considerable, and it may even be virtually identical for some companies depending upon which definition of nonstrategic spend is in use.
For example, because of the way the “tail” is defined within tail spend, and because the purchases that tend to fall beneath the tail are defined as small and infrequent, they may also be commonly identified as being of low value, not critical to the overall mission of the company, and fundamentally nonstrategic. This is the most obvious way in which tail spend and nonstrategic spend might be confused for being interchangeable.
However, it only takes one or two examples to see where vast differences emerge in the way the two spending categories are conceptualized. In our first example, a one-time purchase of software is categorized as a tail spend purchase because of the infrequent nature of its purchase, and because of its relatively low dollar value in the grand scheme of business. Yet, this purchase fails the test for nonstrategic spend because of the software’s expected productivity and suspected importance relative to the overall goals of the organization. Therefore, it is a highly strategic purchase that still falls under the tail spend umbrella.
Conversely, a rent payment is categorized as nonstrategic due to the lack of a discernible strategy connected with paying rent, yet it is also disqualified from categorization as tail spend due to the fact that the aggregation of rent as a set of payments would force it to fall well outside of the tail when plotted on a chart. Therefore, this is a nonstrategic spend item that fails the test to be classified as a tail spend item.
One other element we can’t ignore is the after-the-fact way in which nonstrategic spend is often categorized. While tail spend operates under a fixed definition, nonstrategic spend is a label that can be applied to purchases that were thought to be strategic at the time they were purchased, but are now considered to have been a misallocation of resources due to poor planning, mismanagement or other factors. Tail spend items are defined by where they fall on a chart, and not by opinion.
Regardless of the variances in the ways nonstrategic spend and tail spend might be evaluated, it is critical for organizations looking to squeeze the utmost savings out of their processes to address both, and software now exists that allows procurement leaders to efficiently manage both categories no matter how thoroughly they overlap.