Managing tail spend can be tricky, especially as it’s often overlooked or underestimated. 

But if handled strategically, it can unlock significant cost savings for procurement and organizations as a whole. 

If you’re here because you’re looking for ways to get a handle on tail spend and stop those seemingly small expenses from slipping through the cracks, read on.

We’re here to guide you through a five-step process to effectively manage this type of spend. 

From analyzing your spending data to implementing smart strategies, we’ll give you the tools and knowledge you need to take control of your tail spend and boost your company’s bottom line.

Let’s begin.

Step 1: Taxonomy and Classification

Before diving into tail spend analysis, it’s key to organize your spend data in a structured way. 

This involves classifying all purchases into clear categories to make it possible to analyze and understand where your money is going. 

To organize your spend data, you’ll want to create a spend taxonomy that divides your spend into different levels: groups, families, categories, and commodities.

To illustrate what we mean, let’s look at an example of a taxonomy related to tail spend, focused on Maintenance, Repair, and Operations (MRO).

Source: Veridion

As you can see, each level gets more specific.

This structure helps you see big-picture trends: for instance, you might notice that most of your tail spend falls into the “IT Support” category or in the “Office Supplies” family.

Ultimately, this is going to enable you to focus your efforts on areas that need the most attention.

Some specific services that often contribute to tail spend and that you’ll want to classify thoroughly include:

• Marketing & advertising services
• Printing & design services
• IT consulting & support
• Equipment rentals
• Temporary staffing or contract labor

When creating your spend taxonomy, there are some helpful tips you might want to follow, some of which are shown in the image below.

Source: Veridion

The bottom line is that you want to create enough categories so everything has a place, but you don’t want any overlap between them. 

The categories should also make sense for your specific business needs.

It’s also a good idea to avoid using unclassified categories like “other.”

This can easily become a category where all uncategorized expenses get placed and limit spend visibility, which is exactly what you’re trying to avoid.

You can look at some generic taxonomies used in different industries to get you started:

• United Nations Standard Products and Services Code (UNSPSC) 
• Standard Industrial Classification (SIC)
• North American Industrial Classification System (NAICS)
• European NACE (Nomenclature of Economic Activities)

In summary, the first step in managing your tail spend is to organize your spending data into a clear and logical taxonomy. 

This will make it easier to identify areas where you can reduce costs and improve efficiency.

By taking the time to create well-structured categories, you’ll lay a strong foundation for the next four steps.

Step 2: Assess Tail Spend in Your Organization

The next step is assessing the extent of tail spend within your organization.

Unfortunately, unmanaged tail spend is typically scattered across various departments, with different teams having their own specific needs and purchasing habits.

As the image below shows, if we take a single department, like procurement, it can have multiple categories of spend, such as raw materials, MRO, IT equipment, professional services, etc.

Source: Veridion

Within each of these categories, there will be both head spend—the strategic, high-value purchases that are typically well-managed—and tail spend, the smaller, more frequent purchases.

Now imagine the complexity of trying to assess these separate tail spend categories across all the different departments, each with their own unique spending patterns and categories. 

It’s easy to see how things can get disorganized.

In fact, as Kevin Frechette, CEO of Fairmarkit, explains, one of the biggest challenges in managing tail spend is gaining a complete picture of it due to a lack of data and visibility.

Illustration: Veridion / Quote: Fairmarkit

Some departments might diligently categorize and track all their spending, while others may not, simply because their specific policies don’t require it.

In the end, this results in gaps in the spend data.

Also, even if everyone is tracking their spending, including the small purchases, they might be using different systems or spreadsheets to do so.

So, while we’d have all the data, it would be fragmented and difficult to analyze.

This is where a unified spend management system becomes crucial. 

By centralizing all spend data in one place, you can gain a holistic view of tail spend across all departments. 

A lot of spend management systems on the market even offer dedicated tail spend analysis capabilities, like the one illustrated below.

Source: Simfoni

Your organization’s task will then be to ensure that everyone uses this system to track their spending, both big and small. 

Once the data is all in one place, the system can do the heavy lifting—categorizing, analyzing, and presenting insights in easy-to-understand reports and dashboards.

Overall, assessing your tail spend is the foundation of effective management. 

By gaining visibility into all your spending, consolidating data, and leveraging the right tools, you can start noticing some spending patterns and get ready for the next step of the process.

Step 3: Find Process Optimization Opportunities  

Next, by looking at spend data and reports generated by spend management systems, you can uncover valuable opportunities for optimization. 

Inefficient internal processes can lead to unnecessary expenses and missed savings. 

For example, consider this bar chart showing the number of suppliers per purchasing category within an organization.

Source: SAP

Clearly, the first category has the highest number of suppliers, indicating that the same type of product is being purchased from numerous vendors. 

While not always the case, this pattern can suggest a tail spend problem.

Namely, having too many suppliers can lead to fragmented spending, missed opportunities for bulk discounts, and increased administrative overhead.

When these signs are present, procurement professionals should consider developing a better supplier consolidation strategy. 

This might involve reducing the number of suppliers, negotiating better terms with strategic partners, or implementing centralized purchasing processes.

A case study by Proponent for one of their MRO clients demonstrates the potential benefits of a well-executed consolidation strategy.

Illustration: Veridion / Data: Proponent

By consolidating their supplier base, their client was able to reduce costs, increase efficiency, and improve their purchasing power. 

After all, with fewer suppliers to manage, they could invest more resources in building relationships and negotiating better contracts with them, leveraging their purchasing power for volume discounts. 

