Companies are always looking for ways to spend wisely and save on costs. One important but often overlooked factor that can make a critical difference in cost-savings — if managed wisely — is tail spend. So, what is tail spend exactly? Tail spend refers to high-volume, low-cost items purchased within an organization, that are not actively managed or tracked by finance or procurement managers. Examples of tail spend include the everyday, incidental purchases made by company employees, such as file folders for your desk, lunch for a staff meeting, or arranging transportation costs for new hire interviews. These types of purchases tend to be one-off and uncategorized, which makes them easy to fall off the radar.
While many of these costs are seemingly small and relatively insignificant compared to large-scale expenses that often require pre-approval, these incremental expenses — when added up over time — can mean thousands or even millions of “unknown” dollars spent depending on the size of the company. The 80/20 rule, or Pareto Principle, is another way to help understand tail spend. According to this concept, the top 20% of suppliers that a procurement team works with account for 80% of overall spend. These top suppliers are the highest priority and considered the most strategic. Then there’s everything else. The other 80% of expenses account for just 20% of spend. This is where tail spend belongs, the low-priority but high-quantity purchases.
Many times, companies don’t feel like it’s worth it to spend time and energy on tail spend. After all, tail spend is made up of small, one-off expenses that can’t really be tracked in the first place. And even if they could be tracked, they don’t see any real benefit in going to the trouble. It’s better to focus on the large-scale items that are really moving the needle. This is simply not true, however, and is one of the common tail spend myths that can prevent companies from seeing substantial, game-changing cost savings.
Here are a few things you can implement to better manage tail spend and to build efficiency, transparency, and ultimately higher cost savings for your organization.
Use Technology To Control Spend
Machine learning and artificial intelligence are rapidly evolving, creating better ways to analyze spending and increase quality control. Finance and procurement teams can make expense tracking easier and more transparent by taking advantage of digital technology solutions such as procurement software, automated sourcing, and cloud-based record-keeping. By making company-wide spending more visible and being able to track expenses with ease — no matter how big or small the purchase — companies can avoid many of the issues that can result from low-value transactions.
Use Smart Purchase Controls
One way to keep expenses in check, even before a purchase is made, is to create a buying catalog for the most common items that employees need to purchase. Also, consider setting rules for who is authorized to make purchases, as well as the spend limit. Rather than a “set it and forget it” approach, actively managing tail spend with clear, specific, and highly-visible procedures, can result in big savings in the long run.
Purchase in Bulk
Another way to increase cost efficiency is by purchasing supplies in bulk. This can benefit the vendors you work with by streamlining orders and purchasing processes, and can result in significant discounts in cost on your end. Additionally, if there are certain types of supplies or equipment you need to order across departments, you may want to set up a service contract for a longer time frame, which can bring even more savings.
Revisit Service Plans and Subscriptions
Don’t overlook long-standing contracts and subscriptions with existing suppliers. Specific supply needs change over time, and there may be opportunities to revise or end certain contracts that have become less relevant or beneficial. For example, a phone plan with international roaming may no longer be something your company needs. Additionally, you can look for ways that tail spend can be combined with an established supplier agreement to reduce unnecessary costs. The goal here is to simplify, consolidate, and make sure that purchase processes stay relevant to your changing needs.
Pay in Advance
Paying in advance is another way to reduce purchasing costs, as many vendors will offer a discount for making payments ahead of time. Similar to bulk purchasing, paying in advance can offer advantages to suppliers such as improving cash flow and helping to plan ahead on a more long-term basis. This can also be an opportunity to build a positive relationship with vendors by increasing trust and follow-through.
These are just a few examples of steps companies can take to create more efficient, cost-effective policies and procedures around company spending. Remember that even though one little purchase may not seem like it can make a difference, it can when added together over time. By implementing a few of these tactics to help consolidate tracking and increase the visibility of company-wide purchases, your organization will start seeing benefits and cost savings that can make a real difference in the bottom line.