Why Your RFP Process is Ruining Your Projects - And How to Fix It
by Erin Rollenhagen
Founder and CEO
In 1986, the country was steeped in outrage at the news that the Department of Defense had purchased, among other things, plastic airplane toilet seats for a whopping $640 each ($1440 in today’s dollars), airplane nuts for $2,043 each ($4598 today), and ordinary screws for $37 apiece ($83 now). Taxpayers were angry, President Reagan convened the Packard Commission to look into management of several agencies, and newspapers ran fist-pounding editorials decrying the rampant waste and cronyism at the expense of the American people. We were a nation that had been burned.
In this mistrustful climate, the RFP rose to prominence as a way to combat abuse and ensure fairness and competitive costs. The theory was that with everyone working with the same requirements, the playing field would be equal and the right vendor could easily be chosen (often based on the lowest cost). And as anyone who has ever judged a competition knows, quantitative measures like cost provide a nice benefit: they cover your backside. The lowest bid wins easily, and no one ends up in an ethics investigation.
Before long, businesses began to adopt these practices too. After all, what works for government is bound to be good for the private sector, right? RFPs became a relatively standard procedure, and executives felt relieved that they were getting the best value for their money.
Or were they?
RFPs make a lot of sense when buying something that’s completely defined and we aren’t looking for creativity, such as a screw or a plastic toilet seat or even a specific model of router. In this case the requirement is straightforward and we just want to pick the lowest-cost vendor who can get us what we need.
When dealing with physical products, this often means we’re going to select the vendor with the largest volume or the most streamlined distribution system as there are few other varying inputs to cut cost. And occasionally, we may get lucky and find a vendor who has a bunch of that item lying around that they’ll sell for a discount.
But what if the solution is not so clearly defined? What if we desperately need creativity? What if there is an opportunity to push the envelope and make something truly special?
Meet Sophie. Sophie is an upper level manager at a large corporation who has been tasked with leading a Big Huge Technology Project With Major Strategic Implications. Sophie’s boss, Margo, considers the project the a key element of the company’s strategic goal to surpass their leading competitor by next year, so she’s watching the project closely.
Sophie knows the first step is to write an RFP. She gathers all 14 relevant stakeholders and holds a series of in-depth internal meetings. After much discussion, the team agrees on words like innovative, leading-edge and disruptive to make sure vendors understand that this is no run-of-the-mill project. Next comes the list of features, which is somewhat tougher. Sophie and her team persevere and eventually they compile the wish lists from each stakeholder of things they’ve seen in other products and liked. Although she secretly feels some of the items might be counterproductive or infeasible, or just plain pointless, it’s politically dangerous for her to push back too much on anyone. After weeks of effort, she proudly finishes a 26 page RFP document, and sends it out to 11 prospective partners. She can hardly wait to get their responses back and dig into the groundbreaking ideas she’s sure will be coming her way.
When Art, a prospective technology partner, receives the document, he’s a little confused. The stated goal is innovation and to do something completely new (the word ‘disrupt’ is used more than once), but the RFP is a laundry list of regurgitated features from other products that will cost a fortune to reproduce, many of which are outdated or irrelevant to the core purpose. He is caught between pushing back at the risk of being eliminated, or pretending the requirements are sensible and hoping they can work through it with the client after the project is won. While Art knows they could spend countless hours trying to sort it out and come up with something creative and new to solve the problem, there’s little upside. There are probably at least 10 other companies responding, so with only a 10% chance of winning, it just doesn’t make business sense to put in the time. He puts together a boilerplate proposal, throws a dart at a price and hopes for the best.
When Sophie’s team receives the RFP responses, they’re dismayed. The highest bid is more than 5x the lowest bid. Instead of being elated by the lowest bid, they’re now suspicious that they aren’t truly comparing apples to apples. They spend hours poring over the responses trying to narrow it down to no avail. And there’s something else. The responses all seem…lifeless. As if the firms weren’t even trying. Even the one from Art’s firm, which they were sure would be the most creative. In fact, not one of the responses offers anything truly innovative or outside of the box. Margo asks Sophie how things are going and she weakly responds that they are on schedule, trying to hide the sinking feeling in her stomach.
What went wrong here?
It turns out that RFPs work to select the lowest-priced commodity vendor, but do a terrible job of choosing a creative, innovative partner.
