Managing Tail Spend to Avoid "Porcelain Dalmatians"
5 steps to take when managing tail spend to avoid making purchases within an organization that go underutilized or unused.
By Eric Edwards | January 10, 2023
Tail spend refers to an organization’s high-volume, low-value transactions that are typically unmanaged by the procurement team. Some procurement departments use the 80/20 Pareto principle to focus on the large (80 percent) clients and contracts where supposedly greater savings can be realized, choosing to ignore the smaller 20 percent.Regardless of definition, tail spend is like watching the tail of an excited dog – difficult to track. However, if properly managed, tail spending can significantly reduce costs by as much as 10 percent or more of a company’s indirect expenses.
How tail spend leads to “porcelain dalmatians”
Years ago, a colleague of mine named Robert, coined the term “porcelain Dalmatian” referring to my company’s technology purchases that sat unused on shelves (or in the Cloud), weren’t adopted, or were severely underutilized. Inadvertently revealing his age, Robert’s term referred to the original version of Wheel of Fortune (1975 to 1989), when puzzle-winning contestants bought prizes at the end of a round.
With 90 percent of their money spent on patio furniture, lamps, and cookware, contestants had to spend their last dollars on an item. Without fail, it seemed they only had just enough money to buy the ceramic dog statue destined to obediently fetch dust by sitting next to the fireplace. The term quickly stuck and came to represent any of our company’s untracked, questionable, and possibly wasteful purchases.
So, how many porcelain Dalmatians has your company recently purchased?
When effectively managing tail spend, companies report saving 10 percent or more, which can be a significant addition to the organization’s bottom line.
Five steps to setting up a tail spend management process
As mentioned in a previous article, tail spend is not easy to track, but is usually associated with indirect uncategorized business expenses. Back in the old Wheel of Fortune days, manually tracking these expenses wasn’t worth it. Consequently, most procurement functions devoted little, if any, attention to managing tail spending due to its complexity, even though thousands of hidden low-value, high-volume transactions could occur every day for large companies.
But with cloud-based procurement technology solutions widely available now, it is easier to shine a spotlight on tail spend and have greater control over spending. Companies report saving as much as 10 percent by reducing their tail spending, which can be a significant addition to the organization’s bottom line, not to mention better quality control and waste reduction.
(And remember, despite being a sedentary breed, porcelain Dalmatians do cost the company money and can take up valuable resources.)
Here, we’ll cover five steps to setting up a tail spend management process:
- Determine the business needs
- Identify spending categories
- Get stakeholder approval and buy-in
- Determine the budget for a third party tool
- Research tail spend management tools
Step 1: Determine the business needs
Before changing any business process, your first step is to define the problem you’re trying to solve and the resources needed. Often, a cost-inducing business problem is the result of a faulty process AND inadequate software. Spend time with your department to gain an understanding of the issues from their perspective.
Try to facilitate a constructive meeting with your department without throwing blame or fault around. Ask them what they like and don’t like about the current system and what changes they believe would make their job easier.
Be sure to document the business need and research the cost-savings the company will realize if it decides to move forward with your initiative to eliminate “porcelain Dalmatians.”
Step 2: Identify spending categories
The second step for any organization wanting to better manage its tail spend is to reveal what’s in it. This means taking the time to define what categories make up your company’s tail spend. Typically, tail spending occurs in:
- Office products
- Print and packaging
- Business travel and services
- Temporary staffing
But as mentioned at the beginning of the article, all companies are different. Have your procurement team collaborate on what categories can be added to tail spend management. Bringing the team together will allow everyone to voice their perspective and perhaps find potential solutions upper management may not have considered. This will probably take more than one meeting.
Don’t edit yourself. Capture as many categories as possible. Then go back as a group and edit the ones that will be too small or time-consuming to move into a centralized system. Having a group consensus will better ensure buy-in.
Step 3: Get stakeholder approval and buy-in
Nothing stagnates business process change quicker than leaving out a key stakeholder. If you have thoroughly defined your business case, a project management method like RACI can help you keep on track and inform the responsible parties involved.
RACI is an acronym for responsible, accountable, consulted, and informed.
- Responsible: a team member who is directly responsible for successfully completing a project task.
- Accountable: the person with the final say over successful task completion or deliverable.
- Consulted: people with knowledgeable insights who will be consulted.
- Informed: the executive(s) who maybe isn’t involved, but you need to inform about project progress.
This can’t be overstated; having a project management system in place to help you track stakeholder engagement and project execution will go a long way towards creating a positive change for the organization.
Step 4: Determine the budget for a third party tool
Before submitting a purchase request for a new procurement app, be sure to have approval for a budget. Again, if you have performed a sound analysis of the cost savings from strong tail spend management, the value of the application should be apparent.
Be sure to consider the total cost of ownership (TCO), which includes direct and indirect costs over the application’s lifecycle. This can include training, licensing costs, the number of seats (users) needed to access the application, setup fees, maintenance fees, and charges (if any) for ongoing customer service.
Step 5: Research tail spend management tools
Researching application vendors will take time but be thorough. Look at what people are saying consistently online about certain products. Even though all vendors say their software will do “everything,” some procurement apps will be more appropriate for your size of company.
Will you want an off-the-shelf product or are your unique needs forcing you to look at something more customizable? Create a matrix to see if certain apps not only meet the business needs you defined but have other feature requirements that can be value-added benefits. Considering these factors at the start of your research will help you eliminate certain application choices.
You also may consider taking advantage of independent consulting firms or specialized market research companies that have experience doing this research. While this approach is more expensive, it could save you time because these specialists likely have the information you’re looking for and the experience with your size of company.
For some companies, managing tail spend is a process that feels cumbersome or impossible. Consider outsourcing your difficult-to-manage categories to a third party, like a group purchasing organization.
Use a GPO to manage tail spend for free
For some companies, managing their “porcelain Dalmatians” is not a process they want to handle alone. If you find yourself in this situation, consider outsourcing your difficult-to-manage categories to a group purchasing organization.
As a GPO, Una uses spend analytics to identify issues within our members’ tail spend and find categories that could benefit from our group purchasing contracts to generate immediate savings. Outsourcing to a GPO also frees up the procurement team to focus on more strategic initiatives. Una members regularly save an average of 18-22% within their tail spend categories, with some seeing six-figures added to their bottom lines.
Schedule a consultation with one of our expert Sourcing Advisors to get a free spend analysis and learn how to unlock cost savings and other benefits at no cost.