What is tail spend and how can procurement leaders avoid it?

Tail spend has traditionally always been a blind spot for procurement, representing a high volume of low-value purchases. While these purchases typically make up only around 20% of the total spend, their sheer number creates a significant management challenge.

However, innovative solutions are now available that can enhance tail spend management and transparency without requiring additional resources. These solutions empower businesses to unlock significant cost savings, with potential P&L improvements ranging from 5% to 20% of the total tail spend, according to a study from Deloitte. 

What is tail spend? 

Tail spend refers to the portion of an organization’s budget dedicated to numerous small purchases from various suppliers. It typically results in a high volume of transactions — around 80% — but contributes to a low percentage (around 20%) of an organization’s total spend. 

When it comes to SaaS management, tail spend refers specifically to a multitude of low-cost, infrequent, underutilized subscriptions, or shadow IT applications. These subscriptions often fly under the radar for several reasons:

• Unforeseen purchases: Departments or individual employees might acquire them outside established procurement channels, resulting in shadow IT or maverick spend.
  
  
• Lack of centralization: These subscriptions often remain untracked and unmanaged within a central system, leading to a fragmented view of overall SaaS spending.
  
  
• Underutilization: Some subscriptions might go unused entirely, while others may have inactive licenses or features, resulting in wasted resources.

Despite the seemingly insignificant cost of each individual subscription, tail spend in SaaS can accumulate to a significant sum. Since it involves a high volume of subscriptions, often spread across numerous vendors, the lack of oversight can lead to hidden inefficiencies, such as redundant subscriptions, or even maverick spending on unauthorized applications.

What is the 80/20 rule?

Procurement teams refer to this phenomenon as the 80/20 rule, or the Pareto principle. It’s a concept that observes that roughly 80% of the effects come from 20% of the causes. It’s not a strict mathematical law, but rather a framework for prioritizing. It highlights the importance of identifying the “vital few” factors (unchecked inputs) that drive the majority of results. In the context of tail spend management, this means focusing on strategies to optimize these frequent, low-value purchases for better cost control and improved efficiency. 

What are some challenges that unmitigated tail spend creates?

Although the individual transactions may seem insignificant due to their size, unchecked tail spend can create some serious pain points down the line, including: 

• Lack of visibility: Because tail spend purchases often occur outside of established procurement processes, they can be difficult to track and analyze. This lack of visibility makes it hard to identify spending patterns, negotiate better deals with vendors, and ensure compliance with company policies.
  
  
• Inefficiencies: The high volume of transactions and numerous vendors associated with tail spend can lead to administrative burdens. Processing purchase orders, managing invoices, and keeping track of vendor information can be time-consuming and resource-intensive.
  
  
• Hidden costs: Unmonitored tail spend can harbor inefficiencies and even fraudulent activity. Maverick spending and shadow IT can occur, leading to unnecessary costs and a lack of control over spend.
  
  
• Missed savings opportunities: Without proper oversight, businesses might miss out on potential cost savings. Negotiating discounts with vendors can lead to significant savings that might be overlooked with tail spend.
  
  
• Compliance risks: Uncontrolled tail spend purchases can increase the risk of non-compliance with company policies or regulations. This can lead to issues such as duplicate payments, security breaches, or ethical concerns related to vendor selection.

When a significant portion of the budget is spent with minimal oversight and control, the outcomes are less than optimal. Twenty percent of a budget is no small number, so mitigating tail spend should always remain a top priority for procurement professionals. 

What are the benefits of a tail spend management program?

Countless small SaaS subscriptions might seem insignificant on their own, but they can balloon into a significant expense for businesses. A comprehensive tail spend management strategy can result in valuable benefits, including: 

• Cost optimization: By gaining actionable insights into SaaS usage patterns, organizations can identify underutilized subscriptions, negotiate better pricing with vendors, and consolidate redundant services. This translates to significant cost savings without sacrificing functionality.
  
  
• Improved visibility and control: Using a SaaS Management Platform (SMP) to manage your tail spend allows organizations to bring all of their SaaS subscriptions under one roof, providing a clear overview of spending across departments and teams. This enhanced visibility allows for informed decisions about SaaS usage, preventing the sprawl of uncontrolled subscriptions.
  
  
• Streamlined procurement: Establishing clear approval processes for SaaS purchases eliminates maverick spending and ensures all subscriptions adhere to company policies. Automating tasks like user provisioning and subscription renewals further streamlines procurement workflows.
  
  
• Better spend decisions: A comprehensive tail spend management strategy should provide valuable data on SaaS usage. This data can be leveraged to identify opportunities for standardization across departments, potentially leading to the adoption of a single, enterprise-wide solution for specific functionalities.
  
  
• Improved software utilization: By gaining insights into how employees actually use different SaaS tools, organizations can identify training needs and optimize license allocations. This ensures everyone gets the most out of the software they’re paying for.
  
