Disruptive technologies enable dramatic new ways of doing work and delivering value to customers. Understandably, companies are rushing to implement disruptive technologies to change their business so that they can better serve their customers, employees, partners with new value and lower their total cost of ownership. Achieving this goal necessitates assembling a digital platform. However, few companies have the resources to build and maintain a platform alone, so they need to contract with third-party service providers. Here’s the problem: the classic procurement approach for third-party services doesn’t work with digital transformation.
I’ve blogged extensively on how the industrialized arbitrage market is maturing rapidly. One of the many frustrating aspects of a maturing services market is that a dominant portion of procurements for larger opportunities come through RFPs. These RFPs require sophisticated and elaborate responses with large deal teams and solutioning teams working at the provider’s expense to create a compelling response. This cost is growing, and what’s worse is that it’s not unusual for providers to lose 66 percent of these costly bids.
In the large-deal segment, it’s not uncommon for service providers to spend $1 million – and in some cases as much as $10 million – to respond to the RFPs. These costs are often disseminated through the service provider and not easily recognized; they are borne by the individual delivery teams and therefore can creep up or grow unmonitored by the service provider. When viewed objectively, the costs amount to a substantial amount of money.
At Everest Group, we’ve done a significant amount of work on competitiveness and improving providers’ win rates. For world-class performers, the win rate is around 33 percent of their opportunities – which means that they lose 66 percent. Let’s take the low end of this range as an example. If it costs $2 million to respond to an RFP and solutioning for a winning bid, it costs $6 million for a deal the provider doesn’t win.
These unreimbursed “dead deal” costs are an increasing drag on providers’ profitability and are a significant contributor to service providers’ growing cost of sales.
The implications of this are very significant for service providers seeking to maintain their growth by bidding for larger transactions.
Here’s my question: Can the industry change this?
Yes, there are numerous solutions. One is for providers to pursue only the opportunities that they have a realistic chance of winning.
Here’s another question:
Can the industry shift away from these dead deal costs, instead giving solutioning free to the client in the RFP response?
Effectively, the provider would move to a more consultative structure in which the highest value is not given away in a free solution but is paid by the client in consulting services.
These are intriguing thoughts. This structure would be difficult to accomplish – but well worth the journey if it can be changed.
FOMO is reaching epidemic proportions among service providers. We see it particularly in the Indian firms, but it’s not confined to the Indian providers. It starts in the sales teams as they fall behind in their sales goals; then it spreads and infects the entire organization.
You can easily identify the providers infected with FOMO. In the marketplace, there is no RFP or opportunity they don’t want to contest. The FOMO infection causes them to run from client to client with the newest PowerPoint presentations of great promises. But the decks aren’t compelling and lack depth, so the buyers don’t believe the providers’ messages. The buyers aren’t infected with FOMO, so they aren’t blind enough to believe that one company can be great at everything.
Because of FOMO, the providers don’t spend enough time with the existing or potential client to be able to develop the necessary depth.
Those free of FOMO actually outperform in the market consistently and build a much more relevant perspective unique to a client because of their effort to gain a more in-depth understanding of the client.
They focus on a client’s issues rather than chasing every RFP. They only go after opportunities where they have developed a perspective. They put most of their sales resources into focusing on existing clients instead of developing go-to-market schemes for yet-uncaptured clients.
Paradoxically, not only do disciplined providers outperform other providers with their existing clients, but they also outperform in the marketplace with new clients. This is because when they do engage, they engage in a thoughtful, impactful way.
Fortunately for services buyers, FOMO hasn’t infected the entire services industry.
Photo credit: Flickr
Here’s a blatant truth: Any company looking to procure outsourced services can get into a similar situation as the government faced with its healthcare.gov website before it switched the work to Accenture to fix the debacle. That’s because the RFP process is a breeding ground for “gotchas” that eventually can evaporate a deal’s ROI or, at best, result in a deal that yields just so-so outcomes. I’ve studied the RFP process in my 30 years in this business and observed insanity — that is, companies doing the same thing again and again but expecting different results. I think it’s time to resequence the RFP process.
The foundational error in the RFP process
Typically in a services procurement process the buyer first defines its objectives and then goes to the market to understand which providers are well positioned to meet those objectives. After some consultation, the buyer codifies those requirements into a request for proposal and works the RFP scope through a series of design workshops to truly understand the providers’ responses and help them better shape their proposals to address the buyer’s needs. The result is a number of very similar offers, competing on little more than price as well as terms and conditions.
So it’s no surprise that this RFP process sequence means the provider-selection decision is actually based on price. Despite best intentions, and even documents that say price isn’t the buyer’s biggest driver and it’s positioned at #4 or #5 on the selection-criteria list, the RFP process makes price the most powerful determinant.
A proposal for resequencing the RFP process
Perhaps what we need to do is to change the process to first define the problem and allow providers to build different, not the same, solutions around their strengths. This switches the process from an apples-to-apples perspective to an apples-to-oranges view with evaluation based on total cost and total effectiveness rather than price.
At this point the buyer would thoroughly examine and weigh the capability of the best-and-final two providers to deliver the offered service. This is different from getting client references, which often are manipulated.
Will the industry seize the chance to operate from this new level of thinking in the RFP process, or will it display angst? I perceive substantial pushback from both the procurement community as well as the provider/vendor community. The procurement community is happy to compete on price, and the provider/vendor community doesn’t want to unnecessarily spend scarce resources on bidding and legal fees before assurance of a high probability of a win.
Notwithstanding initial angst and pushback to my proposal, I certainly believe the RFP process needs to change.
Photo credit: Ahmillar