What is tail spend?
Tail spend is often defined as the money a company spends on purchases that account for roughly 80% of total transactions, which makes up about 20% of the company's spend by volume. There is no one size fits all definition for tail spend across different businesses, or even across one business, simply because every organization and business unit’s spending is unique. What is considered tail spend in one category may not be the same in another. These purchases are often too small to go through procurement and are not frequent enough to be included in cataloged systems.
Tail spend can have many definitions, and none of them are right or wrong. Tail spend can include anything from maverick spend to misclassified purchases, so it’s important to identify what tail spend is and define what it means in your organization. It’s also important to define the length of the tail in relation to your organization’s core, strategic vendors.
What are the different ways to define tail spend?
Here are some of the most commonly adopted definitions:
Defined based on spend threshold: Any vendor with an annual spend below an arbitrarily defined number. This can range anywhere from $100k to $1 million, depending on the size of the company and its spending.
The 80/20 rule or the Pareto principle: Procurement departments always have more incentive to focus on large, multi-year contracts because of the larger savings realized. Yet this leads companies to basically ignore almost 20% of their budget. This unmanaged spend is a more traditional definition of tail spend and is typically considered the 80% of transactions that constitute 20% of a company’s spend, otherwise known as the Pareto principle. Some organizations may be at 70/30 or 90/10 but the pattern is generally the same.
Not actively managed spend: Tail spend can very simply be defined as any vendor that is not being actively or strategically managed by procurement.
It doesn’t really matter which of these you pick, just as long as the business is aligned and in agreement with the definition.
The best, and more advanced approach to defining your tail include the following:
- Get a visual representation of cleansed, normalized spend information to the best of your ability.
- Add the risk stratification so you know what spend to go after, why you want to attack that spend, and what the potential cost-savings and value add is.
- Factor in your industry-specific dynamics.