Are conventional competitive bidding tools and tactics still effective 20 years into the twenty-first century? That is a question University of Tennessee researchers set out to answer. The simple answer? No. And here is why.
Every day, companies use well-known, “tried and true” competitive bidding methods to choose their suppliers. Most common, of course, is the request for proposals (RFP)—also commonly referred to as a request for tender or invitation for proposal.
But—are the conventional RFP tools and tactics adopted over the last 30 years as the contract procurement “gold standard” still effective 20 years into the twenty-first century? That is a question University of Tennessee researchers set out to answer. The simple answer? No. And here is why.
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, just rebid the work.
However, as organizations outsource strategically and procure more complex goods and services, this logic no longer works, or at least not very well. Often buyers become co-dependent on suppliers, the costs involved with switching suppliers 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, but also a means to unlock value. In a transaction-based model, it is unlikely that the buyer will get any value beyond cost cuts, as only the price according to specification is asked for. And as the specification needs to be fairly narrow, even cost cuts are deemed to be limited in the long run.
In a globalized and highly competitive world, companies are indeed looking for value beyond cost when it comes to complex goods and services. This value often comes in the forms of innovation and flexibility and are often obtained through alternative sourcing models.
Furthermore, moving toward more strategic sourcing and partnership models enables a more distinct and direct connection to corporate buying strategy. Sourcing business models fall along a sourcing continuum, as shown in FIGURE 1.
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 main types of RFx methods, but often these methods go by different names. This article uses the terms that are most popular, but also lists alternative names used to describe the same or roughly similar concept. RFx approaches fall along the continuum shown in FIGURE 2.
RFX FACTORS TO CONSIDER
Virtually all strategic sourcing processes feature a competitive bidding step. As organizations manage the solicitation process and develop a solicitation plan, there are several factors to consider. For example, they should determine the most appropriate contract solicitation process to use. 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 a request for information (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. This makes sense because it takes more time and diligence to conduct a solicitation for a more complex and higher-risk spend category. For example, if it takes six months to do a source selection, don’t bid out the spend category every six months.
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 factor for a buyer to consider is 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 factor 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. The terms noted below are the most popular, but alternative names that describe the same or roughly similar concept are also provided.
1. Request for Information (RFI) — a.k.a. request for qualification
These are 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 the 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. Organizations that are seeking to understand supplier qualifications from an RFI will often use it to down-select suppliers to a smaller list that will be asked to move to a more comprehensive stage of the competitive bidding process.
2. Electronic Auction (e-Auction)
This is 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.
3. Request for Quote (RFQ) — a.k.a. request for price
These are used to obtain price offers for a specified product or service. They are used for more standard acquisitions that are based on price or cost considerations. Buyers using an RFQ 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.
4. Request for Proposal (RFP) — a.k.a. request for tender, invitation to tender, or invitation for proposal (IFP)
These are used to obtain pricing as well as detailed descriptions of services, methodologies, program management, costs, and other support provided by the supplier. RFPs 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/or potential shared design with the supplier. An RFP is often a follow-up to an earlier RFI. An RFP allows a buyer to specify requirements and allows suppliers to begin to define some of the “how.” For example, a buyer may ask a supplier to outline how it proposes to manage quality issues.
5. Request for Solution (RFS) — a.k.a. request for proposed solution or joint solution request for proposal
This is 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. An RFS is different from an RFP 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 RFS.
6. Request for Partner — a.k.a. request for collaboration or request for mutual value solution
This is a highly interactive process used when a buyer is actively 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 this 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. A typical strategic sourcing initiative includes an “Assess” phase where buyers seek to link requirements to business objectives. In addition, organizations perform various types of analysis (external market analysis, costs analysis, supply market analysis, benchmarking, etc.). Buyers should also assess the level of risk associated with the sourcing initiative and determine how to balance value between the business and suppliers’ organizations.
From a macro view, regardless of the RFx technique used, common themes emerge in considering key factors. These are addressed as follows.
Sourcing Governance and Stakeholder Involvement
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 (refer to 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.
Competitiveness of Approach
A second key difference is the competitive nature of the approaches. While all 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.
Frequency of Bidding
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 an RFP 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 an RFQ or RFP.
Let’s consider an example from the U.S. Navy. The Navy contracts for auxiliary power units (APUs), which are devices that supply power to weapon systems such as aircraft when they are “on the ground.” The Navy chose to create a 10-year contract due to the complexity of the performance-based solution they were working to develop and the criticality of the product. Allowing for a longer contract term enabled the supplier to have ample time to recoup investments to improve processes. It also reduced the transaction costs of having to frequently go to market on a complex bid.
Sourcing strategies are evolving in response to changing business requirements. Traditional specification and price-focused approaches have been effective tools in enabling competitive pricing for many years. Recently, organizations (and software technology) have devoted millions of dollars perfecting the art and science of the highly competitive bid. However, research shows that transaction-based approaches have limited ability to create value for an organization and only work optimally when there is abundant supply and low complexity where the “market” can correct itself.
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 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 enable buyers to work with suppliers on “solutions”—not just on providing a price for a specification.
Modern and collaborative RFS 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 are purpose-built to add value and drive innovation for buyers.
As the business environment evolves, it is imperative that competitive contracting models also evolve. CM
- International authority for her award-winning research and the Vested business model for highly collaborative relationships
- Author of six books on Vested
- Faculty member at the University of Tennessee
- Lauded by World Trade Magazine as one of the “Fabulous 50+1” most influential people impacting global commerce
- She has shared her insights on CNN International, Fox Business News, and NPR
 For more information on sourcing business models, see Kate Vitasek, “Finding the Right Sourcing Business Model,” Contract Management Magazine (July 2016): 24–35.
 For more information, see the Vested white paper, “Unpacking Competitive Bidding Methods: The Essential ABCs of the Various RFx Methods,” available at http://www.vestedway.com/vested-library/.
 European Commission, Directorate General Internal Market and Services, Public Procurement Policy, “Explanatory Note—Competitive Dialogue—Classic Directive,” available athttp://ec.europa.eu/internal_market/publicprocurement/docs/explan-notes/classic-dir-dialogue_en.pdf.
 “Vested” is a hybrid business model in which both parties in an outsourcing or business relationship focus on shared values and goals to create an arrangement that is mutually beneficial to each. (See Kate Vitasek, Mike Ledyard, and Karl Monrodt, Vested Outsourcing: Five Rules That Will Transform Outsourcing (New York: Palgrave MacMillan, 2010). For more information, see www.vestedway.com.
 The book Strategic Sourcing in the New Economy outlines 20 key sourcing considerations organizations should make as they approach any sourcing initiative. (Bonnie Keith, Kate Vitasek, Karl Manrodt, and Jeanne Kling, Strategic Sourcing in the New Economy (New York: Palgrave MacMillan, 2016).)