In life, there are certain aspects and elements that become more emphasized as we mature into our societal roles. For instance, income becomes a need the more independence we seek. As the transactional utility under which our economy operates, sustaining an income is a necessity for most of the world. However, when it comes to financial practices, there is a clear distinction between those who have a keen sense of budgeting; and those who don’t. In the context of a business, a family, a single person, or even a non-profit: spend management is a critical component to financial longevity and operational optimization.
There are many aspects to spend management, and all of them are just as important as the last. However, one of the most elusive aspects of a spend management plan is tail-end spend. Procurement managers and business leaders dread discussing tail-end spend, as it’s one of the most difficult aspects of the budget to manage but it significantly impacts a company’s bottom line.
Understanding Tail End Spend
Before we look at management tactics for tail-end spend, it’s important to come to an understanding of what the term means.
The most common definition for tail-end spend is the 80/20 rule. For those of you new to procurement, tail-end spend is typically defined as 80% of the company’s transactions that only account for around 20% of the actual total company spend.
The reason this 20% of spending is so difficult for companies to wrap their heads around is because of the category under which these transactions fall. In other words, these are the small transactions that make up everyday purchases, and other transactions that have low associated costs.
Meanwhile, procurement professionals are focused on securing multi-year contracts on bigger deals with long-term partners. These larger purchases account for the majority of the company’s total spend year after year but are fewer in number.
The 80/20 rule is not infallible, however. Many companies will find that their ratio is slightly different, whether that be 70/30 or 90/10 or something else entirely. The point to be made is that it’s vital to define what tail-end spend means for your company.
This goes beyond the ratio, however, and your company should dedicate time to defining which transactions are categorized as tail-end spend. This will help your accounting and finance teams more clearly and accurately identify tail-end spend patterns and assist in their attempts at managing tail-end spend.
Tail Spend Management Practices
There are a few major obstacles that make it difficult to manage tail spend. However, as more advances are made in technology and the tail spend management software that procurement professionals rely on, there are more ideas and tactics for tail-end spend management processes than there ever have been before.
The biggest issue that most companies face in attempting to address their tail-end spend management is a lack of spend data and real-time visibility. This is because, again, there is no single definition for tail-end spend, and every organization is going to find slightly different difficulties in their spending management strategies.
Knowing that data and information is one of the key ingredients, there are a few first steps that you should take in crafting your tail-end spend management plan. The very first of these steps is to, as is mentioned above, define what tail-end spend is for your company specifically.
This can mean identifying the ratio that is most optimal for your company but should also include identifying categories of purchases and transactions that are accounted as tail-end spend.
Once these identifications are clearly made, your accounting and finance team can then review current spending and previous spending to conduct an internal analysis of sorts. The results of the analysis should reveal what your company’s current tail-end spend ratio is, as well as pull your attention to poor spending habits within tail-end spend.
Data Collection
Knowing that data is the key ingredient here, it’s important to address your procurement team’s data collection strategy. To gather information on tail-end spending and put those analytics to use; you should consider streamlining purchase activities that are related to tail-end-spend. This will allow the swift collection of data for your procurement team to actively analyze, saving time and money. In turn, leading them to make more informed decisions about tail-end spend and how to minimize it.
Spend management is a robust and layered topic. For more information on spend management practices, or if you’re in the market for procurement software, feel free to chat with us.