PowerPoint Presentation

Don’t issue an RFP unless…

Your business stakeholders are bought into the process.

For an RFP to be effective and to support eventual implementation and management of the goods or service you are looking to procure; it is essential to have your business stakeholders bought into the process and the value you are looking to deliver.

Rightly or wrongly, the procurement process can be perceived as a blocker by internal stakeholders who often (and usually for the right reasons) want to “get stuff done”. It is therefore important that the procurement function acts as a business partner and works with the business to integrate the differing functional constraints into a consolidated procurement plan.

If you don’t have buy in to your procurement process, you may discover internal blockers within your organisation including a technical or operation bias to an existing supplier which may present a risk to the process, either by unwittingly providing sensitive tender information or via encouraging a supplier arrogance towards the process.

Depending on where you are with your procurement process, if you are looking to move quickly against a procurement project, it is important to either have your budget cleared, or to at least understand the key financial parameters your business is looking to operate under (i.e. position on Cap-Ex / Op-Ex) and ensure you understand your route to business case / budget approval.

 

You understand your business capabilities & requirements.

Not all businesses understand their requirements at RFP, and this can present issues in the procurement process and in overall contract delivery. There are numerous high-profile examples of government contract failures, which whilst typically blame is attributed to the Supplier where in fact a failure to articulate and manage requirements was also a key factor.

Where an organisation has limited information on the technical solution required, the RFP should be structured clearly around the business capabilities that an organisation is looking to deliver through the project. In essence the RFP process will be delivering those requirements through the tender responses. In this example though, it is important to assess whether an RFP is the right process to run, and whether you need to issue an RFI to provide more technical maturity internally.

On larger scale Managed Service contracts, it is advisable that organisations invest appropriately in the necessary capability to fully capture and map internal requirements before contract award and preferably before RFP. This enables a sharper RFP process and contract negotiations and allows for effective change management against that existing baseline. Tender teams should also ensure they engage with their business stakeholders to ensure they are consulted and input where necessary into the requirements, all to often a tender or project team issues an RFP and contracts a solution that then turns out to not be suitable with end-user requirements.

Ensure that your business differentiates between:

  • Business Capabilities – Organisational objectives that the solution will achieve
  • Functional Requirements – Something the solution needs to do
  • Non-Functional Requirements – How the solution will work

There is an excellent blog post on Business Capabilities and Resource Based View (RBV) by leading Solution Architect Tim Manning of Design4Services:

http://design4services.com/methods/business-capability-modelling/

 

Your RFP process is efficient.

You should clearly understand your procurement plan, and structure your RFP process and documentation around those areas you have already identified, including ensuring you have key internal resources lined up where required which is especially important during RFP drafting, CQ’s, supplier evaluations and contract negotiations.

Your RFP documentation should be appropriate to the project you are procuring for, and there is often a risk of procurement departments recycling legacy RFP documentation which is packed with unnecessary and onerous compliance questions. Whilst there is of course a place for compliance questions within the process, it is the job of the tender team to determine the appropriate questions to fit the nature of that project. This is also important to build the right “tender” environment and be respectful of your suppliers bid team resources and phase your RFP appropriately to maximise value and impact.

As Mark Twain once said “I didn’t have time to write a short letter, so I wrote a long one instead.”.

You should ensure that you identify the tender plan with the RFP, including key dates for launch, clarification questions (and response dates), key evaluation and decision dates and dates for contract negotiations. You must ensure you have your internal resources lined up the maximise (and document) the outputs from these sessions. Remember, the RFP process may be your first interaction with a potential new supplier or strategic partner, so you want to represent your organisation in the best light.

 

You can leverage the process.

As part of your pre-RFP business engagement, it is important to identify the value you are looking to drive and the objectives of the tender. There may be examples where procurement has insisted on an RFP process, however the business is fixed on a specific sole source requirement. In a valid application of this scenario, then a tailored RFP (or commercial dialogue) must be consider. Procurement professionals must conduct the right due diligence internal to ascertain whether the sole source requirement is valid (or consistent with policies, if you have them) or whether it is being used as a lever to circumvent the procurement process.

You must understand the market position, and your internal constraints and BATNA. If you are issuing an RFP to an existing strategic partner, you should have the necessary levers within your contract to ensure you can optimise value for increased contract spend (whether through spend-level discount mechanism, reduced rates or enhanced discounts).

 

You know your contract baseline.

