Tail spend is rampant in corporate America, amounting to a $1.8 trillion problem in the U.S. alone. And yet, many companies don’t address it at all. Tail spend can be different for each company, but it might look like all of those coffee shop purchases classified as "miscellaneous" in your books, or paying for the same subscription multiple times under different employee's accounts.
What is tail spend?
Tail spend refers to spending that makes up a large number of a company's transactions by volume but only a small portion of total costs. Tail spend purchasing is often challenging to manage because it consists of a large amount of low-value transactions that are generally ill-defined in procurement processes because they don’t fall under strategic spend categories. In addition, these non-strategic purchases are often scattered across any number of suppliers and purchase orders, so companies have poor spend visibility.
These “small” and often one-time transactions are too big to ignore. Because tail spend accounts for the majority of your company’s transactions as well as a significant portion of overall spend, it can silently kill budgets and undermine growth opportunities. The key to keeping these expenses under control is proactive tail spend management.
What is tail spend management
Tail spend management is your ability to monitor, track, and control low-value, high-volume, and sometimes indirect spend expenses. Managing tail spend can mean changing internal processes, updating the sourcing of goods, increasing your spend visibility, or reducing and eliminating unnecessary spend.
Benefits of tail spend management
We get it — you’re busy growing your company, so why should you care about hunting down these minute transactions? Tail spend may seem small on the surface, but collectively these expenses have a significant impact on your budget and company.
1. Saves you money
Tail spend management should be a key piece of your strategy if you're looking to spend smarter and safeguard your budget. A recent study by Deloitte found that companies who manage their tail spend effectively have savings between 5-20% in total spend. It provides visibility into spending so you can:
- Uncover spend that is outside of your procurement department’s policy or doesn’t contribute to your top-line initiatives
- Track billing inconsistencies over time to find areas you can save and optimize contract management
- Identify duplicate services and supplies
2. Provides more accurate budget forecasting
Accurate P&L forecasting and P&L management depend on a predictable budget.. To make accurate predictions, you need to know how much will be spent, where it’s being spent, how it will affect your top and bottom line, and have a sustainable way to enforce your expense policy.
If you struggle with uncertainty surrounding your financial forecasting, it may be due to out-of-control tail spend. Tail spend is typically where companies struggle the most with visibility and have the least amount of spend management. This common feeling of uncertainty isn’t surprising when you consider 67% of procurement professionals have limited or no visibility beyond tier one of their supply chain.
When you have full visibility into dollars spent, procurement teams are able to both curb tail spend and more accurately predict your bottom line.
Tail spend management challenges and setbacks
The first hurdle to overcome with tail spend management is that you are dealing with low-value expenses. It would seem like tackling more significant expenses would help a company's bottom line more than going after the pens and other office supplies. However, it is essential to remember that these low-value items can make up 20% of your company's overall spending.
Once you can come to terms with targeting the low-value expenses, the next challenge is controlling the low-value and low volume purchases. Oftentimes, procurement functions don’t have set procedures for the procurement of small goods and services, leaving employees to think that the purchases are too insignificant to make an impact on your company. But as we can see, this tail spend, if unmanaged, can quickly become an issue that needs to be addressed.
5 steps to reduce tail spend with a spend management platform
As companies grow, it becomes increasingly difficult for leadership to maintain visibility and manage tail spend. Hunting down small transactions is time- and cost-intensive, so companies often turn a blind eye to tail spend management. Or, they’ll outsource this management to firms that just add another expense to their budget.
A better solution is to use a spend management platform. Spend management platforms offer an automated way to handle a company’s spend. They cut both the cost and time involved by automating bookkeeping workflows through affordable software. And at the same time, these business finance tools leverage digital analytics to eliminate wasteful spend and surface cost savings.
1. Get complete visibility into your spend
One of the biggest challenges with curbing tail spend is not having eyes on where your money is going. A spend management platform pulls all of your billing and expenditures into one place to give you a comprehensive view of your spend analytics and budget. A few key features include:
- Track spend over time. The tool will automatically identify and update your company’s vendors, which employees use them, and spend in real-time, so you know exactly how much your company has spent on any vendor over any period of time and who is using them. Use these data metrics to realign spending around your budget goals.
