Tail spend is the wolf in sheep’s clothing of procurement. 

It may look insignificant and harmless at first glance, but it actually carries a variety of hidden risks that can seriously affect your company.

It drains your resources, increases your costs, and hinders the success of your procurement operations—and you certainly don’t want any of that.

The best way to tackle it is to conduct a thorough tail spend analysis.

But what are the benefits and challenges of this process? Are there any best practices you should follow?

And how should you measure the effectiveness of your efforts?

We answer all of these questions, and more, in this article.

Key Objectives of Tail Spend Analysis 

If you’ve ever run out of ink mid-printing an important document at work, chances are, you felt tempted to just go and purchase a new ink cartridge from the nearest store.

Sure, it’s an off-contract purchase. But it’s a small, low-value one, so there’s no harm in it, right?

Well, not exactly.

It is precisely because such purchases are lower in value that they easily fly under the radar and are often written off as insignificant.

However, as they accumulate, they can start making up a substantial amount of your company’s expenditure.

This portion of your budget spent on non-strategic purchases is known as tail spend, and it can quickly snowball into a real issue, potentially preventing your company from being able to invest in long-term growth opportunities.

Jon Pratt, CIO at security managed services provider 11:11 Systems, explains why it’s so important to closely monitor your company’s spending patterns. 

Illustration: Veridion / Quote: CIO

But how do you keep an eye on it? Well, that is where tail spend analysis comes in. 

Simply put, it examines the way your organization spends money, identifies wasteful spending, and ultimately uncovers opportunities to realize cost savings.

And even though saving money is the ultimate goal of tail spend analysis, that is certainly not all it can achieve.

In your quest to eliminate these seemingly insignificant expenditures, you can also reduce maverick spending, consolidate suppliers, and negotiate even better terms with those you decide to continue working with.

This was exactly the case for a pharmaceutical company based out of Japan that decided to bring their tail spend under control.

As you can see in the graph below, a total tail spend of $0.98 billion was identified, alongside 18,000 suppliers in tail spend, as opposed to only 3,160 in main spend. 

Source: Infosys BPM

Upon conducting a tail spend analysis and developing a tail spend management strategy with the help of a business process management company, they were able to:

• gain visibility into an additional $600 million spend that was previously not classified,
• consolidate the total number of suppliers, and
• improve their data classification accuracy, enabling more data-driven decision-making.

Accomplishing these things is a great success in and of itself.

But all of this also allowed the company to identify potential benefits of $62 million, which is not an insignificant amount.

The verdict is clear:

By bringing tail spend under management with the help of spend analysis, you can unlock significant savings and improve the efficiency of your procurement function in the process.

So, don’t overlook this important activity.

Challenges in Tail Spend Analysis 

Although conducting tail spend analysis carries meaningful benefits, the process also comes with its own set of challenges.

To start with, there is the issue of data.

The nature of tail spend is such that it often involves a large number of suppliers and transactions.

If you add to that the fact that this off-contract spending is happening across different spend categories, company departments, and locations, this further complicates things.

It is because of this that the data necessary for conducting tail spend analysis is inconsistent and fragmented.

Venki Subramanian, Senior VP of Product Management at Reltio, explains just how big of an issue fragmented data can be. 

Illustration: Veridion / Quote: CPO Strategy

While he is talking about data fragmentation in terms of ESG, his point is applicable to tail spend and its analysis, too.

After all, how can you even begin to analyze data if it’s scattered across various systems within your organization?

These challenges in getting a clear view of tail spend, along with the belief that small off-contract purchases don’t matter, often lead companies to ignore tail spend analysis altogether.

But then, just when they realize how much money they could save if they bit the bullet and conducted it, they run into another problem: a lack of resources.

This is not surprising, given that tail spend management is not a priority for a lot of CPOs. 

Illustration: Veridion / Data: GoProcure

And when something isn’t a priority, not having the resources to take care of it isn’t unusual.

So, a lot of companies don’t have the necessary personnel, time, or technology to analyze these large, scattered amounts of data.

To overcome this issue, they often decide to simply outsource tail spend analysis to companies like Bell Integration.

Edward Long, their head of pre-sales and analytics for procurement management, explains how their clients benefit from it:

“This allows the client to focus on strategic initiatives that deliver maximum value to stakeholders, while Bell drive efficiencies and compliance in the lower value spend areas. (…) We run the due diligence on the suppliers and also negotiate savings and contractual terms, which means clients get greater visibility of the ever-changing risk profile as well as the total cost of their tail.”

But even though outsourcing the task of tail spend analysis is probably the quickest way to get it done, it’s not necessarily the best way to go about it.

Aside from the fact that it incurs additional costs—the very thing you want to avoid—it also means you’re not the one in control of data anymore.

So, let’s see how you can efficiently conduct tail spend analysis yourself.

Tips for Efficient Tail Spend Analysis

Thanks to the sheer volume of data involved in it, performing tail spend analysis can be pretty daunting.

And since getting started is often the hardest part, we’re going to share a couple of tips that will help you get the ball rolling.

Set Clear Objectives

When it comes to tail spend, no two companies are the same.

That is why it’s important to determine what objectives you want to achieve by implementing tail spend analysis.

Naturally, the ultimate goal is to reduce unnecessary costs. 

But simply stating that your goal is cost reduction is pretty vague and doesn’t really specify how or where savings will be achieved.