A common sticking point within RFP processes can be the negotiation of the actual contract and the time this can take if your tender process doesn’t appropriately address this key area. A common misconception is that the lawyers will “sort the contract”, and if this is the case, at the very minimum you need to ensure you have engaged them in the RFP process.

A more appropriate approach is to ensure that you have the necessary resources to draft an appropriate contract framework prior to RFP. This is of course dependent on the maturity of your requirements and you must ensure the framework is flexible and adjustable as you mature through the process.

You then must understand your organisations willingness and capability to negotiate the contract. It can be very effective to issue a fixed set of terms and conditions, which are (or you at least declare) none negotiable. It is advisable that you are pragmatic through your negotiations and operate in good faith with your supplier should they present valid commercial risks and suggested mitigations which would be more appropriate. Also, organisations must be careful that they don’t default into sending onerous and “meaty” terms and conditions full of bear traps to tenderers. The public sector has examples of these contracts which effectively just push risk on to the supply chain (and bidders should ensure they price these contracts appropriately). Ultimately risk best lies where it can be reasonable controlled, and therefore the contract should be structured accordingly.

If you are using standard templates, you should also ensure you understand your deal type, as contract structures clearly differ for different procurements such as Hardware, Support & Maintenance, Software, SaaS etc. You do not want to use a standard support and maintenance (or Services) template where it is not appropriate, i.e. for a SaaS deal.

You know your commercial model.

It is essential that you understand your commercial model before entering the RFP process, and how you will financially evaluate the tender responses and ensure the contracted solution can be financially managed within your budget.

You must first understand your price type. It is recommended that except in rare circumstances you avoid Time and Materials contracts. If the necessary investment in resources and time prior to an RFP, then you should have clearly defined requirements and desired outputs. A stronger position would be to have well understand framework for contract deliverables, milestone and your associated payment criteria. These principles can be applied regardless of deal size.

If operating under a Fixed Price model, it is essential that you are doing it for the right reasons and that this model will drive the necessary value and you have the right market mix to support that approach (i.e. leverage items, non-critical items). If you are going Fixed Price, then you must define the evaluation criteria for value for money and understand the commercial risk you are transferring. It is important to “know” what risk you are paying for as part of a considered business decision, rather than allow being led by the Supplier.

If you have a mature set of requirements and business outcomes, you have a strong bid team and your organisation is commercially mature you may wish to consider contracting to business outcomes, possibly through a TCIF (Target Cost Incentive Fee) mechanism or via a Gain-Share (or alternative commercial models). To deliver and manage this effectively you need to ensure you have a tender team sophisticated enough to execute and manage a model of this complexity.

 

You can manage the contract.

For a contract to be truly successful, you must ensure you have the capabilities internally to deliver both your project and contact management responsibilities to enable your supplier to deliver the goods or services you are paying for.

It is advisable that you extract key information through the RFP process such as required internal resources and your internal dependencies, and if you really want to put skin in the game you should ensure you contract against these.

You then must meet your contractual obligations and ensure you support the supplier through any change management activities, and you dedicate the necessary resources to conduct supplier management and value for money assurance.

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Benefits of Open Book Pricing & Contracting

“Re-establish good faith, give the estimation of the work and not refuse a reasonable payment to a contractor who will fulfil his obligations. That will always be the best transaction you will be able to find.” Marshal Vauban (1633 – 1707), Chief of Fortifications for Louis XIV, writing in 1683

Open Book Contracting is a commercial and procurement model which advocates transparency between clients and contractors. It is driven by the open and timely sharing of information to ensure that operational, commercial and programme decisions are taken in the best interests of both parties to enable delivery of both parties’ obligations to meet the desired outcomes of the contract. It enables the appropriate transfer of risk and can be used to financially (or otherwise) incentivise suppliers around key business drivers and TCO reduction targets.

In order for an Open Book Contract to truly work, all engaged parties (including, where necessary supply chain partners) must be commercially mature enough to see past the initial perceived risks associated with sharing pricing information, and efforts should be undertaken to ensure all parties understand the strategic objectives and commercial process associated with developing the price, solution and delivery programme. The core principle of Open Book Pricing is transparency, and many companies have reservations about adopting a transparent philosophy in the way that they develop pricing for their clients. Our opinion is that Open Book pricing is one of the few ways in which all parties can truly understand each other’s obligations, and one of the key benefits of Open Book Pricing is that it drives a philosophy and thought process which enables “bottom up” thinking and the sharing of key information between parties. This enables the resulting Open Book Contract to be structured in a flexible and agile manner to accommodate any anticipated risks or changes.

