In an era of high interest rates and persistent inflation, businesses are under more pressure than ever to find innovative ways to reduce costs.

The economic boom we’ve experienced over the last 15 years, combined with low interest rates, has led many organizations to prioritize revenue growth over cost savings and focus their procurement efforts on large, multiyear contracts with strategic suppliers.

These major strategic suppliers typically account for around 80% of vendor spend, leaving the remaining 20% — the ‘tail’ — largely unmanaged.

Now that the market has shifted, organizations are being pressured to find innovative cost-reduction strategies and implement solutions to address all spend, including tail spend, which is ripe for cost-saving opportunities.

Understanding Tail Spend

Tail-spend often goes unaddressed because it’s complex to define and manage. The easy answer is to pick a spend threshold and chalk that up to the unmanaged tail. This tail involves potentially thousands of invoices and suppliers scattered across various categories, making it challenging to identify and act on savings opportunities.

Effective management can address some of these challenges, but solving tail spend issues, identifying savings opportunities beyond the ’low-hanging fruit,’ and creating a sustainable approach to tail spend management can require organizational buy-in and expertise that may not exist within the organization.

Organizations need to define and understand their tail and put pressure on their teams to deliver a targeted solution for those suppliers and spend. With the recent rise of AI and the pressure to innovate for cost reduction, businesses are increasingly turning to technology, automation, and AI to identify opportunities and enhance their tail spend management.

Defining the Tail

The first step in unlocking the full potential of tail spend is conducting a comprehensive spend analysis that covers all third-party vendor expenses. Many organizations draw an arbitrary line that tail-spend starts at a specific spend figure. However, if categories and segments are managed effectively and risk is understood, each spend category will have its own definition of tail spend. A “one-size-fits-all” approach is unlikely to deliver maximum value to an organization.

Leveraging Technology and AI

Technology and AI are powerful tools for tail spend management, including these key areas:

1. Supplier Rationalization: AI, supported by optical character recognition tools, can analyze invoice details to identify overlapping services and consolidation opportunities. Business units and procurement teams can also leverage AI assistants to steer supplier spend toward preferred suppliers. This streamlines the supplier base, improving user experience and making procurement more efficient and cost-effective. The challenge with AI is that vendors embed it in their tools, but it does not actually solve key client challenges.
2. Cost Savings: The development of large language models (LLMs) has enabled AI assistants to automate negotiations. These assistants can also identify suppliers with favorable pricing agreements or help procurement teams launch early payment discount programs, where decreased payment terms are exchanged for discounts or rebates. One example of a company currently leveraging AI for tail spend management is Walmart, which uses an autonomous negotiation tool to renegotiate contracts with tail spend suppliers at a much faster pace than humans.
3. Operational Excellence: Implementing AI-driven analytics and spend management tools can transform procurement functions. These tools provide quick, actionable insights, enabling teams to make informed purchasing decisions and ensure compliance. AArete, for instance, has implemented AI solutions that drastically reduce the time needed for spend analysis, leading to more effective procurement operations.

Developing a Tail Spend Management Plan

Given the complexity of organizational spend, developing an effective tail spend management plan is essential. This involves analyzing criteria such as operational impact, complexity, and speed to potential savings.

Quick wins are possible in categories like staff augmentation, facilities management, and telecommunications through supplier consolidation and stronger governance. Identifying vendors with commoditized products can help achieve rapid savings, while higher complexity categories like business applications may require more advanced technical analysis and risk management.

An example of how AI can assist with these highly complex categories is leveraging a tool to track the utilization of business application software licenses to ensure the business is not paying for unused licenses.

Achieving Tail Spend Efficiency

Tail-spend has long been a ‘black box’ for medium and large businesses. Despite its high transaction volume and lower dollar amounts, effective tail spend management can lead to millions of dollars in potential savings and organizational improvements.

As technology and AI advance, integrating these tools will become essential for all procurement teams. By leveraging AI to streamline processes, identify savings, and enhance compliance, businesses can unlock the hidden value within their tail spend.