Why your SaaS tail spend holds huge cost-saving opportunities
Aimee Manning | FEB 01, 2023
When it comes to reducing business overheads, we often instinctively think about the larger company expenses such as payroll and operational costs. What gets less consideration, however, are the lower-value purchases that are made without the finance or procurement team’s knowledge.
The problem is, these smaller expenses add up.
Just take SaaS purchasing for example. With the average organization now using 177 different applications, many are bypassing official procurement processes, which means that many are going unmanaged.
More specifically, it means that the costs associated with each SaaS tool could be draining your resources and budgets, all the while creating significant obstacles to growth.
But with the cost of SaaS increasing by an average of 9% year-on-year, it’s more important than ever to get a handle on these costs — and this means managing your tail spend.
What is tail spend?
Tail spend refers to the unmanaged purchases made within an organization that fail to pass through an official procurement process. On account of their low value, the costs incurred by these purchases are seldom monitored by financing teams as they are generally too small to be deemed “strategic”. The problem, however, is that they can make up as much as 20% of a business’ total spend.
But while tail spend can be a costly burden for businesses, not all of its forms are problematic. In fact, what constitutes tail spend from one organization to the next is likely to vary significantly — from casual daily purchases of tea and coffee, to larger transactions that go unchecked.
The common theme, however, is that these “invisible” payments fail to pass through official financing channels or be cataloged within the company. Tail spend accumulates over time and ultimately reflects a significant area of business where costs can be trimmed — particularly within SaaS procurement.
What causes tail spend in SaaS?
In some instances, an entire software contract will fall under the category of tail spend if purchased entirely outside of the company procurement process or core suppliers. These will typically be purchases made at the employee’s discretion using either a company card or submitting the purchase as an expense. At other times, it isn’t the entire contract that is responsible, but certain features, add-ons, or fees associated with its purchase. Some vendors, for example, will impose additional support costs during onboarding that go unaccounted for, or surcharges when your monthly usage exceeds your allotted bandwidth.
When insufficiently managed, SaaS procurement can spiral out of control — resulting in 90% of companies overspending by an estimated 20-30% on their software buying.
The bottom line is that tail spend is a key factor responsible for driving up software costs. In fact, one report from McKinsey estimates that companies that manage their tail spend could enjoy savings to the tune of 5-15% of their total expenditure.
So, what is causing it?
Tail spend is largely associated with maverick spending — something that happens when an employee makes a purchase without following the correct company procurement guidelines. When purchasing software, tail spend might not just be the subscription fee, but also the other associated costs such as onboarding fees, customization fees, technical support fees, or any other add-on services.
Interestingly, one common misconception is that tail spend comprises only low-value transactions, but this isn’t necessarily the case. While these transactions are perhaps the most common type of tail spend in SaaS, high-value purchases do also go unmanaged.
As an example, a large transaction may take place to ensure a quick renewal turnaround for a given contract or to purchase a subscription that is urgently required to fulfil a task. This is known as spot buying, a type of maverick spending — or rogue spending — that happens when employees lack the lead time to source a cheaper alternative or engage in vendor negotiations.
Poor SaaS stack visibility
When a company fails to effectively manage its software portfolio, unnecessary and expensive tail spend can occur. If software is being bought outside of the company’s standard procurement system, or if there isn’t one to begin with, it can become all too easy to lose track of the purchases that are taking place.
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.
It’s also worth noting that, on average, software vendors increase their prices by 9% each year. The problem is, many software contracts include clauses that allow for price uplifts, often with little or no notice whatsoever. If software is procured outside company policy and poorly documented, it might become difficult to spot that these costs are rising, leading to further increases in tail spend.
How to manage your SaaS tail spend for greater cost savings
SaaS tail spend management is the process of regaining control of decentralized software purchasing habits. By managing tail spend, CFOs can secure significant cost reduction, as fewer purchases are made without approval and more accurate budgeting can be achieved.
But what are the best practices for managing your SaaS tail spend?
Standardize your SaaS procurement process
To ensure that no future software purchases go unmonitored, you should work to standardize and automate your procurement process. When a department requests a new tool, the application should be sufficiently vetted for its compliance, prospective return on investment, and how it fits into the company’s wider SaaS stack.
At purchase, each contract should be documented and governed by a central procurement team to ensure supervision of the entire portfolio, while also enabling them to gain insight into how to further optimize software spend.
Centralizing and streamlining your procurement can also help to improve software security and compliance. This is because maverick spending is associated with shadow IT, which occurs when departments or individuals within an organization purchase their own IT products without approval. By standardizing your purchasing process and adequately vetting each tool used within the organization, you can better protect your company files, intellectual property, and other sensitive data against costly security risks.
Negotiate all software contracts
Revising your procurement workflow to ensure good governance is just one vital part of the puzzle — but it’s also important to negotiate the contract terms of each item in your portfolio, old or new.
All too often, organizations prefer to achieve a quick turnaround and onboard with a new SaaS product as soon as possible. This is understandable, of course — it’s only natural to want to skip to the good bit and reap the benefits of cost savings and boosted productivity. However, it could mean that for the cheaper or less important software tools in your stack, you’ve missed out on the best price and contract terms by skipping negotiations.
For example, if you’re taking on three unmanaged, un-negotiated contracts for every one larger contract that you track, your tail spend will quickly build up. This is why it’s important to consider negotiating each new SaaS contract, rather than just the more expensive ones that offer higher prospective savings.
How Vertice can assist with your SaaS 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.