Learn how to monitor, analyze and control your tail spend

In business spending, the tail refers to the proportion of spend taken up by high-volume, low-expense purchases. Since every organization itemizes tail spend differently, precise definitions vary, but a generally accepted description is that purchases accounting for 80% of transaction volume but only 20% of total spend constitute the so-called tail.

This definition is loosely known as the Pareto principle, named after the Italian economist Vilfredo Pareto, whose works were reinterpreted by management consultants in the mid-20th century.

On account of their low value, the processes contributing to tail spend purchases are seldom monitored as rigorously as other procurement initiatives. Often deemed too small to be considered “strategic”, finance teams aren’t as ruthless in their application of standard procurement protocols when it comes to tail spend purchases.

Savings opportunities are wider during expensive contract negotiation, which is why tail spend analysis is often non-existent. There is nothing inherently bad about tail spend. The problem is that neglecting that spend — allowing the tail to thrash and flail — can become extremely costly.

What starts as an honest and innocent bypassing of established procurement frameworks can spiral into aggressive tail spend mismanagement. It may seem absurd to claim that there is widespread neglect of roughly 20% of every business’s budget, but this is exactly what tail spend management looks to address.

What are the limiting factors in tail spend management?

Every organization’s spending is unique, so identifying what tail spend means specifically to your business is key. This is perhaps the biggest barrier to effective tail spend management: a failure to categorize tail spend purchases within wider finance budgets. After all, managing something that isn’t officially accounted for is very difficult.

Beyond this, we identify two major limiting factors to tail spend management.

Maverick spending

Tail spend purchases are largely associated with maverick spending — the term used to describe an employee who purchases software or add-ons without following official procurement guidelines. When purchasing software, tail spend might not just refer to the subscription fee, but also to associated costs such as onboarding, customized features, technical support, or any other add-on services.

Applied to SaaS licenses, maverick spending often relates to purchases for low-maintenance subscriptions to everyday business applications such as Microsoft Office, Zoom and Slack. These apps are inexpensive, commonly used, and often essential to business operations. Maverick spending on these products can therefore be seen as a mission-critical necessity to avoid impacting productivity and employee performance.

It’s easy to see how maverick spending is a hindrance to effective tail spend management. Businesses can whittle down subscription fees even for low-cost contracts, but maverick spending often prevents it. When these cost reductions add up, they can become significant.

Poor SaaS stack visibility

Another leading contributor to tail spend mismanagement is poor SaaS stack visibility. Visibility here means much more than knowledge of the number of SaaS licenses in your system — it’s about detailed analysis of each platform’s usage data and the quality of each subscription’s performance.

Companies lose sight of their technologies without this visibility, which in turn acts as a barrier to the management of all IT spend, not just tail spend. For example, the auto-renewal of a given tool’s contract may contribute to tail spend, even if the tool is no longer being used. Without a centralized system in place to take ownership of the contract and govern the tool’s use, billing, and renewal, spending can go unchecked and continue to drain budgets.

Proper analysis of SaaS licenses and their performance — as well as the monitoring of contract expiration dates — is harder to achieve now that the average company uses well over 100 SaaS applications. Tail spend management software tools offer vital support in this area.

The risks of uncontrolled tail spend

In the past, tail spend management was considered more hassle than it was worth. Poring over huge transaction volumes contributing to just 20% of spend was seen by most organizations as a luxury endeavor, but businesses can now leverage automated tail spend management software to alleviate the burden.

Through a modern lens, it’s illogical that 20% of spend wasn’t a high enough number to stimulate preventative action, and indeed that viewpoint is now anachronistic to current times. Here are six risks of uncontrolled tail spend.

