Each day, companies employ well-known, standard competitive bidding methods to choose their suppliers. The most common is the Request for Proposal (RFP).
Recent events should encourage companies to reevaluate whether conventional RFP approaches are suited to navigating the emerging new economy. In many cases these conventional RFPs fall short in the search for the “best fit” supplier or service provider because they might not always ask the right sourcing questions. The result is that they generate incorrect – or at least less than optimal – answers from suppliers.
The tools and tactics adopted over the last 30 years as the contract procurement “gold standard” are not as effective as they once were. Given the next normal for trade in the post pandemic world, it’s worthwhile to examine the purpose and nature of conventional competitive bidding tools.
Organizations have long thought of procurement as a “make vs. buy” decision. This was especially true as organizations explored outsourcing. Many companies assume if they “buy,” they should use competitive “market” forces to ensure they are getting the best deal. In doing so the default approach is to use a transaction-based model. This works well for simple transactions with abundant supply and low complexity where the “market” can correct itself. If a supplier does not perform, simply rebid the work.
As organizations outsource and procure more complex goods and services, this logic no longer works, or not very well. Often buyers become co-dependent on suppliers, switching costs are high, and suppliers have a “locked-in” position.
Moving beyond transaction-based sourcing models is not only a way to manage complex goods and services; it is also a means to unlock value. In a transaction-based model it is unlikely that the buyer will get any value beyond cost cuts, but as the specification needs to be fairly narrow, even cost cuts are somewhat limited in the long run.
Companies are indeed looking for value beyond cost concerns when it comes to complex goods and services, such as innovation and flexibility. They can benefit from recognizing alternative sourcing models.
Moving to more strategic sourcing and partnership models will enable a more distinct and direct connection to corporate buying strategy. Sourcing Business Models fall along a sourcing continuum, as shown in Figure 1 below:
Moving along the continuum to more strategic sourcing and partnership models means consciously using contract structures that shift from transactional and commodity-based thinking to one based on more of a “partnership” between the buyer and supplier. As a buyer and supplier move up the sourcing continuum, they design contracts that are purpose-built to drive productivity improvements and innovation.
There are six primary types of RFx methods, but often these methods go by different names. This article uses the term that is the most popular, but also lists alternative names used to describe the same or roughly similar concept. (For more details, see the Vested white paper, “Unpacking Competitive Bidding Methods: The Essential ABCs of the Various RFX Methods.”) RFx approaches fall along the following continuum in Figure 2:
RFx Factors to Consider
Virtually all strategic sourcing processes feature a competitive bidding step. Buyers have a range of competitive bidding options and it is important to align the appropriate method with the sourcing situation. When dealing with a complex situation, a set of RFx methods are usually needed. Limited market maturity can, for example, constitute a complex situation resulting in the need for an RFI to understand the market capability.
Another factor to consider is how frequently a buyer bids out the spend category. As a general rule, the spend category is bid out less frequently as a company moves along the sourcing continuum to more sophisticated performance or outcome-based models.
A third factor is a determination of what to emphasize in the solicitation. For example, is the company seeking lowest price or best value for the sourcing decision? Is it seeking to buy transactions, buy supplier outputs, or buy broader achievement of business outcomes?
The last factors a buyer might consider are the level of effort necessary for the solicitation and how long the process should take. For example, how much detail is needed to capture from suppliers to feel comfortable making the final supply base decision? This also includes identifying the most appropriate internal resources that must be involved in the preparation and review process. It is also important to take market maturity and the nature of the scope into consideration when estimating the required effort of a sourcing process. Highly complex relational Sourcing Business Model solicitations can take up to six months and involve a dozen or more people.
Overview of RFx Methods
There are six main types of RFx methods – but as noted, these methods often have different names/terms. I use the term that is most popular, but also list the alternative names that describe the same or roughly similar concept.
- Request for Information (RFI; also referred to as a request for qualification) – used to obtain general information about products, services or suppliers. An RFI is sometimes used to gather benchmark information and general market data from the marketplace. Buyers rarely if ever pick a supplier based on RFI information; rather they use the information to help them further refine their RFx approach. As such, an RFI typically precedes other RFx processes and often is used to help a buyer to down-select the number of potential suppliers it will evaluate. An RFI can be used with any of the RFx processes, but it is almost always used with a Request for Proposed Solution and a Request for Partner process. An RFI is not binding for either the buyer or the supplier. RFIs range from simple requests aimed at gathering market intelligence to more comprehensive requests asking suppliers to answer detailed questions about their qualifications.
- Electronic auction (e-auction) — an online, price-centric auction where purchasers specify what they are interested in buying and prospective suppliers respond by entering competing bids. Suppliers are often pre-qualified to participate in an e-auction. There are various types of e-auctions including a reverse auction where a single buyer uses a fixed-duration bidding event in which multiple prequalified and invited suppliers compete for business. Potential suppliers review the requirements, choose to bid and enter their selling price(s) and other qualifying criteria as requested. Suppliers’ prices are visible to other competitive bidders, often resulting in successively lower prices. A seller-driven e-auction is an electronic, online auction where suppliers post items for sale and buyers bid on the items.
