Finding ways to reduce government spend on contractors is en vogue. Boosting competition for contracts, eliminating redundant contracts, switching from cost-plus to fixed-cost contracts — all are buzz-worthy strategies in the federal community.
But professor and government consultant David Wyld thinks the government is still ignoring a big opportunity to cut contractor costs: “tail-spend” management.
“Basically, it’s spending that is outside of the norm and likely has not been addressed by acquisition either in some time or through proper channels,” he said.
It’s all the extra “stuff” that companies spend money on, but no one focuses on, as it’s not part of their “core competencies.” It’s the $60,000 the Internal Revenue Service spent on a parody video; the $2,500 spent on a first-class airline ticket to fly a speaker to a government conference. Agencies and companies are very careful about what is spent on their main business, but let numerous fringe purchases occur without strict oversight.
For decades, the prevailing procurement strategy has been to focus on the core 20 percent of purchases. As a result, there are fewer savings to be found in those core competency purchases. But turn a critical eye toward the “tail-spend” purchases, and the savings might abound — between $113 billion and $226 billion for the federal government — Wyld believes.
In the last decade, the private sector’s approach to procurement manage has changed, said Wyld, a management professor at Southeastern Louisiana University and director of the school’s College of Business’ Strategic e-Commerce/e-Government Initiative. The private sector has increasingly taken notice of the financial benefits of closely managing outlier expenses. Roughly 80 percent of the Fortune 500 companies have now worked tail-spend management into their strategies. Some report savings of up to 30 percent.
Most “achieve an additional 5 to 10 percent in savings by adopting new processes and utilising [sic] advanced spend analytics and technology,” reads the report, funded by the IBM Center for the Business of Government. “A 5 percent savings on tail spend can be the equivalent of a 10 percent increase in net profit.”
Additional research has shown a return of between $3 and $8 for each dollar spent on “procurement efficiency/savings initiatives.” Wyld used data from the Federal Procurement Data System to see how the private sector’s best practices for tail-spend management mapped onto the government’s procurement strategy.
“It’s an opportunity to put government on the leading edge,” he said.
“Leading edge” is a term rarely attached to the federal government. But Wyld believes government agencies — “who are often more fragmented in their spending and have smaller procurement organizations” — are more poised to benefit from tail-spend management than private companies.
If that prediction holds, agencies could outsource tail spend analysis to consultants and avoiding piling more work onto a manager’s already-full plate.
At the very least, getting government agencies to think through the emerging practice “may change their thought process even if they don’t have a 12-point tail spend management effort — I think that’s the value,” Wyld said. “It’s private sector best practice, the government should look at it.”