Vendor Management

  • 11 min read

Tackling Tail Spend in SaaS: Managing Unseen Costs

Tathagata Chakrabarti

1st January, 2024

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Effectively managing tail spend is crucial for controlling unauthorized spending, impacting a company's financial performance and operating margin. In our exploration, we'll delve into the fundamentals of tail spend, examine key examples, and offer insights into tailored strategies for effective management.

Tail spend often receives less attention despite its widespread recognition in the business landscape. Nearly every company contends with tail spend-related challenges, whether consciously or inadvertently. While these expenses are commonly perceived as benign, effectively managing them can confer a competitive advantage.

Now, delving specifically into SaaS tail spend, what exactly does it entail, and how can one navigate its management efficiently?

What Is Tail Spend?

"Tail spend" refers to the invisible purchases made by a company that escapes budgetary and tracking oversight. 

Even though each organization's definition of "tail spend" varies slightly depending on its spend control systems, tail spend is any low-value indirect cost that passes without formal approval.

Over time, the definition has evolved. Ad hoc expenditure and unclassified supplier purchases low in volume, frequency, or value are now referred to as tail spend. 

Point to be noted: There are other names for tail spend, including rogue spend and maverick spend. 

Also, tail spend isn't always detrimental. Petty cash purchases and other costs like strategic "spot buying" are common and expected expenses in many firms. However, not all wasteful spending is tail spend. 

To help you understand better, here are some common examples of tail spend. 

Examples of Tail Spend

Tail spend may include online purchases, which aren't considered entertainment spending, nor do they contribute to your overall meeting budget. In addition, tail spend includes gift cards or rewards points that don't count toward other spending categories. 

Below, we've gathered a few tail spend examples:

Spot Purchases

A stakeholder may need a cheap tool to make their work easier. However, this one-off purchase must meet the qualifications for a high-value purchase and approval process. In this situation, the spot purchase can be given an informal "yes" by the department head or finance manager and moved to tail spending or a discretionary budget.

Although this purchase has been approved, the company ultimately classifies it as overhead or tail spend. If these purchases start to become commonplace, tail spend will eventually rise.

Tactical Buys

An organization or department may occasionally need to launch a software tool swiftly. Sometimes, this urgency is brought on by problems with the supply chain, adjustments to the project schedule, or the introduction of fresh, short-term initiatives that call for quick action. 

In any case, the necessity of these purchases may lead to departments skipping the standard procurement procedure. Therefore, implementing after-action measures to link purchases made in deviation from the usual clearance process back to the original budgets is crucial.

E-marketplace Spend

Marketplace spend comprises products and services that usually offer low margins and high volumes or vendors with existing relationships with your organization or pre-existing accounts. Simply put, the most common and predictable purchases all businesses make fall under this spending category. 

Some of the marketplace expenses can be power tool batteries, stationery (papers, pens, folders, and more), mugs, paper cups, laptops, printers, and other office furnishings that need attention. As these purchases represent a significant amount of a company's transactions, the speed and efficiency of the transaction are far more critical.

Now that you have got a brief understanding of tail spend, let's move forward and learn what causes tail spend in SaaS.

What Causes Tail Spend In SaaS?

Tail spend in SaaS can be caused by several factors, and understanding these reasons is crucial for effective spend management. Here are some common causes of tail spend in SaaS:

• Ad-Hoc Purchases: Individuals or departments within an organization making unplanned or ad-hoc SaaS purchases without central oversight can contribute to tail spend.

• Lack of Centralized Procurement: When there is no centralized procurement process for SaaS solutions, different departments may independently subscribe to various services, leading to uncoordinated spending.

• Shadow IT: The use of SaaS applications without the explicit knowledge or approval of the IT or procurement departments can result in uncontrolled spending and contribute to tail spend.

• Subscription Sprawl: Over time, an organization may accumulate numerous SaaS subscriptions, some of which may become redundant or underutilized, leading to unnecessary costs.

• No Clear Approval Process: Without a well-defined approval process for SaaS purchases, employees may acquire subscriptions without proper authorization, leading to uncontrolled spending.

• Failure to Leverage Negotiation Opportunities: Organizations may miss opportunities to negotiate better terms discounts, or consolidate subscriptions, resulting in higher overall costs.

• Changing Business Needs: Evolving business requirements and priorities may lead to the adoption of new SaaS solutions on an ad-hoc basis, contributing to tail spend if not managed strategically.