- Request for Price (also referred to as a Request for Quote) – used to obtain price offers for a specified product or service. These are used for more standard acquisitions that are based on price or cost considerations. Buyers using a request for price must properly define the requirements so there is no ambiguity for the supplier. The law may or may not treat a quotation as a binding offer.
- Request for Proposal (also referred to as an invitation for proposal [IFP]) — used to obtain pricing as well as detailed descriptions of services, methodologies, program management, cost and other support provided by the supplier. Requests for proposals are used for larger, more complex and technical acquisitions where selection is based on factors beyond just price or cost, such as technical capability, capacity and potential shared design with the supplier. A request for proposal is often a follow-up to an earlier request for information (RFI). A request for proposal allows a buyer to specify requirements and allows suppliers to begin to define some of the “how,” such managing quality issues.
- Request for Solution (RFS; also known as request for proposed solution) — a collaborative process in which a buying organization has a dialogue with potential down-selected suppliers with the intent of collaborating to determine the best solution to meet the buyer’s needs. A request for solution is different from a request for proposal because the buyer does not know the solution; rather it is asking suppliers to propose the most appropriate solution. The buyer gives limited direction on what the solution may be, and instead requests the suppliers involved to design a solution to meet business requirements. The European Commission’s competitive dialogue process is one form of a collaborative request for solution.
- Request for Partner – (also known as a Request for Collaboration or a Request for Mutual Value Solution) — a highly interactive process used when a buyer is seeking not just a solution from a supplier but also compatibility across multiple providers’ cultures, mindsets and a willingness to engage in a collaborative relational contract. A key part of the RFPartner s process is a request for proposed solution, which is used when selecting a supplier for a Vested model. A Request for Partner is typically focused on supply solutions that include joint investment or collaboration between the buyer/company and the supplier(s) selected over a longer time horizon.
Common RFx Themes
Prior to launching any RFx, an organization should do its homework by completing an assessment and analyzing its needs. The book Strategic Sourcing in the New Economy describes 20 key sourcing considerations organizations should make as they approach any sourcing initiative. For example, organizations perform various types of analysis (external market analysis, costs analysis, supply market analysis, benchmarking, etc.). Buyers also need to assess the level of risk associated with the sourcing initiative and determine how to balance value between the business and suppliers’ organizations.
A key difference in each of the solicitation processes is the level of effort in terms of business stakeholder and supplier involvement. As an organization moves across the sourcing continuum, (see Figure 3) it will use a more sophisticated RFx process and spend more time in preparation and evaluation of the RFx proposals. The business stakeholders will be heavily involved in determining the specific final selection criteria and will participate in determining the weight factor assigned to each criterion based on its importance to the business. In addition, suppliers will play a bigger role in both helping to determine potential specifications as well as in preparing their responses.
Due to the increased level of involvement of stakeholders (internal and suppliers), the buyer may need to use a more collaborative RFx technique. These methods will also require a longer time frame to structure, select and implement. Thus, the importance of a well-balanced and adequately represented steering group for governing the process increases with complexity.
Figure 3: Stakeholder Involvement along the Sourcing Continuum
A second key difference is the competitive nature of the approaches. While all of the processes strive to create a competitive environment aimed at fairly selecting a supplier, the level of interaction with suppliers is different. As the buyer shifts along the sourcing continuum, it will need to rely on RFx approaches that use more collaborative approaches purposely designed to build interaction with suppliers and create a conducive environment for suppliers to develop an output or outcome-based solution. Competitiveness is measured more by the value of the potential solution, ability to drive transformation or innovation and supplier fit than price alone.
A third key theme is that buyers consciously choose to use bidding cycles that are longer term in nature as they shift along the sourcing continuum. This makes sense because more comprehensive and complex sourcing situations require increased preparation and negotiation time due to the scope of the solution and the length of the intended supply term. These agreements are typically costly to switch and require increased stakeholder engagement. More strategic categories are usually competitively bid via a request for proposal or request for solution approach, whereas categories with significant leverage either in volume or in the competitiveness of the supply market may be sourced via a request for price or request for proposal.
Sourcing strategies are evolving in response to changing business requirements. As organizations mature and their approaches to sourcing become increasingly sophisticated and ambitious, new models are required to address the need for innovation and more complex sourcing initiatives, such as services that fall under complex outsourcing or alternative procurement methods such as public-private-partnerships.
A key trend that is proving successful is the shift to more collaborative approaches with suppliers. Moving beyond transaction-based sourcing models enables organizations to more effectively buy and manage complex goods and services; it is also a means to unlock value. This means not only turning to more collaborative sourcing business models such as Performance Based or Vested supplier relationships – but also includes incorporating more collaborative approaches into the competitive bidding process that enables buyers to work with suppliers on “solutions” – not just on providing a price for a specification.
Modern and collaborative Request for Solution and Request for Partner processes offer a promising approach to enable buyers to tap into the creativity and innovation of potential suppliers while still allowing for a competitive environment. These collaborative approaches allow suppliers to create solutions that add value and drive innovation for buyers.
As the business environment evolves, it is imperative that sourcing professionals also evolve.