• Lost savings opportunities — If the Pareto principle is accurate, tail spend management is a market worth 20% of every single business’ expenses. It’s staggering that this market was left untapped for so long, but it’s only the advent and proliferation of automated software tools that have made savings opportunities in this area possible.
• Financial waste — A natural byproduct of lost savings opportunities is financial waste. A McKinsey report estimates that companies effectively managing tail spend can benefit from savings between 5-15% of their total expenditure. After the introduction of Automated software tools have changed attitudes to tail spend management, evolving from indifference to necessity. It’s easy to see why with these McKinsey figures.
• Misallocation of human resources — If tail spend in your business is uncontrolled, chances are your unsuccessfully allocating significant human resources to tackle the issue. With SaaS adoption on the rise, the problem will continue to grow the longer you ignore tail spend management software solutions.
• Increase in shadow IT — In SaaS procurement operations, tail spend and shadow IT often go hand-in-hand, because maverick spending actively blocks tail spend management efforts. In uncontrolled tail spend environments, tail spend purchases aren’t considered big enough to warrant scrutiny, leaving room for procurement policy abuse and leaving fertile ground for shadow IT to spread.
• Risk — As with anything uncontrolled or unregulated in the IT world, the threat of potential risk increases. It’s vital that businesses have complete visibility of their entire SaaS stack to be confident of adhering to data regulations and mitigating against cyberattacks.
• Muddies the supply chain — If SaaS products aren’t entirely accounted for, how can you know if your suppliers and their platforms are performing well and adding value to your business? Tail spend management offers supply chain confidence, enhancing and reinforcing positive vendor relations.

How to identify tail spend

Identifying tail spend should be a collaborative effort between finance and procurement teams that covers the following steps.

1. Categorize company spending

The most important step is deciding which purchases fall within Pareto’s 80/20 principle by categorizing every item of spending within the organization’s IT budget. Only then will you be able to agree on which purchases constitute tail spend and which don’t.

2. Analyse supplier performance

Once you’ve identified the (roughly) 20% of purchases making up the tail, analyse supplier performance of each product to assess its value. There may be no cost reduction opportunities here, but you won’t know that until you’ve investigated properly. Compare the performance of each against the KPIs agreed upon during contract negotiations.

3. Consider alternatives

If suppliers aren’t performing adequately, draw up a list of potential replacements that can do the job to a higher standard. Does your business have pre-existing relationships with any vendors that can supply your organization with alternative solutions? These kinds of questions will help you decide whether there are truly any cost saving opportunities to be made.

4. Use technology

The three steps above are more or less impossible without assistance from the right technology. Tail spend management is a modern enterprise, and businesses need modern tools to help them achieve it.

10 steps for improving your tail spend management

An effective tail spend management strategy has several fundamental components that can generate significant saving opportunities. From contract management to purchasing office supplies, organizations can glean a competitive advantage simply by stopping tail spend slipping through the net.  

But how? The steps below form a practical tail spend management foundation:

1. Identify tail spend

Fighting against an invisible enemy is more or less impossible. Identify the purchases constituting tail spend to tame and control the beast. This requires categorizing all spend to determine which purchases fall into the 80/20 bracket. Tail spend items differ from business to business, so there are no fundamentally wrong answers here.

2. Optimize internal processes

Make sure your company is confident with any internal processes relating to tail spend, such as financial reporting and procurement initiatives. Finding ways to make these processes more streamlined — or made clearer to employees — will have a knock-on effect on tail spend down the line. Consider optimizing internal processes via tail spend management and procurement outsourcing.

3. Standardize and analyze spend data

Leverage spend analysis tools to consolidate spending data from various sources, including procurement systems, credit card statements, and departmental records. This consolidation visualizes high-volume or one-off purchases across business units, revealing hidden costs for everything from office supplies and low-value software licenses to indirect spend on shipping fees. For example, a large retail chain could manage tail spend more effectively by rolling cloud storage subscriptions from individual stores into one overall package.

4. Set clear goals and KPIs

After initial analysis, establish realistic goals and KPIs as the foundation for a tail spend management strategy. Define success metrics within spend data to track progress. These can include decreased processing costs and cost savings per category. Using the example above, the retail chain could track whether cloud storage costs have decreased after consolidating into one subscription.

