How to Reduce Tail-Spend: A Holistic Approach

How to Reduce Tail-Spend: A Holistic Approach

Tail-spend management, the small, often overlooked purchases that accumulate across organisations, can lead to significant inefficiencies if not properly managed. Although these transactions may seem minor on their own, collectively they can account for a large portion of procurement costs. Addressing tail-spend effectively requires a comprehensive approach that goes beyond quick fixes or technology-only solutions. This is where a holistic approach to tail-spend becomes critical for cost control, operational efficiency, and sustainable growth.

The Tail-Spend Challenge

Tail-spend often represents an untapped opportunity for improving cost efficiency and operational effectiveness. Because it tends to fall outside of usual procurement scrutiny, many organisations face inconsistent practices, lack of accountability, and outdated processes when managing this type of expenditure. Without proper spend visibility and control, tail-spend can lead to higher costs, misaligned purchasing, and governance issues. By adopting tail-spend best practices, companies can significantly improve procurement efficiency.

A Holistic and Sustainable Solution for Tail-Spend

A holistic approach to tail-spend management focuses on more than just technology. While tools and automation play a crucial role, the real impact comes from integrating process optimisation, governance, behavioural change, and the right technology to drive long-term success. Here are the key pillars of this tail-spend strategy:

1. Policy, Process, and Governance Optimisation

Streamlining tail-spend starts with creating strong procurement policies and optimised processes. This ensures that low-value purchases are controlled, with clear accountability and governance structures in place. Organisations need to work closely with budget holders to co-design a buying process that balances control with flexibility, ensuring that spend is optimised without overburdening the business.

2. People, Mindset, and Behaviours

Cultural change is essential to sustainable tail-spend reduction. Driving compliance and encouraging the right behaviours across teams is key. This involves raising awareness through targeted education, establishing champions within departments, and fostering a mindset of accountability for spend. By shifting behaviours, organisations can create a culture where effective tail-spend management becomes second nature.

3. Technology and Automation for Tail-Spend Management

While procurement technology alone won’t solve tail-spend issues, it plays a vital role in increasing visibility and automating low-value purchasing processes. A tailored approach to procurement automation—whether off-the-shelf solutions, custom-built platforms, or enhancements to existing systems—can support policy enforcement and provide the data insights needed to drive further improvements. Leveraging AI and data analytics can also help in identifying trends and inefficiencies in tail-spend categories, ensuring smarter purchasing decisions.

Incorporating AI into tail-spend management can greatly improve the experience for budget holders. By simply entering free text—such as "I need to buy office chairs"—AI takes over, identifying the most suitable buying channel (e.g., p-cards for small purchases, Amazon Business for off-catalogue items, or a managed catalogue for larger purchases), and ensuring the correct categorisation of the expense.

AI can also enhance the "three bids and a buy" process by automatically sourcing competitive quotes from approved suppliers, running comparisons, and presenting the best option. This not only saves time and ensures compliance with procurement policies, but also frees budget holders from navigating complex procurement tasks. The result is a more streamlined, efficient, and user-friendly experience for managing tail-spend.

Approach

A structured approach with clear steps ensures successful tail-spend reduction. Here’s a breakdown of how to set up for success:

1. Creating Visibility, Uncovering Drivers of Tail-Spend, and Establishing a Policy

• Tail-spend taskforce established: Set up a dedicated team focused on addressing tail-spend.
• Compelling story developed: Create a clear narrative about the importance of tail-spend management.
• Root cause drivers identified: Use data analysis to identify the key drivers of tail-spend, including people, policy, and technology gaps.
• AI-driven spend categorisation: Conduct AI-driven activities to categorise spend and uncover optimisation opportunities.
• Data usability decision: Assess the quality and usability of spend data to ensure it supports decision-making.
• Opportunity pipeline: Develop a prioritised pipeline of optimisation opportunities and high-impact categories/functions.
• Short-term interventions: Implement quick fixes for immediate improvements in tail-spend.

2. Process Design, Governance, and Technology Selection

• Design buying channels: Establish buying channels and catalogues with agreed thresholds for different spend categories.
• Optimised buying process: Co-design an optimised buying process in collaboration with budget holders to ensure alignment.
• Governance framework: Create a governance structure with clear decision-making rights and responsibilities for managing tail-spend.
• Tail-spend champions: Deploy champions across departments to reinforce compliant behaviour and maintain accountability.
• Technology assessment: Evaluate technology solutions for spend visibility and low-value purchasing, including off-the-shelf, custom, and existing tools.

3. Process and Technology Optimisation for Key Functions and Categories

• Rollout low-value spend process: Implement the optimised process in priority areas to address immediate needs.
• Short- and medium-term interventions: Apply interventions that have an immediate impact on tail-spend.
• Tail-spend training: Train staff and tail-spend champions to reinforce compliant behaviour and new processes.
• Pilot technology solutions: Test technology for spend visibility and low-value purchasing before full implementation.

