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.
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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.
A request for BAFOs implies to the remaining vendors that they have competition and that there may be a better deal than theirs on the table. Because a vendor is being "kept in the game" and hasn't yet been eliminated, that vendor may feel that its bid is close and it will only have to make a few more concessions to seal the deal. If the BAFOs are not as competitive as desired, the customer can, without revealing confidential information of the finalist vendors, communicate to each where their proposal falls short and guide them to be more competitive. Where a vendor is unable or unwilling to provide a BAFO, the customer can elect to eliminate that vendor at that time or wait until no better proposals are received. The negotiation/selection RFP model also requires that a contract template accompany the RFP and that vendors are required to respond as a part of their proposals, with any contractual concerns or issues. In providing guidance to vendors formulating their BAFOs, the customer can also explain to a finalist vendor why its responses to the contract template were unacceptable and how modify them.
The negotiations/selection RFP model not only precludes the typical negotiation ploys and tactics gamesmanship, it dramatically reduces the time and resources typically wasted in the negotiation phase of the selection/negotiation RFP model. When a deal is agreed upon, and only then, the contract award and finalist vendor are announced. Final negotiations should be more administrative in nature, such as each party doing a final review of the associated contract in preparation for signature. It is important to conclude final negotiations immediately after the contract award is announced. The reason for this is that if the vendor balks at any of their prior concessions or suddenly has memory loss, the customer will still have the opportunity to go back to an alternative finalist assuming that not too much time has passed. (And read Effective Tips to Measure ROI to make sure you get the most from your vendor.
Stephen Guth is the executive director of the National Rural Electric Cooperative Association's Vendor Management Office. He is a Certified Commercial Contract Manager (CCCM), Certified Purchasing Manager (CPM) and a Certified Technology Procurement Executive (CTPE). He is the author of The Contract Negotiation Handbook: An Indispensable Guide for Contract Professionals and The Vendor Management Office: Unleashing the Power of Strategic Sourcing.