What is the long-tail?
Long-tail spend has gotten its name from a business’ spend curve. As seen in the tail spend graph below, there is a group of suppliers with a lot of spend. This is most often direct spend, which accounts for around 80% of the business’ entire spend.
Following the curve from left to right, spend per supplier decreases. But there are so many of these suppliers with low spend that the graph keeps going – this is what creates the long-tail on the spend curve. Indirect spend, which long-tail spend is, typically only accounts for 20% of a business’ entire spend.
Direct spend accounts for 80% of spend and long-tail accounts for 20% of spend. So, it is natural for Procurement to focus on direct spend (also called “strategic spend”). But while long-spend only accounts for 20% of spend, it accounts for 80% of all transactions. And 80% of all suppliers.
Purchases in the long-tail are primarily low volume with a broad range of suppliers. Many one-time suppliers or infrequent purchases make it difficult for procurement and finance to manage the inevitable administrative burden of creating Purchase Orders, handling approvals, onboarding suppliers, processing invoices and making payments for the long-tail.
Why does it matter?
It is unfortunately easy to ignore long-tail spend and not give it the same strategic attention as direct spend. The complexity that surrounds the long-tail causes many businesses to ignore serious efforts to optimise this spend – it’s simply not worth -he effort.
But there are great savings potential in the long-tail. By strategically managing the tail, businesses can save up to 15% of their tail spend. How much depends on the business – the less mature the business, the more the saving. These savings especially stem from the lower cost of handling invoices and onboarding and managing suppliers.