Have you ever considered the minor expenses that quietly accumulate in your company? We often focus on cutting expenses for larger purchases, but what about the numerous smaller transactions?
Introducing "tail spend," which refers to the frequently ignored expenses of a company that offer significant opportunities for cost savings.
As per Boston Consulting Group report, 27% of companies that optimized tail spend achieved annual savings between 5% and 10%, while 30% of such companies saved at least 10%.
In this blog post, we’ll look into tail spend, discuss the secret behind tail spend analysis, and look at the best practices to reduce these overlooked transactions.
Tail Spend - Definition
Tail spending, often overlooked in procurement, refers to many small-volume transactions that account for a substantial portion of a company's spending.
It accounts for roughly 80% of total transactions but contributes to only around 20% of the company's overall spending volume.
These transactions, which fall outside the conventional procurement processes, are distinguished by their dispersed nature, including many vendors and purchase orders, resulting in low spend visibility.
Although individual tail spend is minimal in value, the cumulative impact on budgets and growth prospects can be significant.
Tail spending varies for each company due to differences in spending practices. However, this category primarily includes small, infrequent, or one-time purchases, such as software, office supplies, and professional services, often avoiding the standard procurement process.
For a deeper insight into managing tail spend effectively, check out our detailed blog post: Tail Spend Management.
What is a tail spend analysis?
Tail spend analysis is a strategic technique that includes an in-depth evaluation of overlooked or minor organizational transactions. It tries to evaluate and categorize these seemingly insignificant purchases, providing valuable insights into areas where efficiency and cost savings can be achieved.
The Tail spend analysis goes into transactions that frequently fall outside the scope of regular procurement processes, revealing insight into spending trends that might otherwise go unnoticed.
Tail spend analysis often includes information from various sources, such as supplier invoices, purchase orders, contracts, and financial documents.
Businesses can improve their financial management and operational efficiency by comprehending and classifying these smaller transactions. This allows them to make educated decisions, avoid waste, and optimize spending.
How do you calculate tail spend?
Calculating tail spend includes defining criteria and classifying transactions within this often-overlooked category.
There are three popular approaches to this:
- Spend Threshold: Businesses establish a spend threshold, such as $100,000 to $1 million, below which transactions are classified as tail spend.
- Pareto Principle (80/20): The 80/20 principle, known as the Pareto Principle, applies to tail spend, where about 80% of transactions make up roughly 20% of the overall expenditure. This ratio might vary depending on specific spending behaviors.
- Not Actively Managed: Tail spend refers to transactions with vendors not actively managed by the procurement team.
For a more extensive calculation:
- Gather comprehensive transactional data covering all company purchases.
- Categorize transactions by value, frequency, and category for organized analysis.
- Establish thresholds defining tail spend based on value or frequency.
- Analyze transactions meeting tail spend thresholds for their cumulative value compared to total expenditure.
- Calculate the tail spend percentage by dividing the total value of defined tail spend transactions by overall spending.
- Based on initial insights, iteratively refine thresholds and criteria for precise tail spend management.
Tail spending can vary from ordinary office supplies to specialized services; therefore, an in-depth calculation is required for optimal procurement optimization and cost management.
Why should you reduce tail spend?
Tail spend management is primarily a cost-cutting effort. This category can easily consume 20% of total spending, a sizable portion of revenue if left unchecked.
The unregulated tail accounts for a sizable amount of total spending, and if not properly managed, these funds become untapped potential, failing to contribute to profitability.
Furthermore, an uncontrolled tail results in an unnecessary waste of financial resources, jeopardizing the organization's overall financial health.
However, the repercussions of ineffective tail spend management extend beyond mere financial considerations. Failure to identify and reduce tail spend can undermine a company's financial robustness, hinder operational efficiency, and erode overall competitiveness.
As a result, there are missed savings possibilities, ineffective resource allocation, increased operational issues, and overlooked opportunities for strategic investments.
Financial Resource Wastage: Unmanaged tail spending leads to unnecessary financial resources, compromising the organization's financial health.
Budget Depletion and Operational Difficulties: Unchecked tail spend quickly depletes budgets and presents operational difficulties, reducing overall financial efficiency.
Reduced Negotiation Power: Ignoring tail spend reduces one's capacity to negotiate favorable terms with suppliers, stifling cost-cutting options.
Compliance Risks: Unmanaged tail spending raises the possibility of non-compliance with rules and industry norms, perhaps resulting in legal troubles.
Missed Savings Opportunities: Failing to optimize tail spend implies missing out on potential savings that might help overall cost reduction efforts.
Untapped Cost-Cutting Potential: Failure to manage tail spend results in missed possibilities for significant cost reduction, affecting total profitability.
Undermined Financial Robustness: Inefficient tail spend control impairs the company's financial robustness, posing long-term financial concerns.
Best practices to reduce tail spend
Get complete visibility on tail-end spend
Visibility is critical for taming the spending tail since you can't save what you can't see. In most cases, this would involve setting up a centralized procurement system and requiring every buyer in the company to make purchases through this unified system rather than making "invisible" purchases through spreadsheets, emails, or phone conversations.
To get complete visibility, you can use a spend management platform that can integrate with your financial systems. This tool offers comprehensive spending insights, revealing individual or departmental expenses across applications. It streamlines billing and spending into a unified interface, presenting a holistic view of spend analytics and budget utilization.
Platforms like CloudEagle will help you identify tail spending quickly, and you can make the right optimization decisions just like RingCentral did.
