Truths and Tips on the Flawed Request for Proposal Process
Fundamental flaws in the request for proposal (RFP) process strip customers of nearly all negotiation leverage and put the vendor squarely in the driver's seat. These tips will make sure you're the one driving the deal.
Thu, March 06, 2008
CIO — The request for proposal (RFP) process has been the bread and butter of purchasing organizations for decades. IT organizations aren't strangers to the process, typically sourcing a significant amount of IT spend through RFPs.
Overall, the process is a good one. Customers document their requirements and needs, vendors are qualified and solicited, and customers compare and contrast vendors to ultimately select the finalist. The process is relatively straightforward, too. An RFP is issued, proposals are evaluated, a vendor is selected and a contract is negotiated. There's also a sense of safety in using the RFP process in that, because it's a competitive process, the customer can assume that he or she is getting a "good deal" more often than not. Unfortunately, what customers don't know is that the RFP process widely used today is fundamentally flawed, and those customers are leaving sizeable concessions on the table by using the process.
In the RFP process, there are two interrelated events: vendor selection and negotiation. Vendor selection implies a formalized competitive bid by which vendors are objectively evaluated and selected based on pre-defined criteria. Negotiation is the process by which two parties have an exchange to reach an agreement. While the events are interrelated, they are sequentially distinct in the RFP process. In other words, a vendor is selected and then a price and a contract are negotiated. That is an extremely flawed sequence of events—negotiations are severely compromised when a vendor is notified that it has been selected prior to beginning negotiations. In that case, the customer loses nearly all leverage because the vendor has been selected. This is the "selection/negotiation" or "begging" RFP model, and is a model very commonly used by customers and purchasing organizations.
Under this model, at the point of selection, the finalist vendor correctly assumes that the other vendors have been eliminated and possibly notified as well. In other words, the vendor's competition has been eliminated by the customer and not by the vendor. If the vendor's sales representatives are shrewd, they will drag out the negotiations, seeking to lengthen the time from the point of the finalist selection to the start of actual negotiations. In doing so, the vendor causes the customer to make a time investment, and selecting another vendor is that much more difficult. After a while, the customer has a vested interest in bringing the deal to a close and, if the vendor is opportunistic, the customer will leave concessions and value on the table. (For more on negotiation, read Price Doesn't Matter.
Simply changing and overlapping the sequence of the vendor selection and negotiation events yields dramatically different results while keeping the rest of the RFP process intact. This change of event sequence, or the negotiation/selection RFP model, implies that the negotiation process begins parallel to the vendor selection process but prior to actual vendor selection. The purpose is to prolong the customer's leverage during the vendor selection process and "pre-negotiate" the price and contract before leverage is materially eroded. Negotiations under this model begin in earnest when a "short list" of vendors has been determined. After the customer has selected two or more finalist vendors, the remaining vendors are notified. The customer then parses the best attributes of all of the finalist vendors' offers, includes any additional concessions desired, and communicates the parameters of the cobbled deal to the vendors. The vendors are subsequently instructed to provide "best and final offers," or BAFOs.