5. Streamline supplier base

Reduce the number of suppliers whenever possible to reduce costs within the supply chain like shipping or transaction fees. This focus on strategic purchasing will optimize your supplier base, as managing tail spend is far easier with a smaller core group of vendors. Businesses also benefit from stronger supplier relationships, simplified contract management, and potential discounts. For example, a restaurant could work with a small group of wholesale strategic suppliers rather than a larger network with more moving parts.

6. Create spend categories

Enhance data quality and optimize strategic analysis by establishing clear and consistent categories for classifying your company’s spend. Split costs based on type, department, or project and identify where tail spend management is most important. The Pareto Principle applies here – identifying the 20% of categories responsible for 80% of your spend is fundamental to revealing where to focus your efforts. The restaurant from above may find that ingredients for specific dishes make up 80% of its spending and can subsequently take steps to rectify this by altering low-margin menu items.

7. Optimize internal processes

Managing tail spend involves similar principles as the wider FinOps philosophy. Initiatives to streamline internal processes and promote a holistic attitude to spending can significantly reduce and tail spend. For example, an ecommerce procurement department could use spend analytics to optimize the organization’s payment gateways by choosing the most cost-effective option. Without optimized internal processes, this could easily slip through the net.

8. Embrace artificial intelligence

Tail spend management involves a significant amount of time-consuming data analysis and categorization. Relying on manual labor is outdated, inefficient, and potentially inaccurate (creating further tail spend issues). Leverage AI to automate tasks like spend categorizing, anomaly detection, and even supplier risk assessments. The Vertice SaaS purchasing platform has advanced machine learning algorithms to help businesses automate categorization and highlight tail spend management opportunities. The ecommerce business from the example above would never effectively spot the right payment gateway to reduce processing fees without automation. The spend analysis would simply be too time-consuming to do manually.

9. Promote financial visibility and accountability

Encouraging financial data visibility across an organization is another cornerstone of effectively managing tail spend. Without doing so, initiatives for cost saving on things like employee expenses, in particular, can  fall flat. However, if all individuals within an organization are required to transparently list expenses, tail spend on food or travel can be significantly reduced.  

10. Continuously monitor and refine

Tail spend management is a constant process requiring continuous monitoring and refinement. Outsourcing can streamline operations and free-up resources for more valuable tasks. For example, the Vertice platform provides real-time monitoring for an organization’s SaaS spending, identifying tail spend examples like unnoticed freemium plan upgrades or data storage fees.

The benefits of effective tail spend management

Effectively managing tail spend has several important benefits. For example:

• Strategic sourcing – Tail spend management encourages strategic supplier or SaaS vendor relationships by highlighting opportunities to reduce long-tail costs, such as delivery or administration fees. This doesn’t just reduce tail spend, it also optimizes workflows and supply chains, creating more profitability overall. For example, a restaurant could reduce delivery time frames with strategic supplier partnerships, leading to fresher ingredients and more efficient preparation.  
• Optimized spend catalogs – Effective tail spend management optimizes supplier or vendor catalogs, ensuring all stakeholders in an organization are on the same page. Businesses can implement better quality procurement across their SaaS networks, fostering closer relationships and potentially obtaining discounts. For example, an ecommerce business could have a catalog of pre-approved marketing software options, helping the marketing team quickly get to business.  
• Reduce long-tail spend – Long-tail spend is a particularly sharp thorn in an organization’s side, characterized by small, unnoticed purchases that accumulate over time. Managing tail spend by consolidating suppliers or software vendors can reduce the number of transactions for things like office supplies or additional data storage, leading to reduced processing and delivery fees.
• Better financial awareness – Tail spend management strategies influence better financial awareness across an organization. With more transparent spend visibility, stakeholders can become more aware of how small decisions can create significant extra costs over extended periods. In the context of SaaS cost management, this can help IT teams optimize resources and only spend the exact amount necessary on pay-as-you-go subscriptions.
• Increased budget robustness – Spend categories and other tail spend management tactics increase budget robustness, enabling organizations to scale their operations or react to unforeseen financial shocks more effectively. For example, an ecommerce business could allocate more resources to luxury garments selling after realizing the increased packaging associated with larger quantities of purchase orders for cheaper clothing is generating high tail spend.
• Cut procurement spend – Procurement professionals must be particularly attuned to tail spend management, as there are many potential financial pitfalls to navigate during the procurement process. Spend analysis might show that an organization is particularly prone to overpaying for cloud storage, something that the procurement department can leverage to obtain better contracts going forward.

