Tail Spend Management

What is tail spend?

What causes SaaS tail spend?

Best practices for managing tail spend

The benefits of effective tail spend management

How much SaaS wastage can be attributed to tail spend?

How Vertice can assist with your tail spend management

Tail spend management FAQs

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.

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?

Maverick spending

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.

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 following best practices for managing tail spend form a practical foundation: 

• 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. 

• 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.

• 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. 

• 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.

• 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. 

• 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.

• 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.  

• 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. 

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.

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 – Employees independently procuring one-time-use SaaS tools without logging these services, thus creating blindspots and potential money drains. 
• 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.

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.