This makes the whole concept all the more abstract.

So, before you start tackling tail spend analysis, think about which areas your company is struggling with.

• Do you have too many non-essential or low-performing suppliers?
• Is your invoice handling process too inefficient?
• Or are you unknowingly spending money on things you don’t actually need?

This last one is a common problem, says Vineet Arora, CTO at WinWire, an IT services company. 

Illustration: Veridion / Quote: CIO

When you have this starting point, a general idea of the areas in which you could reduce off-contract spending, it becomes easier to set actionable goals.

Decide Which Tail Spend KPIs You’ll Track 

But how are you going to make sure that the goals you’re setting are actually being met?

With the help of KPIs.

Define which KPIs you’re going to keep track of in order to measure how effective your tail spend analysis efforts truly are.

If you’re unsure about which metrics you should be tracking, we’ve outlined some key ones to get you started in the image below.

Illustration: Veridion / Data: Procol

Once you’ve defined the objectives you want to achieve and decided on the metrics you’re going to track, you’ve set the foundation for efficient tail spend analysis.

At that point, you can start thinking about the steps you’re going to take in order to actually perform the analysis.

Automating Tail Spend Analysis 

Pulling data from scattered and inconsistent sources, and then accurately pinpointing everything that constitutes tail spend is no easy feat.

Luckily, you don’t have to do it manually.

Nowadays, you can automate the process with the help of AI-driven tools, such as spend analysis platforms.

Tools like that are going to take over the time-consuming, error-prone task of tail spend data consolidation, cleansing, classification, and analysis.

And, according to the findings of Boston Consulting Group, using digital tools to automate the process can save you not just time, but money, too. 

Illustration: Veridion / Data: Boston Consulting Group

And it makes sense if you think about it.

Let’s say you decided to manually handle the data entry and error correction portion of the job.

This would require you to either hire additional personnel specifically for this purpose, or have your existing employees abandon their usual responsibilities to focus on this.

Naturally, that would incur additional costs.

With a spend analysis tool, however, this becomes a thing of the past.

It’s going to automatically aggregate the procurement data from different sources, as well as cleanse and standardize it, saving you resources and creating a single source of truth you can rely on.

David Quist, VP of Sales at Zycus, agrees, highlighting that automating the repetitive tasks leaves more time for decision-making that requires human expertise.

Illustration: Veridion / Quote: Inside Supply Management Magazine 

However, it is worth noting that there is no single solution that can automate all the aspects of tail spend analysis.

Yes, a spend analysis tool can bear the brunt of it.

But if you want to take your tail spend analysis to the next level, you may want to consider investing in some additional tools and services.

Consider supplier data services like Veridion, for example.

Aside from the fact that you can use our platform to discover new suppliers, you can also leverage our AI-powered data enrichment service to supplement your existing supplier records.

It is going to enrich the data you already have on your suppliers, assess potential risks of working with them, eliminate duplicate records, and update any outdated information.

Source: Veridion

The way it works is simple: you tell us the names of your suppliers and the location(s) they operate in, and we will provide you with all the information you need to determine which ones contribute to your tail spend.

No matter which tool—or combination of tools—you decide to use for the purpose of tail spend analysis, one thing is for sure.

If you want to save time and money and make sure that your analysis is accurate, automation is no longer an option—it’s a must-have.

Measuring the Effectiveness of Tail Spend Analysis

Implementing the tips and tricks we shared throughout this article is bound to make the challenging task of tail spend analysis easier, no doubt about it.

But when all is said and done, it’s important to look back at the tools and processes you used and ask yourself how effective the analysis truly was.

This is where the KPIs we mentioned earlier come in. 

Their job is to help you understand what impact—if any—the strategies you used had on your procurement and cost efficiency. 

Kevin Frechette, the CEO and Co-Founder of the software provider Fairmarkit, sums up this point well. 

Illustration: Veridion / Quote: LinkedIn

Yes, establishing which KPIs you’ll focus on to measure the success of your tail spend analysis is important.

But it all means nothing if you don’t actually follow through and analyze them.

Let’s take the “number of suppliers used” as an example.

The purpose of this KPI is to keep track of the number of suppliers you worked with prior to the tail spend analysis, versus how many were left after it.

By definition, in tail spend, 80% of suppliers account for 20% of spend, so reducing the number of suppliers used in order to reduce costs is a natural goal.

If you managed to consolidate suppliers and negotiate better deals with the key ones, you could consider your tail spend analysis a success.

However, even if all the analysis brought you was the realization that you do, in fact, have way too many suppliers contributing to tail spend, it’s still a success.

Why?

Because it indicates that you did something right.

Detecting that there is an issue in this area is an important first step in improving your procurement processes and developing new strategies that will help you reach your spend objectives in the future.

So, don’t just set and forget your tail spend KPIs.

Instead, make sure you’re actively tracking them, and you’ll be able to easily assess whether your tail spend management efforts are going in the right direction.

Conclusion 

Although often overlooked and written off as insignificant, tail spend and its analysis can actually have a huge impact on the financial performance of your organization.

We hope that this article has opened your eyes to both the challenges and the benefits of this important process.

Being aware of the challenges will help you prepare to tackle them, and knowing the benefits will motivate you to implement the tips and tricks we shared.

And remember: you don’t have to do it all at once. 

Start small, learn the ropes, and then slowly expand your analysis to your entire organization. 

Good luck!