When you also consider that processing a single large order is often more cost-effective than handling multiple smaller ones, you can see how these practices can lead to further tail spend savings.

Another common optimization opportunity that emerges from tail spend analysis is the chance to establish long-term partnerships with your core, strategic suppliers. 

Matipa Yombwe, a procurement and logistics officer, highlights the advantages of such relationships.

Illustration: Veridion / Quote: LinkedIn

Instead of spending on hundreds of suppliers, long-term partnerships with your best-performing vendors offer benefits such as:

• greater collaboration,
• opportunities for better pricing, 
• better service performance, and
• joint innovation initiatives that create mutual value.

All in all, by identifying and addressing operational inefficiencies, you can reduce costs, create more strategic supplier relationships, and improve the overall effectiveness of your procurement function.

Step 4: Monitor Compliance

Once you’ve identified and implemented process optimizations, it’s crucial to ensure these changes are followed consistently. 

This is where compliance monitoring comes in. 

It involves tracking adherence to procurement policies and procedures to ensure that all spending is authorized, efficient, and compliant with regulations. 

This is particularly important for controlling tail spend, as it often involves a higher risk of maverick spending and non-compliant purchases.

The first step in monitoring compliance is to ensure that procurement policies are being followed. 

This can be achieved through a variety of methods like the following:

• Clearly communicating the policies
• Providing training and education on procurement procedures
• Implementing approval workflows and controls
• Conducting regular audits and reviews

However, even with these measures in place, compliance monitoring is often ineffective. 

As Yokoy CEO Thomas Inhelder observes, even the most digitalized organizations often lack spend visibility.

Illustration: Veridion / Quote: Yokoy

Visibility into spending data is crucial because without it, there’s no way to know if policies are being followed or if unauthorized purchases are occurring.

Software plays a key role in achieving this visibility. 

The spend management software market is constantly growing, and such tools offer numerous advanced features for compliance monitoring.

Take a look at the image below, which shows an intuitive graph of compliant and non-compliant spend.

Source: SpendHQ

This visualization makes it easy to track compliance over time and identify areas where further attention is needed. 

With this data, you can quickly address non-compliant spending and take steps to prevent future violations.

Moreover, these systems can provide valuable insights into the financial impact of non-compliance, such as the “lost/potential savings” metric seen in the image above. 

Sharing this data with stakeholders can help reinforce the importance of adherence to procurement policies and drive organizational change.

Put simply, tail spend management software is a necessity, and the findings of a 2024 study by The Hackett Group reinforce this.

When asked about tail spend management platforms, 62% of procurement leaders felt that these tools had either exceeded or met their expectations. 

Illustration: Veridion / Data: The Hackett Group

Clearly, these systems play a crucial role in effectively managing tail spend, as we wouldn’t see such results otherwise.

In essence, by combining policy enforcement practices with robust software for monitoring and analysis, you can create a culture of compliance, minimize risks, and optimize your tail spend management practices.

Step 5: Continuously Optimize Your Tail Spend Management

So, you’ve completed the previous 4 steps and created a well-thought-out tail spend management practice. 

But the process doesn’t end here, because tail spend management is an ongoing activity. 

Market dynamics, supplier landscapes, and your own organizational needs are constantly changing. 

So, ongoing optimization is necessary to continuously identify new savings opportunities, improve supplier relationships, and adapt to evolving circumstances.

One crucial practice is scheduling regular reviews of your tail spend activities.

For example, you can track key tail spend management metrics and assess whether they’re improving over time.

Source: Veridion

Is the percentage of tail spend decreasing? Do you have an optimal number of suppliers? 

These are just some of the questions you’ll want to ask yourself during these reviews.

These reviews go hand-in-hand with supplier assessments, which can be done through Supplier Quarterly Business Reviews (QBRs).

“Supplier QBRs serve as a platform for evaluating the performance of suppliers against a set of predefined metrics … These metrics may include delivery times, quality of products, adherence to cost structures, and responsiveness to change requests.”

These reviews are essential for tail spend management because they help you identify and address any performance issues with suppliers, ensure compliance with contracts, and uncover potential cost-saving opportunities.

But to get the most out of these reviews, you need to have the full picture of your suppliers. 

Veridion can help you with that.

Yes, you can use Veridion to search for new suppliers in our always-fresh database containing millions of suppliers.

But aside from that, you can rely on our Match and Enrich service to add important data to your existing supplier records.

Source: Veridion

Our enrichment service uses AI technology, so even with basic information like a supplier’s name and location, it can generate a number of other important vendor details. 

This gives you a complete view of your suppliers, which is crucial for managing tail spend effectively. 

In fact, you can use your updated supplier records to identify underperforming suppliers, find potential risks, and have all the information you need for better supplier assessment and consolidation decisions.

Overall, with regular check-ins and a willingness to improve your tail spend management process with powerful tools, you’ll be well on your way to controlling your tail spend through the most efficient practices.

Conclusion

And that wraps up our five-step process for managing tail spend. 

We’ve covered everything from analyzing your data to implementing strategic sourcing and using the right technology.

By now, you should have a solid grasp of the stages of tail spend management, as well as some valuable insights that you can apply to your own procurement practices.

As you move forward, remember that effective tail spend management is an ongoing process that requires vigilance, adaptability, and a commitment to continuous improvement. 

Embrace this challenge, and you’ll be well on your way to transforming these hidden costs into a source of savings and value.