Any low-value expenditure made outside the remit of your core budget is known as tail spend. Usually, this is not managed by the procurement team and can include things like office snacks, taxi rides and non-compliant expenses. The Pareto Principle is used to calculate the spend percentage. Based on the principle, an organisation spends 20% on low-value spend while the remaining 80% is used to pay approved suppliers.
Hidden expenses of tail spend
Most organisations focus on cost reduction when it comes to high-value sourcing. However, tail spend is often overlooked as it is hidden and is not under the purview of the procurement department. Since it is low volume, organisations have a misconception that it has minimal savings potential. As a result, they do not look for ways to curtail expenditure.
Procurement analysts have determined that the cost of tail spend can eat into a company’s bottom line. In some organisations, nearly 80% of the tail spend is spread across too many suppliers, leading to maverick spend.
However, managing and curtailing tail spend can help an organisation save money. Research suggests that companies can save up to 15% with conscientious management of tail spend, enjoying category savings of anywhere from 10% to 30%.
A survey published by The Hackett Group states that tail spend management helped respondents save up to 7.1% on average by controlling non-compliant outgoings.
Getting value from tail spend
Tail spend can be managed by adopting tactical sourcing methods. This is especially true for mid-tail. Strategic tail spend control frees up technical and strategic resources, which can be utilised for wider budgetary management.
Organisations that are keen to give back to the community can up their corporate social responsibility game by sourcing tail procurement from startups and small business owners who are struggling to break through in the market. While this will not ensure optimal cost reduction in tail spend, organisations will still enjoy savings. Above all, it will create brand value that can have a positive impact on sales and revenues.
Ed founded Odesma in 2014 with the explicit intent of creating a new kind of procurement consultancy founded entirely on cloud principles. Deploying best-of-breed subject matter experts alongside the best on demand technology to deliver rapid and effective change for customers.