What is tail spend and how can we manage it?

Tail spend, a concept that is acknowledged in procurement departments but rarely addressed, is finally getting its time in the spotlight. Tail spend is software, professional services and business purchases that are outside the typical large, ongoing purchases that organizations make. These purchases are often too small to go through procurement and are not frequent enough to be included in cataloged systems. An easy way to think of it is the 80 percent of suppliers that represent just 20 percent of an organization’s spend, following Pareto’s principle.

When you boil it down, the most difficult aspect of tail spend management is lack of data visibility. This can happen for a number of reasons such as procurement and contract management running on separate systems, siloed subgroups within the same organization (when they may be using the same vendors and resources), high numbers of vendors and decentralized policies.

What are the first steps towards managing tail spend?
Identify it

Since tail spend can include anything from maverick spend to mis-classified purchases, it’s important to define what it is and where this is happening within your organization.

Streamline internal processes

In order to save money and gather relevant data it is imperative to have centralized processes and that they are enforced. Streamlined processes mean better payment terms with frequent suppliers across departments and can lead to more strategic buyers within your organization.

Put your data to work

Once you’ve streamlined your internal processes, organizing, classifying and analyzing spend data will lead to greater spend awareness, informed purchases and decisions.

One study conducted by The Hackett Group estimated that 7.1% savings on average can be achieved by better managing tail spend, which often comes along with a reduction in time spent per purchase and increase in bids per RFQ. By properly managing this spend some of your biggest cost and time savings can ultimately come from your smallest purchases. Utilizing digital technologies to identify, track and manage your tail spend will result in greater cost savings, risk reduction and efficiency.

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