  
• Enhanced vendor relationships: Centralized management of SaaS subscriptions fosters stronger relationships with key vendors. This can lead to better pricing negotiations, improved customer support, and streamlined communication.

Coupling an SMP with a robust tail spend management program for SaaS empowers businesses to take control of their cloud software expenses. It facilitates cost optimization, improves visibility and control, and allows for better spend decisions that maximize value from every SaaS subscription.

How to manage tail spend in 6 steps:

By following these six steps, you can effectively manage tail spend and unleash its hidden potential for cost savings and improved efficiency:

1. Identify your tail spend:
   • Start by gathering data from all purchasing channels, including credit cards and departmental budgets. To streamline this process, consider adopting an SMP to gather all of your data in one place. 
   • Set a clear definition for tail spend based on spend threshold or category.
   • Leverage technology to automate data collection and analysis for better visibility.
     
     
2. Streamline internal processes:
   • Identify and eliminate bottlenecks in the procurement process that slow down low-value purchases.
   • Implement standardized procedures for purchase approvals and vendor selection for tail spend items.
   • Consider self-service options for frequently purchased, low-risk items.
     
     
3. Organize tail spend information:
   • Consolidate data from various sources into a central repository — like an SMP — for easy access and analysis.
   • Categorize tail spend data to identify buying patterns and common vendors.
   • Leverage data visualization tools available within an SMP to gain clear insights into spending trends.
     
     
4. Utilize tail spend insights:
   • Analyze data to identify opportunities for cost savings, such as negotiating bulk discounts or consolidating vendors.
   • Standardize specific products or services across departments to streamline purchases.
   • Renegotiate contracts with high-volume tail spend vendors to secure better pricing.
     
     
5. The crawl, walk, run approach:
   • Begin by implementing tail spend management in a pilot program focusing on a specific department or category.
   • Once you’ve achieved success in the pilot, gradually expand the program to encompass other areas.
   • Continuously monitor and refine your approach based on the learnings from each stage.
     
     
6. Monitoring the benefits of tail spend management:
   • Track key metrics such as cost savings, purchase order processing time, and vendor consolidation.
   • Communicate the success of your tail spend management program to stakeholders to ensure continued support.
   • Regularly review your program’s effectiveness and make adjustments as needed to optimize results.

By following these steps, you can transform tail spend from a hidden cost into a strategic advantage. With a little effort, and the right approach, you can gain control over spend, free up valuable resources, and operate more efficiently. And the right SMP can help you increase those benefits even further. 

How can a SaaS Management Platform help tame tail spend?

With a comprehensive plan for tackling tail spend underway, consider taking it a step further and streamline the steps in your strategy with an SMP. The right SMP can help with:

Enhanced visibility and control:

• Centralized view: An SMP consolidates all your SaaS subscriptions into a single platform, providing a clear overview of spending across departments and teams. This eliminates the blind spots associated with decentralized purchases and forgotten subscriptions.
  
  
• Automated discovery: Many platforms can automatically discover and track all SaaS subscriptions in use within your organization, even those procured outside traditional channels. This eliminates the risk of hidden costs and ensures all subscriptions are accounted for.
  
  
• Usage monitoring: SaaS management platforms can track how your teams are actually utilizing different software tools. This data can be used to identify underutilized subscriptions or features, allowing you to optimize license allocations and potentially reduce costs.

Streamlined procurement processes:

• Automated workflows: SMPs can automate workflows for tasks like user provisioning, subscription renewals, and contract management. This frees up valuable time for IT teams and eliminates the risk of human error associated with manual processes.
  
  
• Standardized approvals: By establishing approval workflows within the platform, you can ensure that all SaaS purchases adhere to company policies and eliminate maverick spending on unauthorized subscriptions.
  
  
• Simplified vendor management: Managing numerous SaaS vendors can be a hassle. An SMP can streamline vendor communication, facilitating contract negotiations and renewals in a centralized location.

Actionable insights and cost optimization:

• Spend analytics: SMPs provide valuable data and insights into your SaaS spend. This data can be used to identify trends, optimize license allocations, and negotiate better pricing with vendors.
  
  
• Subscription optimization: By analyzing usage data, you can identify opportunities to consolidate redundant subscriptions or find alternatives with better pricing and features.
  
  
• Budget forecasting: Improved visibility into your SaaS spend allows for more accurate budgeting and financial forecasting, ensuring SaaS expenses stay within your defined limits.

A SaaS management platform is not just a tool for managing subscriptions; it’s a strategic weapon for controlling tail spend in the cloud. By providing enhanced visibility, streamlining processes, and delivering actionable insights, an SMP empowers you to optimize your cloud software investments and maximize the value you get from every subscription.