12th December, 2022
TABLE OF CONTENTS
Tail spend management can be time and resource-consuming. It actively controls rogue spending, which favors the company's financial performance and affects the operating margin.
In this article, we'll cover the basics of tail spend, the vital examples of tail spend, and how to manage tail spend to avoid many problems that could contribute to major difficulties for an organization.
These days, procurement departments have to be smart shoppers—and a key part of that is optimizing tail spend for your business.
Even though the idea of tail spend is well known, it is rarely properly optimized. Regardless of size, every firm has, whether they are aware of it or not, experienced tail spend problems. Even though this spending is generally safe, keeping it under control can give you a competitive edge.
Procurement departments should re-evaluate the spending habits of their direct spend areas to see if they can save money on both a quantitative and qualitative level. The best way to accomplish this is through the indirect cost perspective, which shows that certain items could have been purchased more efficiently at a lower overall expense.
So, what is the big deal with tail spend? Why is it necessary for organizations to comprehend just how much money is at stake? What you cannot see, you cannot control; therefore, bringing tail spend under control is a crucial method for overall cost management and savings.
Let's examine what tails spend is in detail and how your organization can manage it.
The term "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, in general, tail spend is any low-value indirect cost that passes without going through a formal approval process.
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. Most businesses don't prioritize tail spend management for this reason. There are various names for tail spend; these include rogue spend and maverick spend. It's the covert purchases that organizations undertake outside the agreements it has with their primary suppliers, frequently without the procurement team's knowledge.
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. A robust budget and approval procedures should be used to monitor and manage the entire process.
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. We've gathered a few spend examples below:
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.
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.
When no systems are in place to manage contracts or track licenses, unauthorized auto-renewals thrive. Mainly, purchases made without approval, like those made using a company card or through an expense report, may continue to auto-renew and cost the business money.
Even worse, if billing owners move on or leave in some circumstances, the renewal may get lost in the flurry of email reminders. This is a costly and widespread example of unintentional tail spend that leads to the gradual inflation of software costs.
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 made by all businesses fall under this category of spending.
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.
Tail spend is the small stuff — like a cup of coffee here and there or even a little bit of dry cleaning. While these seemingly small expenses can add up when they happen frequently, they often 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.
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 is to define tail spend in relation to the particular organization. Finally, you must calculate your tail spend by evaluating the spend-to-supplier ratio. Any purchasing suppliers outside of the 20% with the greatest spend are referred to as tail spend.
After completing the first three phases, you must segment commodities with high-tail spend and 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.
All internal processes must be streamlined to improve spend management. This will make data more accessible, reduce the overall number of suppliers, and enable you to monitor all expenditures closely.
An e-procurement system should streamline the purchasing process and help you save money. For example, your employees must 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.
All internal processes that have been optimized should assist the organization's ultimate purpose - transforming tail spend into strategically controlled spending and directing it toward catalogs or other automated purchasing channels.
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, classification, and analysis of 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.
Integrating big data and analytics, AI, automation, and digital platforms into your tail spend management techniques is the key to effectively leveraging data.
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. 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.
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 teams should always look for ways to reduce costs and better manage their IT infrastructure. By centralizing spend data and creating advanced automation tools, you can streamline your software procurement process and make it easier to procure new software at a lower cost.
By sifting through expenditure data and locating pointless or redundant purchases, spend management software automatically spot 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.
If you keep track of your SaaS landscape, you are gaining out on SaaS benefits and increasing SaaS spending. Zluri assists IT teams in eliminating SaaS wastage and enables total control and visibility over your SaaS stack. It handles your SaaS spend and keeps track of your cost and the applications in use. It understands your SaaS ecosystem and starts giving you recommendations for cost-effective and better SaaS apps. How, you ask?
Zluri helps you to manage all your software application contracts and payment renewals and alerts you about your upcoming payment and contract renewals, giving you enough time to decide whether or not you need the app. In addition, it helps you track spending on SaaS contracts and subscriptions and the associated payment methods. It also lets you gain visibility at all the licenses, subscriptions, contracts, and perpetual.
Zluri offers various modules that provide in-depth insights, based on which IT teams can make the right decisions and manage SaaS spending.
With Zluri, you can also learn how much each department's budget has been allotted compared to how much it has spent. So, if it exceeds the budget, you can investigate the specifics to determine what is happening and contact the owners with the necessary data.
Additionally, you can observe which budget categories are using a lot of money. When various departments employ tens of apps for the same use case, money is often wasted due to in-app redundancy.
To boil it down, with the help of Zluri, you will maximize your SaaS ROI, secure the organization, and retain a competitive edge. To understand the offering better, book a demo today!
An obese SaaS stack leads to SaaS wastage. It's a disease! It not only causes financial issues but also gives you security and compliance problems. That's why you must keep tight control on your SaaS stack. And it begins with managing your SaaS vendors.
In this post, you'll learn about shadow IT due to SaaS apps. You'll also learn the most common types of shadow apps categories, shadow IT risks, and shadow IT benefits.
Zluri's Modern IGA solution helps companies mitigate security and compliance risks. Govern access to your SaaS for the entire user lifecycle through user provisioning, automated access reviews, and self-service access requests.
When an organization has a large number of SaaS applications in its SaaS stack, it gives rise to SaaS Sprawl.
SaaS operations consist of procuring the right set of SaaS apps, managing access to these apps by users/departments, monitoring their usage, and offboarding them properly when they are no longer needed.
Evaluate 5 crucial Vendor Management KPIs compiled by our experts to make informed data-driven decisions.
Explore the top 10 components essential for a robust SaaS agreement contract, curated by industry experts with our SaaS Agreement Checklist.
Find the Best CobbleStone Alternatives for Efficient Contract Management | Streamline Your Contract Processes with Top 8 CobbleStone Competitors