Picture a Scorpion’s Tail!

Have you heard of tail spend?

Even if you haven’t, it exists in your not-for-profit organization somewhere on your Statement of Financial Activities. Simply put, “tail spend” refers to the 20% of your administrative overhead that you don’t have time to manage as tightly as you’d like.

The best way to think about tail spend is by recalling the Pareto Principle – the 80:20 rule. On the expense side of a not-for-profit’s statement of financial activities the 80% represents costs associated with the organization’s core purpose: what the organization spends on people and programs. That’s where financial managers direct their time and energy, and rightly so. And consistent with the Pareto Principle, that 80% of expenses is clustered around 20% of the suppliers – the core of key vendors who are closely managed and, for that reason, subject to all the proper controls.

 

tailspin-min
Conversely, 20% of a not-for-profit’s expenses – the “tail spend” – is associated with cost categories that aren’t core to the organization’s mission but are nonetheless essential. On the “tail” you typically find things like copier contracts and printer leases, telecom and data plans, payroll service fees, benefits insurance, property and casualty insurance, uniforms and linen rentals, software subscriptions, merchant card fees (especially relevant for cultural not-for-profits that sell memberships or charge admission), food service, etc.

What’s difficult is that the tail – that non-core 20% of a not-for-profit’s expenses – is where you find 80% of the organization’s suppliers. And unlike the 20% of suppliers who serve the not-for-profit’s core mission (and for that reason command financial managers’ attention), that 80% of the organization’s suppliers – the non-core suppliers – are much less likely to be closely managed or subject to proper controls.
In some organizations – it doesn’t matter whether they’re for-profit or not-for-profit – it’s not unusual to find that the cost of processing and paying invoices related to tail spend purchases sometimes exceeds the value of the goods or services received.

So, what can you do to put controls around your tail spend?

• Chart your total spending: how does the Pareto Principle apply among the suppliers to your organization? (For an example, see the graph below.)
• Study the data: are there cost categories in which spending is dissipated among a disproportionate number of suppliers?
• Prepare a negotiation strategy: are there opportunities to consolidate spending among a shorter list of preferred suppliers – i.e., reward them for giving you better service and lower costs?
• Leverage your dissipated purchasing power; shorten the tail; gain visibility to your spending; create metrics to measure your success in controlling your non-core administrative expenses.

A Pareto-style assessment of your tail spend opportunities will yield between 10% and 30% savings in each and every cost category you attempt. Why leak cash when you can redeploy it to enhance your mission?