So, to address the above challenges, you need to opt for a tail spend management system, which will help your team to identify areas to effectively reduce tail spend and accordingly work on it. But what exactly is included in tail spend management?

What Is Tail Spend Management?

Tail spend management includes controlling, mapping, and organizing purchasing expenses across all non-strategic suppliers. This approach enables companies to streamline their supplier base and also helps gain enhanced visibility into expenditures and potential savings.

But what benefits will companies get by managing tail spend?  

Benefits Of Managing Tail Spend 

Here are some advantages of effectively managing tail spend:

• Optimizing Savings

Implementing control measures for tail spend leads to more prudent spending, ensuring adherence to budgets and facilitating substantial savings. As per several surveys, managing tail spend effectively can yield overall savings ranging from 5-20%. 

Basically, tail spend management helps identify non-compliant spending and uncover irregularities in invoicing. This proactive approach contributes to efficient contract management and empowers you to eliminate redundant services effectively.

• Refined Budget Forecasting

Maintaining a consistent budget is vital for accurate profit and loss predictions. Managing tail spend provides a comprehensive view of expenditures, allowing for more precise financial forecasting. This enhanced insight into tail spend helps address uncertainties that often arise due to limited visibility beyond the primary supply chain level, positively impacting both revenue and expenses.

• Cost Reduction 

Tail spend analysis offers valuable insights that aid in minimizing maverick spending (unauthorized purchases), rogue spending, adjusting procurement needs, consolidating vendors, and establishing transparent purchasing processes. Also, centralizing procurement systems improves spend visibility and mitigates potential vendor risks.

• Improved Compliance and Stakeholder Satisfaction

Tail spend management prevents unauthorized spending and ensures compliance with internal and external policies. Adopting streamlined procurement processes through automated systems shortens purchasing cycles, enabling procurement staff to concentrate on value-added tasks. This, in turn, contributes to enhanced compliance and increased satisfaction among stakeholders.

Now that you've discovered the advantages of managing tail spend, you may be eager to learn how to effectively manage your tail spend and harness these benefits.

How To Manage Your SaaS Tail Spend For Greater Cost Savings?

While SaaS tail spend seems like small expenses, if they occur frequently they can become uncontrollable expenses. Also, these often overlooked expenses can contribute to bigger problems such as understaffing, underfunded offices, and missing sales targets. To avoid these problems, it's essential to maintain healthy margins and manage your tail spend effectively. 

So, to help you effectively manage your organization's SaaS tail spend, we've listed below some of the best-proven ways. 

• Identify Your Tail Spends   

It is crucial to identify and categorize the parts of a business that are spending a lot of money on items with little or no bearing on revenue generation or profitability. The initial stage of identifying tail spend is collecting and identifying spend data from all sources. After that is accomplished, the following stage defines tail spend in relation to the particular organization. Finally, your finance team needs to calculate your tail spend by evaluating the spend-to-supplier ratio. 

After completing the first three phases, you, as a manager, need to segment commodities with high-tail spend. Once done, begin searching for ways to reduce and eliminate costs at both the transactional and spend levels.

The segments are: 

• Hidden tail: The largest suppliers to the company are found in the 'hidden tail,' and they are frequently handled as part of strategically managed spend.

• Head of the tail: This segment contains the spend that is not carefully planned or strategically managed.

• Middle of the tail: Purchases in this section come from many suppliers. However, it is not strategically managed because of the low spending per provider.

• The tail of the tail: The suppliers at the end of the list are those who spent less than $2,000.  

• Strengthen Internal Processes

All internal processes need to be streamlined to improve spend management. This will make data more accessible, reduce the overall number of suppliers, and enable your finance team to closely monitor expenditures.

Furthermore, an e-procurement system can streamline purchasing and help you save money. For example, your employees can fill out formal purchase requisitions before converting them to purchase orders. This will reduce spending outside any strategically managed contracts, and the system should include an approved vendor list and products to choose from.

So, overall, all internal processes that have been optimized need to be aligned with the organization's ultimate purpose. That transforms tail spend into strategically controlled spending and directs it toward catalogs or other automated purchasing channels.

• Organize The Data

The next stage is arranging the actual data after you have chosen the scope and determined the business systems and sources that contain the data. Spend awareness will increase due to the cleaning, classifying, and analyzing spend data, allowing for wise business decisions.

