Tail Spend

Tail spend represents a significant portion of a company’s procurement activities, often overlooked due to its fragmented nature. This concept is crucial for organizations aiming to optimize their spending and enhance operational efficiency.

Definition 

Tail spend typically refers to the purchases that constitute approximately 80% of a company’s transactions but account for only about 20% of the total spend by volume. However, this definition is not universally applicable, as the nature of it can vary significantly across different organizations and even within different departments of the same company.

Characteristics

Common Examples: Office supplies, Maintenance services, Travel expenses, One-time purchases.

Key Features:

• Comprises numerous small transactions
• Often falls below the procurement department’s radar
• Typically involves non-strategic or indirect purchases
• May include maverick spend or misclassified purchases

There is no one-size-fits-all approach to defining tail spend. Organizations should consider the following methods to determine what constitutes tail spend in their specific context:

• Spend Threshold Method: Establish an annual spend limit below which vendors are considered part of the tail spend. This threshold can range from $100,000 to $1 million, depending on the company’s size and overall expenditure.
• Pareto Principle (80/20 Rule): Apply the traditional definition where 80% of transactions representing 20% of total spend are classified as tail spend. Some organizations may adjust this ratio to 70/30 or 90/10 based on their specific spending patterns.
• Unmanaged Spend Approach: Define tail spend as any vendor relationships not actively managed by the procurement department.

To develop a more sophisticated understanding of tail spend, organizations should:
1. Create a visual representation of cleansed, normalized spend data
2. Incorporate risk stratification to identify high-priority areas
3. Consider industry-specific dynamics that may influence spend patterns

Effective spend management can lead to: cost savings, improved supplier relationships, enhanced compliance and risk management and greater visibility into overall spending patterns.

Tail spend management presents several significant challenges for organizations. The sheer volume of small transactions involved creates a complex landscape that is difficult to navigate. This is compounded by a lack of centralized control, which often results in decentralized purchasing practices across different departments or business units. Limited visibility into spending patterns further exacerbates the problem, as fragmented data across multiple systems makes it challenging to track and analyze expenditures effectively. Additionally, the diverse nature of these purchases makes it arduous to implement standardized processes, leading to inconsistencies in procurement practices and potential compliance risks. These factors collectively contribute to the difficulty in managing this type of spend efficiently, potentially resulting in missed cost-saving opportunities and increased financial risks for organizations.

By addressing these challenges and implementing robust spend management strategies, organizations can unlock significant value and improve their overall procurement efficiency.

At Levelpath, we don’t just provide a software solution; we provide a customer commitment in the form of a partnership. Our success team is dedicated to procurement with the knowledge, tools and support they need to stay curious and continually drive procurement transformation. From initial workspace setup to advanced customization and beyond, the Levelpath community is there every step of the way to help organizations with all areas of spend, including Tail Spend.

To learn more about how Levelpath can help your organization move faster, uncover risks earlier, and keep people focused on the more strategic work, request a demo today.