Despite its historic success, the Request for Proposal (RFP) in procurement may be dying in today’s fast-moving environment. Alternatives are emerging that deliver greater flexibility and agility, leading to more innovative solutions. But RFPs still have life left to get the best pricing when comparing similar commodity services. To learn the best practices, read on.
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While RFPs have successfully delivered great business results for decades, a growing sentiment is that the process has its limitations, especially in complex deals. In seeking proposals for services, no perfect model exists for finding the best solution and balancing cost, quality, and risk. The sourcing approach always relies heavily on the skill and experience of the specialists delivering the activity.
Some of the shortcomings we see in using the RFP outsourcing services process include:
- RFPs are slow – The sequential approach from gathering business requirements through to contracting can take more than six months for most complex procurements, which is a disadvantage in high-speed environments. Best-in-class organizations take far less time for the same activities in IT strategic sourcing initiatives, completing the process in nine to 10 weeks, according to our IT Sourcing Pinnacle Model Assessment
- RFPs lack agility – Buyers can become tied into less-than-optimal solutions because they fear adjusting or adapting the requirements will lead to a lot of reworking and additional time communicating with suppliers. Customer concerns that the whole process might need to be restarted if they make changes limits flexibility
- RFPs make direct comparisons difficult – An RFP can be effective in comparing pricing on a consistent set of business requirements where exact specifications can be documented.
However, using an RFP submission is not of value when comparing like-for-like services that can be delivered in multiple ways while still meeting Key Performance Indicators (KPIs) or Service Level Agreements (SLAs). Using an RFP can lead buyers to make decisions purely on price and not on the fitness for purpose of the solution offered
Most procurement and sourcing teams know the traditional RFP process has its restrictions, so why is it still being used?
Procurement, finance, and senior leadership teams who traditionally prefer to look across a set of “line-item costs” and compare suppliers to make a selection are comfortable with the RFP process. It is clear who is offering the best price, even if it does not help identify the best solution.
Other more informal approaches may leave procurement teams open to allegations that a “proper” process was not completed. It is important to have an audit trail of procurement activities for many reasons including compliance. The RFP is seen as a very robust and traceable way to conduct a procurement event.
Alternatives to the request for proposal in procurement
To address some of these issues, procurement teams are using alternatives to the traditional RFP approach that can either stand alone or be used alongside a traditional RFP in outsourcing services. A few emerging approaches we see are:
- Joint solutioning sessions – The buyer and selected suppliers work collaboratively to develop a solution to address a business problem or opportunity. As an example, a leading agriculture company conducts regular solutioning workshops with suppliers to shape requirements for white space IT Research and Development (R&D) solutions. Generally, this format works best for newer services but is not recommended for commoditized solutions such as Application Management Services (AMS)
- Pros – A collaborative approach where a solution is shaped in partnership with the supplier is more effective at addressing a dynamic set of requirements and allows suppliers to include all elements, including value-add services and technology as part of their solution
- Cons – This method does not allow for comparisons between suppliers as each solution delivered is unique. Conducting multiple workshops across suppliers poses the risk of information asymmetry, while conducting one workshop may discourage suppliers from sharing ideas. Further, suppliers can tend to get sales-oriented across workshops and preferred suppliers with leadership presence in the workshop, more skin in the game, or better connections may get an undue advantage
- Pilots – Running a pilot with a supplier to test a new concept/model
- Pros – Works well with an incumbent and when the solution can be quickly deployed into operation
- Con – Ineffective when looking to bring in new suppliers, and costs are high to implement a pilot that may not progress to operation
- Reverse auctions – Traditionally used to source simple services or goods, reverse auctions are becoming increasingly popular in outsourcing services. However, the complex and dynamic nature of e-auctions requires robust technology and advanced supplier training.
- Pros – A proven way of getting competitive pricing for commodity products
- Cons – Not suited for extremely complex service procurement where the method of delivery is not comparable across solutions offered. An unclear process or underlying assumptions can lead to an unfair bid comparison. Therefore, the process must be standard with clearly laid out assumptions for all stakeholders
Examples of outsourced services well-suited for auctions
Source: Everest Group, The Effective Use of E-auctions in Outsourced Services
Agile sourcing recommendations
When deciding if an RFP is required as part of a procurement event, it is important to weigh if the ability to compare pricing across consistent deliverables is first, important, and second, possible. If the answer to both of these is “no,” then an alternative solution may be more appropriate.
In cases when an RFP is required either to meet internal requirements or to compare across like items, we see an increased focus on “agile sourcing.” This method is less sequential or waterfall-like and more agile, similar to approaches used in project management and software development.
We will cover more on this topic in the coming months, so stay tuned for future blogs. For now, let’s look at the following best practices we have observed in an agile model that shorten the RFP process while driving increased value:
- Run pilot projects with suppliers before awarding additional spend
- Share a standard list of obligations in the pre-contract phase
- Provide suppliers with all details, accessorial charges, and potential changes during the RFP process
- Initiate supplier discussions earlier and more frequently
- Conduct one-day supplier workshops instead of lengthy discovery and selection processes
- Reduce multi-page proposals to single-page templates to clearly explain requirements and engagement
- Keep suppliers involved for as long as possible. Procurement can discuss terms and conditions with all suppliers, not only the ones they will contract with
- Run the initial round of negotiation and contract drafting in parallel to the sourcing process
- Ensure constant interaction occurs across the sourcing lifecycle between the buying organization and the supplier to develop the contract collectively and incrementally
No standard approach exists for skipping steps in an RFP. Each sourcing exercise is unique and procurement leaders typically rely on their teams’ expertise to decide on the sourcing methodology.
While times are changing, RFPs are still alive and have their place for commodity items where the costs for like-for-like items need to be compared. But the age-old process may no longer be suitable for complex services deals where innovation is key. To move into the future, sourcing teams should start evaluating alternatives.
Learn about current outsourcing pricing in our webinar, Outsourcing Pricing: 3 Pitfalls and 2 Unknowns Enterprises Need to Know in 2022.