After beginning your purchase in this manner, you'll need to monitor progress using a variety of tail expenditure KPI metrics, including:

• Cost avoidance and reduction.

• Cost of transactions.

• Improved spend transparency.

Note- Integrating big data and analytics, AI, automation, and digital platforms into your tail spend management techniques is the key to effectively leveraging data.

• Establish A Strategic Supplier Alliance

For any company, it's crucial to have a strategy and execution plan to establish vendor partnerships that provide vital product features, technical innovation, or a different user experience. 

Moreover, the danger and opportunity for overspending are significantly reduced by shifting away from transactional vendor relationships and toward a cooperative supplier base.

By reducing the number of suppliers you work with, Finance and Accounts Payable will have less to maintain and manage in terms of different relationships and thousands of duplicate invoices. In addition, your top and bottom lines will gain due to increased chances for better pricing and supplier performance by strategic supply chain management.

• Optimize Spend Through Automation & Eliminate Redundant S/pends

Most companies spend tens of thousands of dollars purchasing software and making it work with their infrastructure but don't realize the amount of time and money they could save if they automated their processes. 

IT Managers need to always look for ways to reduce costs. So, you as a manager can opt for an advanced automation tool to manage your SaaS tail spend. These tools are designed to help your finance and procurement team centralize spend data and streamline your software procurement process. This, in turn, helps in effectively managing spend and makes it easier to procure new software at a lower cost.

Also, by sifting through expenditure data and locating pointless or redundant purchases, spend management software automatically spots the potential for savings. To automatically enforce your corporate standards and keep staff in check, you can issue cards with pre-approved expenditure limitations connected to your spend management systems. 

However, going through numerous tail spend software and tail spend management companies in the market can be overwhelming, leaving you unsure about the right choice. To streamline your decision-making process, it's essential to outline your needs, objectives, and desired features and prioritize data security and other factors. 

Amidst the options, one tool that stands out among the rest of the competitors is Zluri. What is Zluri? How does it manage your SaaS spend? Let's delve into a quick overview.

Effortlessly Manage Your SaaS Spend With Zluri 

Zluri stands as a cutting-edge SaaS management platform designed to enable your finance team in efficiently managing SaaS spend, while simultaneously aiding your procurement team in securing software at the best deal. How does it do that? Zluri's SMP offers exceptional features, such as license management, renewal management, SaaS procurement capabilities, and more, that help your teams minimize SaaS expenses and optimize existing resources effectively.

This was just a glimpse of what Zluri is capable of. To provide you with a clearer understanding, let's explore each capability that contributes to effective spend management.

• Helps Identify Hidden Spend 

Zluri's SMP helps your team discover all the SaaS apps present in your organization's SaaS stack with its 5 discovery methods, i.e., SSO or IDP, finance & expense management system, direct integrations, browser extensions (optional), and desktop agents (optional). 

This allows your team to eliminate shadow IT, which helps your finance team identify which application subscriptions they are paying for. 

Furthermore, with Zluri's SMP, your team can acquire all the app details that help analyze which app offers similar functionalities. Accordingly, your finance team can discontinue the subscriptions for duplicate and redundant SaaS apps, cutting down on SaaS costs.

However, Zluri's SMP doesn't stop here; it provides details of underutilized and unused licenses; with the help of this data, your finance team can decrease, reallocate, or right-size the licenses. 

Apart from that, to find the hidden charges, Zluri provides your finance team with the cost and actual spend (YTD) data, which helps them to identify the difference and obtain accurate expense data.

• Effectively Manages SaaS Renewals To Prevent Unnecessary Expenses  

With Zluri's renewal calendar, your finance team stays informed about upcoming renewals. This enables them to make well-informed decisions regarding the continuation or cancellation of subscriptions and contracts by assessing app usage prior to the deadline. Furthermore, the renewal calendar allows your finance team to see all payments and contracts month by month.

Additionally, it provides the flexibility to prioritize renewals according to specific needs. For example, if a payment is substantial, your finance team can prioritize that renewal. 

Apart from that, they have the option to set alerts manually, ensuring they stay informed about critical renewal deadlines at their convenience.

However, by default, your finance team will receive timely alerts for contracts 30, 15, 7, and 1 days prior to renewal, while for payments, they will receive alerts 7 and 1 days prior to renewal. This comprehensive system ensures they have full control and visibility over the renewal processes.

