Comparing apples with oranges: Key principles for running an effective RFP

2 April 2020

Issuing a Request for Proposal (RFP) to the market? How do you ensure that the considerable time, effort and resources committed to the project ultimately result in an effective RFP? There are a host of reasons why an RFP might be the preferred or even the required approach for a company to procure a solution (whether by regulation or by internal policy).

In our experience there are certain key principles common to all RFPs which  can assist you in achieving the right outcome. This article is intended to briefly touch on four of these principles and to explore some of the approaches we have found work consistently when running or managing an RFP.

1. Collaborative sourcing and comparing apples with oranges

The general rule of thumb when issuing an RFP used to be “get your requirements right, issue these to the market, and everything else follows”. In other words, to run an effective RFP, you must have a clear and detailed description of what you require and how this needs to be provided from the outset. The responses to this request would allow for a ‘like for like’ comparison (i.e. apples with apples).

This may still hold true if what you’re procuring is entirely bespoke and you end up dictating your requirements to the market. However, more often than not, it will be a case of seeing what the market has to offer and deciding which solution best fits your environment.

This is because there has been a drive by suppliers to standardise their solutions in a bid to increase efficiencies, promote faster innovation (by narrowing development focus to a single solution) and reduce price. As a result, going to market with a broader set of objects (rather than detailed requirements) and accepting standardised solutions is frequently the preferable approach as a customer.

To assist when comparing different standardised solutions (i.e. apples with oranges), look to leverage the experience and expertise available from suppliers by adopting a collaborative approach to sourcing. Set up workshops with each supplier to understand the details of their solution and ask the suppliers to explain how it will be integrated with your environment. The suppliers should be able to confirm (and commit to) the extent to which the solution being offered will meet your objectives, which will in turn allow you to weigh up the different solutions to determine which one best meets your objectives.

2. Maintaining competitive tension

In an RFP, maintaining competitive tension among the potential suppliers is the most important source of leverage for a customer, whether it’s leverage to get pricing down to a level that makes the business case or ensures services are performed in a way which works best for the business, or leverage to introduce a necessary degree of flexibility to ramp up and down the services to meet demand.

Timing is everything. If the preferred respondent is made aware (whether formally or not) that it  is going to be down-selected or awarded the RFP, there is a very real risk that any competitive tension is immediately and permanently lost. This means that the customer’s leverage and ability to negotiate favourable terms will be dramatically reduced.

So, when is it “safe” to announce a down-selection or award? When the supplier has committed to the right pricing, to performing the services in a way which meets your needs and you have the necessary flexibility required. There may well be other key points for the specific RFP which are “must haves”, and these should naturally also be covered in the negotiations before any announcement is made. Importantly, none of the key commitments from the supplier should be subject to ‘assumptions’ (discussed further below in point 3).

3. Don’t kick the can

In nearly all RFPs, you will be working to establish a business case for your project. This means that driving pricing down and securing competitive commercials is fundamental to the deal. 

But even where on face value the committed pricing is favourable and a business case has been demonstrated, we’ve often seen an RFP process unwind at the final stages. This is almost always as a result of the two sides ‘kicking the can down the road’ on a difficult issue where there is no immediate solution or alignment cannot easily be reached.

As the deferred issue  is then left to the end of the RFP, you would no longer have any competitive tension. More often than not, it is at this point that the parties re-engage, with the supplier telling the customer that the only way to meet your requirements is if the price is adjusted upwards. Common examples include deferring putting appropriate service levels and service credit mechanisms in place, discussing minimum volume commitments, negotiating a right for the customer to exit early, or agreeing an ability to ramp services up or down as dictated by demand.

If an important issue cannot be resolved when it arises and the parties have to defer, it may be useful for the customer to try to get the suppliers’ commitment to ‘different scenario pricing’ depending on what is ultimately agreed. This way, the customer at least knows what the pricing will be once a position has been settled.

A final word of caution on pricing - if one respondent emerges with dramatically cheaper pricing than the others, this should always be thoroughly interrogated. Usually the disparity results from one of two causes - either the cheaper supplier has fundamentally misunderstood what is required of them, or they have priced in a way which will not cover their costs down the line. Both scenarios can cause the  deal to collapse. For example, if a supplier has priced at a level where it cannot cover costs, the services will not be sustainable and the supplier will invariably start looking for ways in which to break the contract or reduce the standard of service.

4. Involve your legal team from the start

Your legal team will always be able to add more value to the RFP if they are involved from the outset.

While topics like service descriptions and pricing may appear entirely technical or commercial in nature, ultimately these will need to be documented in a contract - and it is frequently during this process when the details are set out, that the parties realise there are issues or areas of misalignment. The sooner these issues can be addressed, the less likely they are to impact on timelines and the overall success of the RFP.

Legal also plays a pivotal role in managing risk. As with all contractual negotiations, aside from documenting what is going to provided and the price, it is primarily a discussion about allocating risk between the two contracting parties. From a supplier perspective, risk usually has a cost attached to it, i.e. the more risk you expect a supplier to take on, the higher the price will be. Understanding this relationship between risk and price early on in the process with each supplier, allows you to make an informed decision with your stakeholders about how much risk you are willing to accept at a particular price point.

Finally, we strongly recommend sending out a draft of the contract together with the initial RFP. This has a number of benefits. It allows you to use the competitive tension present at the outset of the RFP to drive a favourable allocation of risk. It also ensures that a supplier’s approach to the contract is factored into any down-selection decision and, importantly, avoids a last-minute delay where contract negotiations hold up the project as a whole.

This article has highlighted a few principles to keep in mind to assist in running an effective RFP. If you’d like to hear more about the support we can offer you on any upcoming RFPs or a strategy to improve your contracting processes more generally, please get in touch.

by Erik Heyns

The information and views contained in this article does not constitute legal advice. If you do require legal advice, please contact us on hello@lighthouse.law.