Four Tips for Controlling IT's Tail SpendPosted 08-27-2013
Four Tips for Controlling IT's Tail Spend
By Mark Ball
For most IT organizations, the classic 80/20 rule applies to the supplier portfolio, where more than 80 percent of the total spend is dedicated to less than 20 percent of the organization’s total number of suppliers. This is expected because large IT infrastructure systems and resources are typically procured through a relatively small number of well-established IT providers. But problems can arise when IT organizations have a very large number of “tail” suppliers—e.g., small IT suppliers that collectively make up less than 20 percent of the total IT spend. Some large IT organizations might have hundreds or even thousands of such tail suppliers. An excessive number of tail suppliers can create problems in at least three ways:
1. The cost of managing a tail supplier, including onboarding, vendor management, risk management, payment processing and other practices, is often the same as, or even greater than, managing a larger and more strategic supplier. When this operational expense is multiplied by the large number of suppliers at the tail of the IT spend, the total operational burden can be significant.
2. There is inherent risk in maintaining a supplier portfolio that includes a large number of small suppliers. This should be intuitive, because the more suppliers that are granted access to the company’s data, systems, hardware and other resources, the greater the opportunity for breaches in security, system failures, or other risk issues.
3. By spreading the IT costs across a large number of suppliers, the company is not taking sufficient advantage of scale economies and pricing discounts that could be achieved by consolidating its base of suppliers.
It should be noted that this is not an argument against procuring goods and services from small businesses. On the contrary, small, niche IT companies often provide higher quality, lower priced, and unique products and services that larger companies do not offer. The danger lies in maintaining an excessive number of tail suppliers, which prevents the company from efficiently managing a best-in-class supplier portfolio.
Here are four tips for controlling the quantity of tail suppliers:
· Measure and monitor the tail spend. As usual, the first step toward a solution is to understand the nature of the problem. It is best to leverage a spend analysis tool that extracts data directly from the company’s financial systems in order to determine the size and scope of the tail spend. While organizations may have different definitions of what qualifies as “tail spend,” typical criteria might include supplier spend that falls below the dollar threshold of requiring senior management approval and suppliers comprising the bottom 20 percent of the total supplier spend. Robust spend analysis will highlight key metrics such as the number of tail suppliers, the size of the tail spend, the categories and sub-categories most affected, and the business units responsible for driving the tail spend.
· Define and publish the list of preferred suppliers. Unauthorized tail suppliers often exist because business managers seek urgent and inexpensive suppliers to satisfy pressing needs. But often the manager is not aware that an existing qualified supplier is already under contract with well-negotiated pricing and terms. The organization should define and communicate a comprehensive yet limited list of preferred suppliers that represent the pre-approved providers for each spend category and sub-category. Within the technology category, the IT organization should identify the core list of staffing firms, consulting companies, support providers, hardware, software and other IT suppliers that represent the organization’s preferred list of approved vendors. It is important that the preferred supplier list include an appropriate spectrum of large and small companies, multi-service and niche players, as well as market leaders and low-cost alternatives.
Four Tips for Controlling IT's Tail Spend
· Leverage a procure-to-pay catalog system. Procure-to-pay is another quality and price control solution where commonly purchased, small-ticket products and services are made readily available via an Amazon.com-like catalog. Requiring business managers to source the majority of their small purchase requirements from the pre-approved, pre-negotiated online catalog will increase purchasing speed and convenience while also limiting the usage of non-approved suppliers. Procure-to-pay has the added benefit of integrating with existing financial systems to reduce processing costs and increase management control.
· Set targets and broadcast results. Once the size and scope of the tail spend has been established, it is useful to communicate the current-state baselines—the number of tail suppliers, percentage of total spend, etc.—across the organization. If these metrics can be detailed by business unit and sub-department, then a broad communication identifying the key organizations responsible for the tail spend will help to create peer pressure on those units to address the issue. Establishing clear tail spend targets for each organization will set expectations and enable senior management to periodically evaluate results versus targets.
Addressing an IT organization’s tail spend is an important part of supplier portfolio management, and will enable the organization to reduce operating costs, achieve greater quality control, and decrease vendor risks. And it’s a surefire way to help improve an organization’s return on information technology.
About the Author
Mark Ball is the managing director of Emerging Sun LLC, a Washington, DC-based management consulting firm that offers an array of IT strategic services, enabling clients to reduce costs, improve performance, and make intelligent business and technology decisions.
To read Mark Ball’s previous CIO Insight article, “Five Steps for Improved Performance Management,” click here.