Here’s their customer success story of reducing tail spend using CloudEagle.
Vendor consolidation strategically involves narrowing down and collaborating with a select, reliable group of vendors to enhance efficiency in procurement. This process entails assessing and reducing the vendor count, eliminating redundancy, and securing more favorable terms.
This approach yields numerous benefits. Firstly, it streamlines procurement procedures and diminishes administrative burdens by eliminating redundant applications. A consolidated vendor pool also empowers negotiation power, facilitating advantageous pricing, terms, and contract discussions.
Moreover, fostering stronger ties with a limited set of dependable suppliers promotes collaboration and innovation. It encourages mutual growth and development while adhering to ethical and regulatory standards, enhancing risk management.
Ultimately, vendor consolidation is a strategic tactic to boost efficiency, increase value, and foster mutually beneficial relationships with vendors.
Stay ahead of renewals with automation
Staying ahead of renewals through automated workflows is crucial for avoiding contract auto-renewals and reducing unnecessary tail spend.
Automated renewal workflows take a proactive approach by tracking contract renewals using a calendar, allowing organizations to prepare for renewals well in advance.
Spend management tools have renewal workflows that’ll send alerts via Slack and email 30, 60, or 90 days before renewals. This eliminates unintentional auto-renewals, giving procurement teams enough time to renegotiate terms, research alternative vendors, or rightsize unused licenses, resulting in increased savings.
Unsanctioned application renewals often slip under the radar, contributing to a rise in tail spend. With comprehensive visibility, identifying these unsanctioned applications becomes possible, enabling effective renewal tracking. This proactive approach helps prevent automatic renewals and the subsequent escalation of tail spend.
Organize and streamline your procurement process
The procurement process must be organized and streamlined to reduce tail spending and mitigate decentralized purchases. Organizations should develop clear policies and educate users on avoiding shadow purchases, stressing the importance of utilizing centralized solutions for all procurement needs.
Implementing standardized procurement processes improves consistency throughout the organization, lowering the chance of wasteful spending and improving control over expenses.
Utilizing an integrated procurement platform streamlines SaaS purchases through efficient workflows, offering users clear visibility and expediting the process. This streamlined procurement approach effectively curbs shadow purchases and simplifies user and spend management for IT and finance teams, thereby averting the escalation of tail spend.
Rationalize to remove redundant apps
Rationalizing and removing unnecessary apps is essential to streamlining an organization's operations and reducing spend. Redundant apps, frequently accumulated over time, can lead to inefficiencies, increased costs, and user confusion. Businesses should thoroughly audit their app ecosystem to detect overlaps and unnecessary redundancies.
Streamlining the software portfolio improves system compatibility, lowers maintenance requirements, and promotes a smoother user experience. Organizations save money on licensing and maintenance by removing redundant programs, improving data security, and streamlining IT support.
This approach aligns the tech stack with business needs, leading to a more agile and budget-friendly IT setup. It ensures the company invests in and sustains applications that notably enhance productivity and align with its strategic goals.
Use a Tail spend management software
According to a 2022 study, businesses that utilized technology in procurement efficiently handled much more spending and received a 2.4x return on investment from cost reductions.
Now, consider using automation to navigate this overlooked section.
Effective tail spend management necessitates appropriate tools, notably a top-tier spend management platform tailored for tail spend control. This comprehensive software is pivotal in efficiently trimming tail spend.
These platforms offer expense insights, streamline procurement, and facilitate strategic decision-making. They empower businesses to optimize expenses, consolidate vendors, and ensure adherence to regulations. Implementing such tail spend management software leads to substantial cost savings and enhanced financial oversight.
This is where CloudEagle, a prominent SaaS management and procurement platform, excels. CloudEagle's extensive capabilities give businesses complete visibility into SaaS spending, allowing them to identify and optimize tail spend.
CloudEagle streamlines the entire process, from vendor consolidation to centralized procurement, making it an excellent asset for enterprises dedicated to improving financial discipline and procurement efficiency.
With CloudEagle's extensive integration library, you gain comprehensive visibility and detailed insights into spending. Quickly pinpoint tail spend, optimize it through efficient negotiations, and streamline procurement processes. Utilize automated workflows for renewals and license reclamation to end the challenges of increasing tail spend.
Educate and train employees
Employee training and education are essential for mitigating the risks of tail spend. Companies should educate the workforce on the risks of uncontrolled tail expenditure and how it affects the bottom line.
Emphasize the benefits of centralized procurement systems while explaining the risks of decentralized purchases. Train employees on how to raise purchase requests through a unified procurement system and enforce policies to get them to follow the new approach effectively.
Make sure employees understand the consequences of not adhering to procurement procedures. By creating awareness and encouraging compliance, companies empower their staff to contribute to cost-effective and efficient procurement, protecting the company's financial health and preventing tail spend.
In conclusion, reducing tail spend is essential for businesses looking to improve efficiency and cut wasted spend. If left unmanaged, often missed transactions can have far-reaching implications, affecting financial health, operational efficiency, and overall competitiveness.
Implementing best practices such as vendor consolidation, automatic renewal workflows, streamlined procurement processes, and utilizing a powerful spend management platform like CloudEagle enables organizations to reduce tail spend, manage SaaS spending, optimize budgets, and maintain strategic alignment.
Are you ready to take control of your tail spend? Book a demo and see how CloudEagle can help you reduce tail spend.