Tail Spend Management: Take Control of High Volume, Low Value Spend

Tail Spend Management: Take Control of High Volume, Low Value Spend
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Have you ever exceeded your personal budget and had no clue how you spent more than you had planned? Sure, you paid attention to large purchases, like that vacation you've been saving up for. But what about the small purchases that seem so inconsequential that you forgot about them altogether? Random, unplanned purchases—like a $2 pack of gum or a $6 on-demand movie—quickly add up to thousands of dollars annually.

Stop overspend before it happens.

Lola is the only platform that gives real-time visibility to both finance teams and budget owners.

This type of unaccounted-for spending doesn't just happen to people; it also happens to businesses in the form of tail spend.

What is tail spend?

Tail spend consists of small purchases that companies make that are too small to go through an official procurement process. This category makes up 20% of a company's total spend through 80% of its vendors. Also called tail-end spend, it gets its name from the tail-like shape it creates on charts comparing money spent per vendor versus the number of suppliers.

These are the tail spend categories you'll encounter:

  • Head-of-tail spend: This category consists of purchases that add up to between $50,000 and $1 million per vendor but fail to go through the procurement function because the individual transactions seem inconsequential.
  • Tail-of-tail spend: This is where you’ll find the most problematic spending—many small transactions split across a large number of vendors.
  • Hidden-tail spend: This category includes purchases from vendors that typically go through the procurement system, but bypass it when they were too small to warrant a contract.
  • Maverick spend: Tail spend may include purchases that are considered maverick spend, which are higher-cost purchases that should have gone through the procurement process, but went outside the process either intentionally or by mistake.
  • Spot buys: Spot buys occur when there is an immediate need or emergency and the purchase is made “on the spot.” They are typically one-off purchases where the person tasked with the purchasing decision may have only limited familiarity with the asset and supply base. Spot buys are usually small orders and are paid for immediately.

Why is tail spend problematic?

Tail spending is problematic because it’s sneaky. While companies pay attention to and budget for large expenses, they may not realize how big of an impact a large volume of minute purchases can make on the business.

Because tail spend involves purchases that are too small to go through the procurement process, they can go unnoticed until it’s time to close the books. However, these expenses add up to one-fifth of your company's budget. If your startup has $3 million to play with each year, it could save up to $600k by managing tail spend. That's money that could be strategically invested in the company, rather than being spent haphazardly.

Tail spending often arises when different teams purchase things from the same vendors independently of each other. If they made purchases together, they could have enough spending power to negotiate a contract and a discount on the products or services they need.

But this kind of collaboration usually isn't possible, especially when things need to be bought quickly. Managing minuscule purchases strategically is tedious, and most startups want to focus their resources on larger-impact decisions.

What are the benefits of managing tail spend?

Managing tail spend, rather than turning a blind eye to it, can work wonders for your business.

The first benefit of managing tail spend is cost savings. Research by BCG found that when companies manage their tail spend with a digital tool, they can save up to 10% on yearly expenses. Think of what these savings opportunities could do for your business. A 10% cost reduction could free you up to grow your team, add new features to your product, or even launch in a new market.

Managing tail spend can also help you streamline operations. Spend management tools can automate tail spend management by restricting who can make purchases through what vendors. Automation frees your procurement team up to focus on high-value strategic initiatives, rather than low-value, repetitive tasks.

What are some strategies to manage tail spend?

Traditional procurement solutions fail to address tail spend. The most challenging part of tail spend management is the lack of visibility and access to data. To identify tail spend, you’ll need to pull all your spend data from the various sources and platforms, then analyze it.

You need an easier, digital solution to take tail spend consolidation off your plate. That's where Lola.com’s spend management software and virtual cards come into play.

This tail spend management framework lets you tie virtual corporate cards to budgets, and tie budgets to vendors, and monitor spending in real-time. You’ll have full visibility of spending which is outside of set vendor budgets and full access to consolidated spending data. You’ll also be able to see if your employees are spending a lot of money with a certain vendor (even if they are across different departments) and can then consider moving those purchases through the procurement process and negotiate better terms. This tail end spend solution helps maximize every dollar of your budget.

One of the main reasons spending doesn’t make it through the traditional procurement process is because employees are deterred by the admin involved. The right spend management software can eliminate the admin work and help you take control of tail spend.

FAQs

What is tail spend?

It is unmanaged business spending that makes up 20% of a company's spend via 80% of its vendors. It is made up of purchases that are too small to go through the procurement process.

Why is tail spend problematic?

Because it adds up to a significant portion of a company's budget, but goes unmanaged. Small expenses slip through the cracks and can add up to a fifth of your total spend. These expenses could easily be reduced with the right tool.

What are the benefits of managing tail spend?

It streamlines operations, reduces spending, and allows procurement professionals to focus on projects that maximize revenue.

What’s the best way to manage tail spend?

A spend management tool like Lola.com, which lets you tie budgets to vendors via virtual corporate cards, can help prevent unnecessary purchases and give you real-time spend visibility.

Lola.com is the spend management solution that keeps you on budget.


About the Author: Ana Cvetkovic
Ana Cvetkovic is a freelance writer for Lola.com. She is also the CEO of BLOOM Digital Marketing, a creative marketing agency that specializes in creating demand generation content for SaaS companies in the hospitality and travel industries.