• Keeps Track Of Software Usage 

Zluri's SMP offers your finance team valuable software usage insights. These insights help them identify which employees are actively utilizing specific app features and which remain untouched. 

With the help of this data, your finance team can make informed decisions and shift to a more suitable tier or downsize to a suitable tier, ensuring they only pay for the features the employees are actively using. This intelligent approach optimizes resource allocation and reduces the chances of SaaS cost leakage.

Monitors Employees/Department App Usage  

Zluri's SMP helps your team track employee/department app usage. By doing so, you can unlock opportunities to minimize SaaS expenses. 

For instance:

• With applications that are frequently used and crucial for employee roles, your finance team can negotiate a multi-year deal with the vendor. This way, your team can save costs in the long run. 

• Applications that employees don't use but are crucial for their roles, your finance team can find suitable substitutes for the app. By doing so, your team can avoid unnecessary expenses and provide employees with the required applications. 

• Applications that employees neither use nor are critical for their job functions can be discontinued altogether. By simply discontinuing the app licenses, your finance team can eliminate unnecessary costs associated with unused software.

As for departments, your finance team needs to find which application licenses are used or underutilized by each department.  

By carefully assessing usage patterns and aligning them with the importance of each application, your finance team can optimize SaaS costs and make informed decisions.

• Offers SaaS Buying Capabilities To Help Acquire Software At the Best Price  

Further, Zluri offers SaaS buying capabilities, making app purchasing less complicated. It allows experts (procurement professionals) to negotiate for the best deal on behalf of your procurement team while procuring a new SaaS app. These experts use two negotiation ways, i.e., ZOPA (Zones of Possible Agreements) and BATNA (Best Alternative To a Negotiated Agreement). 

Let's take an example to make you understand better: you have a budget of $ 40,000 and want to purchase a SaaS from a vendor. When you conduct market research, you find out that vendors offer the required app for between $35,000 and $ 45,000. So, in this scenario, the ZOPA is the difference between your spending limit and the vendor's price range of $35,000 to $45,000.

With the help of this information, Zluri's experts can confidently negotiate on your behalf and get the SaaS app for a price closer to $35,000 while ensuring the vendor makes a profit. 

Another scenario can be considering that you and a vendor are negotiating a new service agreement. Your preferred vendor is charging $20,000 per year for the service. However, you have received estimates for $17,000 and $15,000 annually from other vendors who are giving the same services. In this case, your best option is to choose one of the other vendors if the desired vendor's price is out of your price range. 

With this knowledge, Zluri's experts can bargain with the preferred vendor to try to get the service for closer to $17,000 or $15,000 annually. Also, you can use your BATNA and select a different vendor if the preferred vendor cannot match this price.

So this is how Zluri helps your finance team optimize your SaaS spend effectively. You can book a demo now and see for yourself how it significantly reduces your SaaS expenses from day one of deployment. 

SaaS Tail Spend: An Expense That Cannot Be Overlooked 

In conclusion, effective management of SaaS tail spend is crucial for organizations seeking to optimize their resources and enhance overall financial efficiency. By strategically addressing often overlooked indirect spend, streamline procurement processes, and ensure a more transparent and controlled expenditure landscape. 

Using advanced tools such as Zluri can further help your teams make informed decisions, from managing renewals intelligently to prioritizing critical expenses. As businesses continue to navigate the dynamic landscape of software procurement, the mastery of SaaS tail spend management stands as a key driver for sustainable cost reduction, improved compliance, and enhanced operational efficiency.

FAQs

What Does Tail Spend Mean in procurement?

In procurement, tail spend is commonly recognized as the portion an organization spends on purchases that encompasses roughly 80% of transactions but only 20% of the total spend.

What Is Tail Spend Sourcing?

Tail spend sourcing is a short-term solution that hampers the realization of over 70% of the value that should rightfully benefit the purchasing organization. This is evident for at least five reasons: Unmanaged Spend does not equate to a Spend Category. Tail Spend is not a distinct spend category and, as such, cannot be effectively sourced as one.

About the author

Tathagata Chakrabarti

Tathagata is a Technical Content Writer with 4+ of experience in the SaaS industry. He has a keen eye for research and understanding macro trends in the SaaS & AI-based technology space. He has worked across several marketing & strategy roles in various domains like banking, e-commerce, and education sectors. In his leisure time, Tathagata is a full-time PC gamer.