Tail Spend Management: What, Why, and How?

Understanding where your business is spending money and where it should be spending its money is a core tenet of any fiscally responsible brand.

However, one area where things can quickly spiral out of control for many businesses is in the area of tail spend. With so many of the company objectives being focused on the expenditure which is directly related to the core operations of the business, it can be easy to lose focus on ancillary spend on products and services which are not.

Tail spend can be challenging to effectively control but getting a handle on this expenditure can help turn your business into a more efficient and profitable machine. Thankfully, there are many technologies and strategic frameworks available today which can help make the task significantly easier and more accurate than it has been for previous generations.

Tail Spend

When we talk about tail spend, we are referring to any expenditure which is not actively managed in all spend categories and does not have a direct and obvious impact on overall business performance. However, due to its impact on categories such as selling, general and administrative expenses, and cost of goods sold, tail spend can influence financial performance more than many organizations realize.

• Tail spend can include, but is not limited to:
• Off contract spend
• Fragmented spend
• Low value spend
• Non-PO spend
• Commercial/one-time vendor spend
• Unclassified/incorrectly classified spend
• Maverick spend

However, your organization defines tail spend, if left unmanaged, these expenditures can quickly increase in significance and indirectly harm the bottom-line financials of the business.

Why?

Tail spend management has, broadly speaking, three main objectives – spend coverage and savings, process improvement and optimization, and effective spend management.

Spend coverage and savings aims to increase the coverage of spend managed by the sourcing firm while improving the visibility of low value spend which can easily slip through the cracks. Organizations need to identify and implement opportunities for sourcing savings and eliminate unnecessary transactions, reducing the overall cost of the indirect procurement sector within the company.

This can only be achieved by improving and optimizing the processes which drive these functions. Data quality needs to be increased so fewer tail spend expenditures go unnoticed. Increasing contract coverage and compliance reduces business risk, as does the elimination of trivial suppliers.

Combining all these factors will create a culture where your organization is able to far more effectively manage tail spend. Your supplier base will become more diverse and maverick spending and outright frauds will be drastically reduced, if not eliminated altogether, through increased compliance with internal procurement policy and external laws and regulations.

Data Maturity

The number one reason we see businesses fail to effectively manage tail spend is due to the poor quality of their internal data and a low level of maturity when it comes to analyzing and tracking that information.

Incorrect supplier and material names, incorrect or absent data linkages, duplicated information, junk characters in the database are just a few examples of how low-quality data can lead to your organization losing track of where expenditure is being lost and cripple your ability to detect and manage it. Low quality external data such as siloed information from a large number of suppliers and decentralized policies and process also conspire to make the situation even more untenable.

We know how important data maturity is to a modern organization and we’ve been stating for years the harm siloed and low-quality information can do to an organization’s ability to track expenditure and the impact it has on the financial performance of the business. These conditions create a petri dish where bad practices, maverick spending, and unauthorized or even criminal spending practices can easily thrive and multiply.

You need to create a culture where spend data is repeatedly refreshed and classified to increase visibility of tail spend; sourcing levers such as contracts, rapid RFx, spend aggregation, and vendor rationalization are deployed; and procure to pay methods such as catalogues, punch-outs, P-cards, and E-invoicing are leveraged to increase compliance and efficiency, and reduce transaction costs.

An adapted form of the Kraljic Matrix can be deployed here to create an effective framework for ongoing tail spend management within any organization:

(Image source: infosysbpm.com)

Final Thoughts

Getting hold of tail spend needs to be a priority for any business looking to maximize the financial performance of their operation. Without an effective tail spend management program in place, bad practices can be given a place to fester, and expenditure can quickly spiral out of all control.

Tail spend is sure to be a hot topic at ProcureCon Indirect West 2023, being held in February and March at the Hilton San Diego Bayfront, San Diego, CA.

Download the agenda today for more information and insights.