Are Your Contracts Gold Mines or Land Mines?
Kelly Scott Longgrear, C.P.M.
September/October 2013, eSide Supply Management
Vol. 6, No. 5
Avoid writing contracts that could under-protect your organization or overspend valuable dollars. Part two in a series.
In the first installment of this series, we discussed the process for developing the specifications or Statement of Work, and their impact on the contracting process. Now, we will look at the request for proposal (RFP) process.
A significant amount of resources are expended by all parties in an RFP process. There are several key steps involved, including development of the RFP documents, bidder selection, proposal evaluation and ultimately, supplier selection. We will examine each of these steps, including some do's and don'ts.
In an RFP, you are conveying a set of requirements to the bidders and, in return, asking for a proposal that will address your needs. If you don't do a good job of communicating your requirements, you can't expect good responses. It really is that simple. In order to be thorough, it's important to address most or all of the following items within the RFP:
- Background. Briefly tell the story of your company and, more important, what has transpired to warrant an RFP. This is important information for the bidders because it provides context. Context is an important element of the bidders understanding what you are seeking.
- Desired state. What exactly are you trying to accomplish? Whether you provide a detailed list of requirements or a performance-based specification, explain as clearly as possible what you are looking for. If you aren't sure what exactly your requirements are, this is a great place to say that, as well.
- Technical info. Include any applicable industry standards, along with performance criteria, desired service level agreements and the like.
- Legal information. Include your boilerplate agreement, as necessary, for the bidders to review and redline, along with any legal considerations for the RFP, such as confidentiality or indemnification.
- Q & A process. Build into your RFP time line a question-and-answer process, to give the bidders an opportunity to clarify your requirements. A best practice is to keep the questions anonymous and publish the Q&A to all bidders.
- Response format. Ideally, drive the bidder responses to a common format, including a pre-defined pricing response format. Going through the exercise of developing a template for responses can also expose gaps in the information being provided within the RFP.
- Pricing model. It's important to choose the type of pricing response the bidders are to provide, such as fixed-price, cost-plus, time and materials, and other factors. In addition to the pricing format requested in the RFP, it's generally beneficial to allow the bidders to propose alternative pricing. Also, request that bidders include an explanation on how all pricing was calculated, including classifications, and hourly rates for specific resource levels that would be assigned to the project. This comes in handy during secondary negotiations or the post-contract award during change-order negotiations. It also provides additional data points for comparison across the bidders. Think about forward-pricing options (year-over-year increases, for example), as well, and build that into the pricing matrix. Better to capture that information upfront than try to negotiate it once you have picked the supplier. The numbers always look better when the situation is competitive.
- Bidder details. You'll want to know more about the bidder, including some or all of the following:
- References who will vouch for the bidder's work, especially within your industry and specifically for the type of project you are contemplating.
- Financial information is especially important for privately held companies. While you may not receive audited financials, most are willing to provide some high level sales, revenue and cash flow numbers.
- Facts regarding experience, especially how long have they done this specific type of work, and have they done it in your industry.
- The proposed team that would be performing the work, and the credentials of each individual.
- Communication process. Explain the rules for bidder communication during and after the RFP. Establish the buyer as a single point of contact for the bidders.
- Scoring criteria. This should not be shared with the bidders, but should be established among the proposal evaluation team prior to proposal evaluation.
- Submission instructions. Ideally, bidders should be able to submit proposals electronically, and follow up in hardcopy if appropriate.
RFPs should be thorough yet concise. Try not to scare bidders off with sheer volume. There's an old joke in the government sector that potential bidders would hold the printed government specifications in their hands, and price the project based on the sheer mass of the documents, such as, "This feels like a $200,000 job." Perhaps the joke is not really funny, but it's definitely telling.
Bidder List Selection
How many bidders are enough? As a general rule of thumb, four to five is a good middle ground. Weigh the pros and cons of not enough versus too many bids. Avoid "paralysis by analysis" — seven or eight proposals to review may bring your project to a grinding halt. Two proposals are generally not enough to establish a "competitive range"; thus, three should be the preferred minimum, especially on larger projects. Some things to consider with regard to bidder selection and evaluation:
- The inside track. Some bidders come into the game with prior knowledge. These are typically the bidders that wrote the spec for your internal customer, or provided the original budgetary quote. Or, they may be friends with someone in the company. In any event, they most likely have a leg up on the other bidders, and it can result in a less than fair and objective RFP process. While in the real world this situation can't always be avoided, the process needs to be as objective as possible and not a colossal waste of resources for all concerned.
- Pre-qualification of bidders. In advance, determine which companies are appropriate to include, and what factors will disqualify a bidder. Unqualified bidders generally submit unqualified proposals.
- Breadth/depth. Select bidders with different areas of expertise and you will potentially benefit from a broader and deeper range of responses.
- Fresh faces. Don't rely on the same bidders over and over, especially if they haven't been getting your business based on previous proposals.
Evaluation is a critical part of the process. Miss something here and it could cost you later. Some things to consider:
- Team selection. Choose a team with the right skill sets, and keep the size of the team manageable. Beware of overpowering personalities. Someone needs to be in charge to guide and direct the evaluation — it may or may not be the procurement team member, the project manager or someone else. In any event, that person needs to be a focused, assertive personality who can keep the process focused and moving.
- Process discipline. A good evaluation process will produce documented, supportable decisions. Agree to the rules upfront and try to follow them as closely as possible.
- Executive management involvement. Executives can derail the proposal evaluation process — be careful about including them on the evaluation team, even in a mentoring role.
- Staying on track. Teams can easily derail. The leader's role is to refocus the team as needed.
- Clarification and follow-up. Ask the bidders to clarify their proposals where necessary before eliminating them from further consideration. The RFP may not have been perfectly clear in all respects, so a substandard proposal may not be solely attributable to the bidder.
The supplier selection decision is both art and science. While a sound process with a disciplined approach increases your chances of success, at some point it comes down to the feelings you and the team may have about a particular company and their proposal. The following components of supplier selection will facilitate the decision:
- Narrowing the field. Some suppliers won't make the initial cut once the proposals are received, either because they submitted a poor proposal, or because it's easy to determine immediately that it's not a fit. In any event, it's important to stay focused on the agreed-to evaluation process. Try not to tell any of the bidders they aren't finalists too soon in the process; doing so can undermine your objectives and may impair your competitive position during negotiations. While the bidders always want feedback, your goal of picking the right partner outweighs their need for status at this point. Don't let any of the bidders off the hook until you are sure of your direction.
- Concurrent negotiation. Assuming you have multiple finalists, it's a best practice to conduct concurrent negotiations. While this maximizes leverage on both business and legal terms, let them know they are still competing against another unnamed provider. Unfortunately, time and resources don't always permit concurrent negotiation; either way, the bidder does not have to know they are the only provider still under consideration.
- Notification. The bidders deserve to know where they stand in the process. Even so, as mentioned above, be careful not to reveal bidders' standings too early because one of the unlikely choices may move up in the rotation due to a negotiation impasse or other unforeseeable situation.
The RFP process is one of the most effective tools at a buyer's disposal. Unfortunately, not everyone uses the tool to maximum advantage, and sometimes the process is misused, which ultimately only hurts the issuing organization, through bidder disenchantment or failed outcomes. Use the RFP process appropriately, and you will save your company a lot of money and improve your chances for a successful outcome — and perhaps uncover a gold mine in the process.
Kelly Scott Longgrear, C.P.M., is strategic sourcing manager at Waddell & Reed, LLC in Overland Park, Kansas. For more information, send an email to firstname.lastname@example.org.
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