Article as seen on Inc.com
Nobody wants to overpay for something. In fact, we’d all like to get the most for our money. But, some of the approaches to save money for your business might actually cost you money, and you might not realize it.
Request For Proposal – A Double-Edged Sword
The Request for Proposal (RFP) is one tool that saves you money in some cases, and could surprisingly cost you money in others. When it comes to purchasing raw materials and commodities, using a disconnected process that keeps vendors at arms-length might be effective. The variability from one product to another might not be that great.
For example, if you are purchasing paper products or staples, you can be pretty sure of what you are getting. In these situations, pursue a traditional purchasing/procurement process. Procurement or purchasing professionals get the specs from the business units, and then find the best “deal.”
The RFP Trap
However, when you get into services or innovation, the RFP can be risky. In government procurements and many businesses, the procurement process requires that the RFP process be conducted without any intervention from vendors or suppliers. While this seems logical on the surface, this blind RFP process (one without any vendor interaction) often leads to trouble.
In this case, the expensive sentence is, “We already know what we want.”
According to Jack, “Each purchasing experience presents an opportunity to learn and capture new innovation. But to benefit from the ever-improving marketplace, we have to acknowledge that we don’t know it all, and that the sales force has expertise that can serve us.”
Quarles adds, “A blind RFP puts the kibosh on learning and communication. If buyers take the small investment of time to let market-savvy salespeople ask a few smart questions, they stand to both understand their problems better and find superior solutions… often at lower total cost. ”
I often benefited from Jack’s insight as my co-author of Same Side Selling.
Get Buyers And Sellers On The Same Side
Let’s say you are implementing emerging, innovative technology. One vendor presents resources at a billable rate for $137 per hour. Another presents resources for $185 per hour. Which one is a better value?
Sadly, you don’t have enough information to make a decision. The reality is that the hourly rate is almost irrelevant. What you need as the buyer is results. You need to ensure that your issue is resolved. Paying less or more per hour won’t necessarily change the results. How do you know who is better qualified to get you where you need to be?
Procurement teams will often work with their business customers to create a document that defines the requirements, capabilities, and skills needed for the project. The one thing you can count on is that what you ultimately end up needing will almost always differ from the original requirements.
This means that the vendor who blindly responds might deliver exactly what you asked for at the price you agreed to. However, it might not be what the business actually needs.
This failure is not a reflection of incompetence. Rather, two factors are beyond the control of the business: 1. Your needs and the available innovative solutions can rapidly shift; and 2. With innovation, experienced vendors learn from prior projects, and will ask questions you might otherwise overlook.
How To Ensure Value
You need to ensure results, and don’t want to overpay. Here’s what you can do.
1. Once you identify the problem you are trying to solve, identify one or two vendors who have experience in that field. Let them speak directly with the business units (including procurement). Notice the questions they ask. The good ones will ask about the problem you are trying to address and the measurements for success.
2. Get their ideas about what should be in the RFP. Yes, this means that they have an inside track. However, the bid process will allow you to compare prices against others.
3. Focus on results. It doesn’t matter what you pay if you don’t get the results you need. Your primary measurement should always be the likelihood of success.
Good vendors can be a powerful ally. Of course, feel free to torment the ones just selling stuff and ignoring results and value.
It’s Your Turn
In the comments below, please share examples of vendors who were worth the extra investment based on results.