4. Future-Proofing and Scaling

• Scale technology across functions: Once processes and technologies are optimised, scale their use across the entire organisation.
• Continuous improvement: Establish a continuous improvement model, focusing on ongoing process and technology optimisation to keep tail-spend under control.

Implementing Buying Channels and Spend Thresholds

One of the most effective strategies for managing tail-spend is to define clear spend thresholds and assign appropriate buying channels based on the value of purchases. This approach helps streamline processes, enforce compliance, and minimise unnecessary spending. Here’s how it can be structured:

1. P-Cards for Low-Value Purchases

For transactions under a certain value, typically £500 to £1,000, many organisations use procurement cards (P-cards). These allow for quick, low-risk purchasing without the need for a formal purchase order. P-cards are ideal for small, ad hoc purchases such as office supplies, event expenses, or emergency maintenance.

• Threshold: Up to £500-£1,000
• Channel: P-cards
• Control Mechanism: Limited cardholder access, predefined spend categories, and monthly spend reviews ensure accountability without creating excessive administrative burden.

2. Amazon Business for Off-Catalogue Purchases

When employees need to purchase items that fall outside the company’s regular catalogues, using a platform like Amazon Business allows for flexibility while still maintaining control. A spend threshold, such as £1,000 to £5,000, can be set for this channel. This ensures that off-catalogue purchases are still managed, with visibility into what is being bought and where.

• Threshold: £1,000-£5,000
• Channel: Amazon Business (or equivalent)
• Control Mechanism: Predefined user permissions, purchase approvals for higher amounts, and integration with procurement systems for spend visibility.

3. Managed Catalogue for Mid-Value Purchases

For purchases within the £5,000 to £50,000 range, using a managed catalogue ensures consistency and control. Suppliers within the catalogue are vetted, and products or services are pre-negotiated for cost efficiency. This approach provides both oversight and scalability while ensuring that spend aligns with business needs.

• Threshold: £5,000-£50,000
• Channel: Managed catalogue with preferred suppliers
• Control Mechanism: Centralised purchasing through a procurement system, budget holder approvals, and automatic spend tracking.

4. Formal Procurement Process for High-Value Purchases

For anything exceeding £50,000, a more formal procurement process should be followed. This typically involves issuing requests for proposals (RFPs), competitive tendering, and negotiation with approved suppliers to ensure value for money and compliance with strategic goals.

• Threshold: Over £50,000
• Channel: Formal procurement process (RFPs, tenders)
• Control Mechanism: Strategic sourcing, procurement team involvement, and full contract management.

Leveraging Technology for Tail-Spend Management

To effectively address tail-spend, organisations must integrate the right technologies into their strategy. Technology can help in various areas, such as Marketplace/Buying, Spend Visibility, and Classification. Here’s how these categories can be supported by available solutions:

1. Marketplace/Buying Solutions

Marketplace technologies streamline low-value purchasing by offering access to multiple suppliers while maintaining control over the buying process. These platforms simplify procurement, making it easy for employees to buy what they need within predefined guidelines.

Example Vendors:

• Amazon Business: Amazon’s business platform allows organisations to purchase products while enforcing procurement policies, offering purchase approvals, spend visibility, and integration with procurement systems.
• Coupa: Coupa offers a broad suite of procurement and spend management solutions that provide marketplace functionality along with pre-negotiated catalogues and supplier management.

Custom Build Option:

• Pros: Fully customised to organisational needs, more control over specific functionalities, and ability to integrate with existing systems.
• Cons: High upfront development costs, longer implementation time, and ongoing maintenance requirements.

2. Spend Visibility and Classification Solutions

Classifying tail-spend and using AI to analyse and categorise purchasing data can help identify trends and opportunities for optimisation. These technologies automate the manual process of spend categorisation, saving time and improving accuracy.

Example Vendors:

• Pactum: Pactum uses AI to negotiate better contracts and automate procurement tasks, helping reduce manual efforts in low-value purchasing
• Simfoni: Simfoni’s AI-powered spend analytics solutions automate data cleansing and categorisation, enabling faster and more accurate analysis of procurement data

Custom Build Option:

• Pros: Custom AI algorithms tailored to your organisation’s specific procurement patterns, greater flexibility in how data is categorised and processed.
• Cons: High development costs, potential challenges with data integration, and longer deployment times.

Conclusion

Addressing tail-spend requires more than a quick fix; it needs a comprehensive strategy that focuses on people, processes, governance, and technology. By adopting a holistic and sustainable approach to tail-spend management, organisations can unlock significant cost savings, improve operational efficiency, and future-proof their procurement processes. Defining clear buying channels, spend thresholds, and leveraging the right technology—from marketplaces to AI-powered classification—helps optimise low-value purchases while ensuring compliance and cost efficiency.

Now is the time to move from reactive to proactive tail-spend management, ensuring your organisation is set up for sustainable growth and efficiency.