A New Take on Tail Spend Management
31st October 2023

In today's dynamic B2B landscape, businesses are constantly exploring new strategies to enhance efficiency and reinforce their bottom line. 

One approach that's rapidly gaining traction is the practice of effective tail spend management, a facet of procurement that has long held the reputation of being more trouble than it’s worth.  

We spoke with Billhop’s very own CFO, Ingemar Sjögren, to discuss why tail spend management has continued to plague companies and how businesses are coming up with innovative ways to combat this issue. 

Identify Your Tail Spend

“The first step to tackling tail spend is to understand what it actually is,” Ingemar begins. “What is considered tail spend differs from corporation to corporation”. 

Tail spend generally encompasses all ad-hoc, low-value purchases that are not essential for daily operations or core business functions. 

They make up as much as 80% of transactions while merely accounting for 20% of the total spending within a company.

Unsurprisingly, tail spend is often neglected as companies invariably prioritise their strategic spend, which can be easier to manage and often yields a higher return. 

What’s more alarming, though, is that many companies are oblivious to the staggering costs associated with poor tail spend management. 

In some cases, these oversights can cost them hundreds of thousands, or even millions of dollars annually. 

Key Hurdles in Managing Tail Spend

“Large corporations with many entities across the globe tend to have numerous local decision makers. This makes it extremely challenging to gather a holistic view of the company’s full spend data. Additionally, despite similar spend items in different countries, they might not be immediately comparable because of language or specification differences,” Ingemar noted.  

There’s no denying that with the advancement of Expense Management Systems (EMS) like Pleo and SAP Concur, ad-hoc T&E and B2C purchases have become more manageable over the years. 

In fact, corporations that manage their tail spend with digital tools report an average annual expenditure reduction of 5 to 10 percent.

For large global corporations with expenses reaching hundreds of millions or even billions of dollars, this represents a substantial amount.

T&E and B2C purchases in particular, can be made with existing procurement cards (P-cards) or T&E cards. This makes them less of a headache to manage and analyse because credit cards provide robust purchase details that make reconciliation and reporting easier. 

In addition, because everything is settled by cards, there is no need for any supplier onboarding or other related action. 

Unfortunately, that is not the case for some indirect purchases. Most B2B suppliers remain reluctant to accept credit card payments due to the high processing fees involved. 

Consequently, finance teams have to engage in the lengthy and costly process of onboarding numerous low-value suppliers into their ERP systems. 

Many of these suppliers might be onboarded just to settle a single invoice. 

The True Cost of Supplier Onboarding

One of the key takeaways from the interview was the importance for enterprises to grasp the true cost of supplier onboarding. 

“With our clients, we see a varying cost for processing and ERP supplier registration from 200 to several thousand euros,” said Billhop’s CFO. “And this is even before factoring in the annual renewal and maintenance fees associated with using the ERP.”

As a result, the processing costs for a single tail spend invoice can be exorbitant, ranging from 10% to well over 100% of its principal amount.

Ingemar notes that the typical onboarding process for tail spend suppliers in large companies involves multiple moving parts, from conducting comprehensive supplier due diligence to onboard suppliers to creating purchase orders each time they transact with these suppliers.

In certain cases, enterprises may mandate suppliers to complete extensive questionnaires and impose substantial supplier fees, which can present challenges for smaller suppliers who already have tight margins.

Transforming the Onboarding of Indirect Spend Suppliers into Simple Expense Items 

Ideally, according to Ingemar, tail spend should be treated with the structure and strategy of strategic spend. 

Yet, due to the sheer amount of time and manpower required for in-depth analysis of indirect spend and precise category management, this approach isn't always practical.

While it's possible for businesses to control employees' purchasing power by confining it to items in procurement catalogues, this approach often overlooks various ad-hoc spending categories, such as marketing materials and occasional professional services. 

In essence, determining who gets to spend money is a balancing act. This is compounded by the size and complexity of any business. 

On the one hand, it is in an enterprise’s interest to limit extensive maverick spend, while on the other, employees should be empowered to make financial decisions wisely.

This is where large corporations can drastically streamline their internal processes by consolidating all indirect spend purchases onto their existing P-card programme. 

As mentioned earlier, the challenge with this solution lies in the fact that not all B2B suppliers are willing to accept card payments.

Thankfully, innovative payment platforms like Billhop have created an elegant solution to overcome this hurdle. 

Billhop empowers businesses to pay any non-card accepting supplier by credit cards, without the need for supplier onboarding or involvement.

Through strategic partnerships with major players in the card industry, Billhop equips companies with the ability to conduct global transactions in a wide range of currencies.

The Global Toll of Late Payments

In Ingemar’s view, a major advantage that often goes unnoticed is the ability to pay suppliers on time and in full (OTIF). "Suppliers are hesitant to sell to companies that are process heavy," the CFO points out. “They know from past experience with these companies that it will take them months of chasing to get paid, if they even get paid at all.” 

According to the European Commission, late payments are a worldwide problem. Approximately 10% of invoices issued in commercial transactions around the world do not get paid on time (or get written off as bad debt), costing the global economy billions of euros annually.

Late payments can cause a chain reaction, leading to more and more late payments. 

In Europe, 70% of businesses assert that receiving timely payments would enable them to meet their obligations to suppliers promptly as well.

To combat this issue, the European Commission proposed a new regulation that will cap the maximum payment term at 30 days, down from the previous one where it can be extended by over 60 days, for all commercial transactions, including B2B payments. 

While this may be welcome news to many SMEs struggling to get paid, the 30 day cap can place a huge strain on not only enterprises but also governmental organisations that are process heavy. 

Often, the time it takes just to conduct due diligence or onboard a supplier can take well over 30 days. 

In light of this, opting for credit card payments can provide these companies with a strategic advantage. 

This not only ensures that invoices can be paid on time and in full, but also offers the benefit of extended payment terms for the payer.

By embracing credit card payments to their suppliers, companies can enhance process efficiency and reduce the administrative overhead associated with traditional payment methods, which can lead to significant cost savings in the long run.

Adapting to the Changing Landscape of Tail Spend

As the interview with Ingemar illustrates, the B2B landscape is evolving rapidly. Companies that embrace innovative payment methods, like paying non-card accepting suppliers by credit card, position themselves for success.

This practice enhances efficiency, streamlines transactions, and allows companies to pay their suppliers on time and in full. 

It represents a paradigm shift for companies across various industries and it’s a change we are likely to witness more of in the B2B world in the coming years.

About Ingemar

Ingemar is an accomplished financial executive with a rich and diverse career that encompasses investment banking, strategy consulting, and group management within a multinational manufacturing group. Currently serving as the Chief Financial Officer of Billhop, Ingemar applies his extensive financial sector knowledge to drive strategic decision-making and financial excellence.

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Billhop AB is a Swedish payment institute, authorised and regulated in Sweden by the Swedish Financial Supervisory Authority. We are exempt from the prohibition, in regulation 138 of the UK Payment Services Regulations 2017, on providing payment services in the United Kingdom and we are not authorised by the UK Financial Conduct Authority. Billhop upholds industry best-in-class security standards including 2FA and issuer security solutions such as 3DS. All client funds are safeguarded through standard client funds account setup.