General Benefits of Open Book

  1. Partnered contracting models allow for “bottom up” thinking, which allow all parties to understand each other’s constraints, obligations and considerations in order to make effective commercial and operational decisions on behalf of the partnership.
  2. Open Book Pricing allows for the true understanding of the costs of the products or services and enables effective decisions to be made regarding the true Total Cost of Ownership (TCO).
  3. Open Book Pricing and contracting allows for the partnership to truly understand each other’s commercial and operational performance drivers, allowing for an effective contract to be structured to facilitate the desired outcomes.

Benefits of Open Book Pricing / Contracting for Suppliers

  1. Open Book Pricing encourages a granular and bottom up estimating methodology, which affords suppliers the opportunity to fully cost both their obligations and solution.
  2. Open Book Pricing enable transparent information sharing between parties, which allows for price variances to be modelled upon the provision of updated or revised information.
  3. Open Book allows Suppliers to discover the client’s true business drivers, increasing customer engagement and enabling the development of a true value proposition back to the customer
  4. Open Book Pricing opens the door for incentive based contracting mechanisms, including Maximum Pricing and Target Cost Incentive Fee (TCIF) commercial models.
  5. Allows for risk sharing protocols to be determined, enabling the commercial model to be structured to anticipate, mitigate and treat commercial, programmatic and operational risk and ensure that risk is attributed where it is best managed.
  6. Open Book principles build trust with customers and suppliers, especially when the processes and principles are structured cognisant of the interests of both parties.
  7. Supports the development of effective change management governance and functions, and the associated financial baseline to adjust charges where appropriate.
  8. Open Book contracts can sometimes be more profitable than traditional “fixed price” engagements, especially where profit is linked to stretch performance targets (i.e. gain share on reduction in TCO spend).
  9. Open Book contracts drive internal operational and commercial discipline, and “gear up” organisational behaviour and contract management to truly meet customer requirements.
  10. Conducting Open Book Procurements (both pricing and contracting) builds a supplier’s internal commercial capability and drives commercial contract management and financial management principles.

Benefits of Open Book Pricing / Contracting for Customers

  1. Open Book Pricing allows for greater cost and price transparency, which underpins Value for Money assurance and provides the necessary detail to conduct commercial due diligence.
  2. Open Book Contracting is capable of delivering value for money initially at Contract Award and through collaborative working and levers for innovation it can deliver TCO reduction.
  3. Allows for relationship development with the Supplier (and partners) which is beneficial for ensuring a stable baseline in developed which enables effective commercial contract management.
  4. Open Book Contracting allows for payment and commercial incentives to be linked to Key Performance Indicators (KPI) which can be directly linked to internal business requirements.

Further Considerations

  1. Open Book Pricing requires a partnered behavioural approach from both parties. If Open Book is used as a “weapon” by Customers’ then there is a risk that the process may break down or that customers may not extract the potential benefits this commercial model can facilitate.
  2. Open Book must be used to drive benefits, and therefore the customer must be mature in understanding its own requirements and success criteria.
  3. Open Book Contracting requires highly trained commercial contracts staff on all sides, who must have the necessary skillset and behaviours to operate in a transparent and structured manner.
  4. Suppliers must have accounting systems that are capable of accurately recording contract costs, and these should preferably be integrated with contract management and financial management systems / processes.
  5. Open Book Pricing can remove the advantages of Market Based Pricing methodologies deployed by Suppliers, although these can be mitigated by making exceptions through the procurement process (i.e. transparency can be applied against specific quants only such as labour days only, not rate).
  6. Open Book may be difficult for suppliers to sell internally, especially without the necessary expertise to communicate the potential benefits, including increased profitability and customer retention.

Conclusion

This blog post is a top-level summary of some of the benefits (and risks) that Open Book Pricing and Contracting can offer if deployed correctly. This should not be taken as an complete guide to the subject and should you or your organisation require specialist assistance, we would advise deployment of a specialist commercial contract manager to ensure success. Should you wish to engage with Athena Commercial regarding a future or current Open Book engagement, we would be more than happy to discuss particulars with you in more detail.

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Athena Commercial February 4, 2019 0 Comments
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