How much SaaS wastage can be attributed to poor tail spend management??

Organizations can unknowingly accumulate significant costs due to inefficient SaaS tail spend management. Hemorrhaging cash with unnecessary services, feature overlap, and underutilized subscriptions is all too common, especially with SaaS stacks regularly exceeding 100 different applications.

SaaS tail spend usually develops due to a combination of the following:

• Shadow IT — The term used to describe blind spots within IT stacks, often caused by individual employees purchasing SaaS products outside of established procurement guidelines. SaaS tools used for one-off projects often lead to shadow IT, complicating contract renewal management due to the lack of ownership.
• Auto-renewals – Many subscriptions have auto-renewals. If left unchecked, these can drain the budget for no reason.
• Freemium upgrades – Some cloud applications offer a free trial period before automatically upgrading to a premium pricing plan, an obvious barrier to strategic spend.
• Data storage – Pay-as-you-go cloud storage solutions can get expensive if companies exceed their contracted limits.

These dangers are easily avoided with the right SaaS spend management tool. Vertice’s solution is a prime candidate to help you eliminate tail spend once and for all. Our platform leverages AI to provide detailed spend analytics, helping you optimize your SaaS stack and eliminate the bloat.

How Vertice can assist with your tail spend management

Tail spend is just one of many factors that are pushing up business SaaS expenditure year on year — and leading to the majority of companies overspending on their software subscriptions. But if you’re looking to achieve complete visibility on your contracts and outgoings, Vertice can help.

Our platform provides streamlined management of your SaaS portfolio so that you can see exactly what you’re paying for, when you’re being billed, and where opportunities exist to trim costs. We use automation to turn your SaaS procurement process into a seamless workflow and ensure that the only costs coming out of your budget are those that are necessary and accounted for.

We also negotiate on your behalf, maximizing the value you get from each tool in your stack. Vertice has access to over 13,000 global vendor prices and discounting benchmarks that we can leverage on your behalf in the negotiations process, so that you can save at least 20% on your annual software bill.

To learn more about how we can help your business, get in touch with us today or see how much you could be saving by getting a free cost savings analysis.

If you’d like to learn more about tail spend management and its associated topics, check out the list of articles below.

• SaaS visibility — A guide to surfacing SaaS licenses in your organization and eliminating shadow IT;
• Cloud visibility — A guide on how to improve visibility of the cloud products in your IT system;
• Shadow IT — Learn more about maverick purchasing, known in the SaaS space as shadow IT, and how to tackle it;
• Cloud spend management — Information on how to effectively manage cloud spend, including a 60% reduction on AWS EC2;
• Full stack observability — Closely linked to SaaS visibility, gain insight into the end-to-end performance of your entire SaaS portfolio;
• IT procurement category management — Discover how category management can ease procurement efforts and stimulate greater ROI;
• IT procurement purchasing strategy — Information on how to build an effective purchasing strategy in IT procurement;
• SaaS spend management — Wider insight into SaaS spend and how it can be brought under the control of software tools;
• Vendor relationship management — A guide to vendor relationship management and why it’s vital to all procurement efforts.