Tail spend: definition, examples, and how to effectively manage

If you’ve ever looked at your credit card bill at the end of the month and thought, “where the heck did all this come from?”, you understand how quickly it can tank your bank account. Just as with personal spending, the small expenditures that move the business forward can sneak up on you. 

In business, these ordinary but impactful purchases are called tail spend, and it's vitally important for procurement teams to monitor — and curb them where necessary. Small purchases add up to significant total spend over time, sapping your revenue and growth potential. 

Today we’re taking a look at the finer points of tail spend management: What it is, why it happens, and how to ensure that no purchase within your organization goes unnoticed. 

What is tail spend?

Tail spend refers to the small-dollar, “invisible” purchases in an organization that fly under the radar for tracking and budgetary control. While every organization defines “tail spend” slightly differently according to its spend control structures, in general, tail spend refers to all the low-value, indirect spend that skates by without a formal approval process. 

Tail spend isn’t always a bad thing. In many organizations, costs such as strategic “spot buying” or petty cash purchases are a normal and expected part of business operations. Tail spend isn’t all unnecessary spend. However, it should all be monitored and controlled through a good budget and approval processes. 

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The difference between maverick spend and tail spend

Tail spend is sometimes referred to as “rogue” or “maverick” spend. While these labels may certainly apply to transactions, in contrast to these terms, tail spend may be condoned even if not well-managed. For instance, if there is no procurement process to follow, such as purchase requisition/intake forms, approval workflows, procurement cards (p-cards), or strategic spend practices, spending can’t “go rogue.” In this case, everything outside of direct procurement purchases would simply be classed as “tail spend.”

4 common examples of tail spend in software

Software buying, when not governed by a purchasing process, can quickly blow up budgets and reduce visibility into the tech stack. Here are three common scenarios where software falls under the category of tail spend:

Tactical Purchases

Sometimes a department or business needs to get a software tool up and running quickly. This urgency is sometimes due to issues with the supply chain (another planned tool is unavailable), changes in the project plan, or the introduction of new, short-term initiatives that require fast action. In any event, the urgency of these purchases may cause departments to forego the normal procurement process. When there is an exception to the normal approval process, it’s important to take after-action steps to tie those purchases back to their intended budgets.

Spot buys 

Sometimes, a stakeholder may require a low-value tool to make their job easier. This one-off purchase doesn’t meet the qualification criteria for a high-value purchase and approval process. In this case, a department head or finance leader may approve the spot buy with an informal “okay” and relegate the purchase to tail spending or a discretionary budget. While this is a sanctioned purchase, the organization ends up classifying it as overhead or tail spend. If these purchases become the norm, tail spend will increase over time.

Maverick spend

When stakeholders take purchasing matters into their own hands, you end up with software tools in the tail spend category which should be tied to a project budget and a tracking process. When this doesn’t occur, the spending is relegated to undefined tail spend. These purchases cause issues with budgeting, lead to redundancy in your tech stack, and can lower the cost savings benefits of using strategic sourcing and leveraging volume pricing. 

Auto-renewals

Unsanctioned auto-renewals flourish when there are no contract management or license tracking tools in place to stop them. In many cases, purchases made outside of an approval process (for instance, those on a corporate card or through an expense report) may continue to auto-renew and cost the company money. In some cases, the billing owner may have moved on, or the renewal is lost in the shuffle of email reminders (if the supplier sends them at all). This is an expensive and pervasive example of unintended tail spend that causes software budgets to bloat over time. 

Why tail spend needs to be properly managed

Tail spend management is, first and foremost, a cost-saving exercise. When left unchecked, this category can easily eat up 20% of total spending, a significant chunk of revenue. What’s more, these purchases, while individually low-cost, are responsible for up to 80% of transaction volume (an excellent example of the Pareto principle at work). Your procurement professionals would be far more effective in leading other priorities for the procurement function. Your revenue will also be better-utilized driving growth (rather than buying incidentals). 

4 ways to analyze and manage your tail spend

Good process is the cornerstone of any budgetary control process. By implementing solid procurement practices within your organization, you can effectively control both direct procurement costs and tail spend.

Formalize your procurement process 

Having a SaaS purchasing process for every type of purchase is the best way to ensure that every transaction — whether for a large software buy or a quick spot purchase — supports organizational spending goals. For small or incidental purchases, this may only require a light oversight process, such as a department head approval tied to a discretionary budget, or a procurement card program that enables incidental purchases while maintaining spending transparency. Building comprehensive procurement controls and reporting is the best way to ensure that every purchase is reported and categorized. 

Build a strategic supplier relationship

Building a cooperative supplier base and moving away from transactional vendor relationships takes much of the risk and potential for overspending out of the software buying equation. It lowers the number of suppliers you interact with, which reduces the burden on Finance and Accounts payable to track and manage excess relationships and thousands of redundant invoices. Strategic supply chain management increases opportunities for better pricing and supplier performance, benefiting both your top and bottom line. 

Optimize spending through automation

Automating your software purchasing process helps you streamline procurement to save money and time. With the right automation tools, you can:

• Create standardization in your evaluation and approval process.
• Empower stakeholders to choose the right software from approved vendor lists or catalogs.
• Create an automated approval process for requisitions and purchase orders.
• Improve forecasting and planning for high-value spend. 
• Centralize spend data for benchmarking, reporting and analysis.

Implement spend analytics

You won’t know the impact of your company’s spend categories unless you carefully monitor them. Implementing spend analysis for every purchase can increase spend visibility, guide purchasing decisions, and help establish budget guidelines for both high-value and low-value transactions. 

Spend analysis helps the procurement department look for opportunities to tie tail spend to projects, reduce redundancy through contract and supplier consolidation, and improve managed spend overall. 

When you should reduce tail spend

Tail spend reduction should be an ongoing priority for the financial health of the organization. Cost reduction is important for easing cash flow and remaining competitive in a fast-moving or volatile economic environment. 

Outside of the perpetual incentives for reducing low-value, high-volume spend, the following conditions could indicate that an audit and reduction of indirect procurement spending may be in order when: 

• You find unrealized savings opportunities such as redundant contracts.
• Cash flow issues stand in the way of new projects, expansion potential, or access to investment capital. 
• Spend analytics reveal waste spending or license underutilization
• The mission of the organization changes or the production roadmap evolves
• During large-scale economic changes (e.g. natural disasters, public health issues, or international relations). 

How Vendr helps manage tail spend and make software budgets more efficient

Vendr brings all essential activities and metrics for the Procurement function together in one platform. Using Vendr to manage software purchases can help you reduce tail spend by improving your data quality and visibility, centralizing contract information to ensure competitive pricing, and helping organizations improve strategic sourcing and reporting that enables data-driven software buying decisions that optimize spending.

Get an inside look into the platform where you can discover and buy new tools, see how much you're saving on software, and stay up-to-date on all of your deals with our free guide to the Vendr SaaS buying platform.