- Organize into tail spend categories. Organizing tail spend into different categories will give you a high-level understanding of where your money is going.
- See your upcoming spend. A spend management platform automatically identifies all active subscriptions and predicts upcoming payments—no more surprises or manual tracking.
With this visibility, you’ll be able to tailor your budget with ease.
2. Eliminate unnecessary spend
Tail spend documentation is typically scattered across POs, spreadsheets, crumpled-up receipts, and lost emails, making spend analysis difficult. Spend management platforms centralize spend information and make it easy for accounting teams to catch unnecessary expenses, identify savings opportunities, and reduce maverick spend. They do this by:
- Automatically detecting wasteful spending. Spend management platforms automatically identify opportunities to save by combing through spend data and identifying unnecessary or duplicated purchases.
- Controlling spend with cards tied to your expense platform. Issue cards with pre-approved spend limits to automatically enforce your company policies and keep employees in check.
3. Block unapproved vendor spend
The biggest issue with traditional vendor management is that it is time-consuming and labor-intensive. Traditionally, things are spread across multiple channels, and every approval has to be done manually, so expenses and approvals inevitably get lost in the shuffle. With a spend management platform, everything is simplified by centralizing vendor data and applying seamless approval processes that enable significant cost reduction while also saving time and keeping everyone accountable.
- Review and approve spend requests in seconds. It’s easy to see potentially overlapping services and suppliers and identify what expenses should be approved or not with a complete visual of the budget, spend, and vendors.
- Predict and control all your vendor costs. Identify and collect all your vendors and contract owners in one place. Stop waiting for monthly statements—know the instant a transaction takes place and when payments will happen. Easily pull data to negotiate with vendors and manage partnerships, both new and old.
4. Automate policy enforcement
With a spend management platform, you can let the bot be the “bad cop,” enforcing your spending policies and automating approvals—creating a smooth process that saves time for everyone.
- Enforce policies consistently. Reduce inconsistency for your employees and your books with automated policy restrictions and pre-approval standardization. These features streamline spend by removing the guesswork for employees about what purchases are covered, and the finance team doesn’t have to waste time matching policies and expenditures for approval.
5. Simplify expense submission and reimbursement
The manual expense process isn’t hard on just the finance team; it’s hard on employees, too. The time it takes for employees to track down crumpled-up receipts and fill out expense reports for every minute expense is exhausting and often results in inaccurate or incomplete expense reports. Not only that, but according to Forbes, “2 in 5 employees have experienced cash flow issues due to slow expense reimbursement,” which hardly promotes a positive work environment.
Thankfully, you can leverage expense automation to simplify reporting while protecting your business and your employees.
- Make expense submission easy. With automated receipt-matching, cardholders are notified the instant they swipe by SMS or email. The spend management platform automatically reminds, collects, and matches receipts for every transaction that needs one.
- Reimburse with ease. Create reimbursement policies for every use case. Then sit back and relax with automatic receipt verification that automates 90% of expense reports. With one-click approval and deposit, you can reimburse your employees in no time.
Ramp: A new way forward in tail spend management
Ramp’s spend management software, in combination with our powerful corporate card, offers every feature you need to get your organization’s tail spend under control. Let us help you save time and money so you can focus on growing your business.
Check out our ebook to learn to design a stronger expense policy to guard against wayward tail spend:
Tail spend can mean a lot of things, depending on your business’s needs and processes. Purchases made on lunches, pens, cab rides, computers, coffee, and paper, can all be considered examples of tail spend.
Organizing and classifying your spend is a good start. Managing spot buying and maverick spending can also help optimize tail spend. Consider finding different and cheaper providers of office supplies and monitor and block unapproved vendor spend. Remember, unmanaged spending can really add up over time. The more you understand your business’s financials, the better you can manage it.
Ramp issues corporate cards to small and large businesses. These corporate cards have built-in spend management and receipt automation, giving you transparency and control over your teams’ purchases.