Shadow spend costs UK firms margins as AI offers hope
Research from Ivalua indicates that untracked and unmanaged expenditure, known as shadow spend, is resulting in significant financial loss for UK businesses.
According to a study of 300 UK supply chain decision-makers, on average, one in every ten pounds spent by UK companies falls into this category of shadow spend, escaping the oversight of formal procurement systems. The report highlights that 87% of UK businesses estimate up to a quarter of their total expenditure is not tracked by procurement, and 4% believe the figure is even higher, exceeding 26%.
Poor visibility is cited as the main contributor to the growth of shadow spend, with 80% of organisations reporting that a lack of clarity prevents them from monitoring expenditure, managing suppliers, and securing favourable pricing. These oversight gaps, the report suggests, fuel a range of business challenges, including overspending (73% of respondents), heightened compliance risks (57%), and missed savings opportunities (53%).
The effects of shadow spend are concerning for the financial health of UK companies, particularly against the backdrop of recent insolvency figures. Government data recorded 23,872 registered company insolvencies in 2024. Additionally, figures from research firm Beauhurst documented the closure of 198,046 businesses in the final quarter of the same year.
Stephen Carter, Product Director at Ivalua, commented: "With £1 in every £10 lost to shadow spend, businesses are eroding margins and exposing themselves to risks without even realising it. In a cost crunch climate driven by tariff uncertainty and geopolitical tensions, shadow spend becomes a drain on resources that is no longer sustainable and must be stopped. But getting to grips with shadow spend is impossible if organisations can't see it happening. Without greater visibility and control over spend management, businesses are flying blind, and running out of room to react, leaving many UK businesses at risk of financial collapse."
The research reveals that more than half of UK companies expect the problem to worsen in the coming year, underlining the urgency for improved spend management. Shadow spend is described as quietly accelerating financial pressures by inflating costs and eroding organisational margins, at a time when economic resilience is under strain.
Technology is identified as a critical facilitator in addressing the challenges posed by shadow spend. Most UK businesses (84%) believe artificial intelligence can assist in identifying untracked expenditure, with 43% confident in its potential to do so to a large extent. The application of AI is also anticipated to benefit employee experience by simplifying essential procurement processes, such as navigating e-procurement systems, adhering to approved supplier lists, following purchasing workflows, and complying with expense policies.
Automation and analytics are highlighted as other important tools in the drive to combat shadow spend. The report notes that 86% of businesses believe automation can contribute to reducing shadow spend, with 30% expecting a significant impact. Moreover, 95% of businesses express confidence that spend analytics can improve the identification and management of shadow expenditure.
Carter added: "In today's volatile global landscape, managing purchasing has never been more complex, and shadow spend thrives in chaos. Shadow spend is the silent margin killer, hiding in fragmented systems and poor visibility. AI won't just expose this problem, it will address it at the source. For example, conversational AI interfaces will help employees to buy what they need without bypassing spending policies and controls. By improving the employee experience, technology makes it easier to do the right thing, because if you can't see where your money's going, you'll never control where it ends up."
The findings reflect an increasing awareness among UK companies of the threat posed by unmonitored expenditure and a recognition of the role technology could play in mitigating its impact.
