Tail Spend

Tail Spend Importance for IT Managers

Although it is a common term but rarely optimized, tail spending is currently gaining traction and coming to the spotlight. In the current IT landscape, IT managers encounter far more indirect expenses than those in a contract or direct spending. Thus, there is a wide scope of savings in tail spending. 

The most essential instances are incurred by:

• Impact on profitability due to inflation across global IT warehouses.

• Long cycle times lead to churning customers who look for 24*7 support.

• Catering to a wide range of sustainable IT suppliers due to getting into agreements with multiple partners.

• There are no proper savings modules.

• Improper risk countering strategies.

Key Characteristics of Tail Spend

The recent pandemic has led to upheaval in the IT industry, where IT managers are finally considering tail spending as part of expenses. The most volatile factor is that it has negligible visibility in the budget that offices or firms neglect. 

Here are the key characteristics of tail spending:

• High Volume Transactions: Over time, these many little purchases mount up. These include print and packaging, business and marketing services, signage and displays, uniforms and clothes, facilities, presents and incentives, office supplies, and temporary workers.

• Neglected Area: Some expenses are overlooked in favor of managing high-value contracts. These encompass maverick spending, incorrectly coded purchases leading to errors in overall buying cost, fragmented spending where goods are bought in chunks, and low-priced high-frequency and low-frequency IT assets.

• Complexity: It is difficult to monitor due to the wide range and volume of transactions. The number of items to be managed is so large that contracts pile up for all these expenses, leading to inadequacy and failure to track costs.

Benefits of Managing Tail Spend

Its management addresses costs induced by a firm's frequency of low-value, high-frequency expenditures. This makes the firm more cost-aware and increases cost-effectiveness.

• Cost Savings: When managed effectively, it has the potential for significant savings. Proper management cuts costs by 5-10% annually and reduces maverick spending. When consolidated, low-value and low-value high purchases can significantly save amounts.

• Efficiency Improvements: With proper management, it leads to streamlined processes and better purchasing controls. A centralized procurement system keeps track of tail spend, thus increasing spend visibility and lowering the risk of unmonitored expenses.

• Better Resource Allocation: It leads to focusing on strategic spending and reducing waste. Allocation is done optimally and in bulk. For instance, a software subscription is done for the whole team, thus cutting costs rather than buying individually for each team member. This also simplifies the procurement process, resulting in the firm's financial stability.

Challenges in Managing Tail Spend

Managing tail spend is an enticing term, but adopting it is a disruptive and tiresome process. Despite this, there is no denying that optimally managing tail spend can do wonders for a firm.

However, there are potential challenges that are posed while trying to strategize it for a company.

1. Data Visibility: There is limited visibility and difficulty aggregating disparate data. Since tail spend data is so high in volume and complex, deriving insights from it becomes cumbersome. These purchases are made from various sources, leading to cost overheads.

2. Supply Chain Complexity: IT managers must manage multiple suppliers for low-value, non-core items. When there is no software or solution for tracking them, burdening Excel sheets just aggravates the complexity.

3. Compliance: Ensuring that even small purchases align with company policies and standards is pivotal. Compliance with company standards leads to better tracking and reduces costs and functional overhead.

Tools and Strategies for Tail Spending

Though it has been a less talked-about factor, it is now gaining traction. Businesses invest in resources that monitor tail spending and optimize costs and resources for the firm.

A few tools for monitoring it are:

• Analytics Software: Use data analytics tools to gain visibility into tail spend. Popular tools like Power BI and Tableau track data in hindsight and curate strategies that lower or mitigate this expenditure. These tools provide a holistic overview, enabling businesses to strategize better.

• Centralized Purchasing: Through consolidating purchasing to reduce fragmentation, low-value high-purchase or low-value low-purchase items are bought in bulk to evade fragmented and unnecessary charges.

• Supplier Management: Adhering to a large supplier base creates extra costs. Therefore, with proper tail spend management, firms can seek out the most efficient and compliant suppliers and associate with them. By lowering the number of suppliers to the bare minimum, firms can reduce paperwork and increase overall efficiency.

FAQs

What is a tail spend example?

Examples include stationary expenses for employees, maverick costs, and fragmented expenditures while engaging in contracts with multiple vendors or suppliers.

How do you address a tail spend?

It can be addressed by consolidating contracts with multiple vendors and associating with the most required ones. Also, better utilization of data analytics tools enables viewing and strategizing to save on these costs.

What is the tail spend problem?

When multiple transactions need to be carried out by organizations of low value but high frequency, it leads to cost overhead; the worst part is that these expenditures are not visible, so tracking them becomes hugely complex.