But isn’t this necessary to get the best price? Don’t firms bid lower trying to get the work if they know they have competition?
I can’t speak for other firms, but from my perspective, typically no. Here’s why:
In a normal project process outside of an RFP, we start with a broad concept and general budget, and gradually zero in on the implementation and design through a series of sessions with the client. We help them sort through conflicting wants and needs, prioritize goals and come up with brand-new ideas no one’s seen before. It’s like that little machine you’d see at old-time grocery stores where you drop in the coin and it rolls on its side in an ever-tighter spiral until it falls into the pot below. Only once we’ve arrived at the center do we assign a price. At this point we can do so with confidence, knowing we’ve arrived at the right implementation.
In the case of an RFP, we’re skipping right to the price part without the benefit of all of this collaborative work. The less comfortable we feel that we have all worked through the details, the higher we must bid to cover the risk of differing expectations. Now, most clients feel their RFPs are extremely detailed, but no matter how specific an RFP may seem to be, there is still inevitably room for interpretation.
We can either err on the side of bidding low and risk losing money or disappointing the client, or err on the high side and risk not winning the business, but if we do, we’ll have the budget to do a thoughtful implementation. We choose to err on the high side, though many choose the low side. For the client who is biased toward the low bidder, this is often disastrous for both them and the chosen vendor.
And that brings up another point. The largest cost in a custom technology development project is generally talent. With the current competitive job market, we all face similar cost structures. With costs similar, if we each planned to solve the problem in the same way, bids would be similar. If bids are more than say 15% apart, it most likely reflects different assumptions about the project. As the client, you aren’t necessarily going to be happiest with the cheapest one. Technology and especially software design are inherently creative disciplines, and that creativity has a benefit to the client - but also a cost. Favoring the lowest bidder often means favoring the least innovative partner.
But what about RFPs that say they encourage creativity? Or ask vendors to pitch new ideas? Don’t those help?
To be blunt, not really. Even if the respondents truly believe that the client values innovation, the small chance of success ensures that prospective partners can’t afford to put much effort into the RFP response.
Think about it: costs of acquiring business are always inherently passed along to the customer. If a firm spends 5% of the expected cost of the project on winning the RFP (this is not much in a world where design is 20-30% of total project cost), and wins 20% of the RFPs they submit, that means the cost of the proposal must go up 25% to accommodate the cost of acquisition of the client. That’s unacceptable in most markets — so the RFP response must be done quickly and cheaply.
Okay, so what do I do about this?
There is a better way; a way to encourage the type of long-term partnership that yields work we can all be proud of. We’ll share two options.
The Band-Aid Option
One small step in the right direction is to take price out of the equation. Many organizations know going in what they can afford to spend. Instead of specifying the features and asking for a price, specify a ranked list of priorities with a budget and ask the respondents to put forth their plan to get the most bang for your buck. This still has many of the issues of a traditional RFP because there’s a low chance of success for the respondents so the overall time investment will be low, but at least you’re encouraging them to compete on value rather than price.
The Real Solution
If you’re ready to truly make a change, you have to shift the process away from trying to get to apples to apples. It’s never truly apples to apples — and that’s okay. Rather than trying to get vendors to put on a mask to all appear the same, embrace the fact that each is different, and work to figure out which one suits you and your project best.
Stakeholder meetings are still useful, but instead of coming up with a laundry list of features, they should focus on defining three things:
- objectives (the result for your organization, such as increased sales or faster ordering)
- pain points
- the environment in which the project will operate
These don’t have to be completely solid. No more than 2-3 meetings should be needed. Set expectations that this is about high-level visioning to ensure you stay on target. One line I like to use if we’re getting too far into the weeds is “That’s interesting. How will that change your work?” This gets people thinking about the result of the feature they’re requesting, and the answer reveals the objective, pain point, or environmental factor they’re trying to accommodate.
At the same time you’re conducting stakeholder meetings, start asking around for referrals. (Quick tip on referrals, especially if you’re going to post on social media: define that you’re only interested in referrals of partners the referrer has actually worked with - not “my ex brother-in- law does that.”) If prospecting amongst your contacts for referrals completely fails, try contacting an industry association and explaining what you’re looking for. If that fails, there’s always a Google search. Identify a shortlist of potential partners who you think are the best cultural fit. Then ask these potential partners for an introductory meeting.
Your message to the partners on the shortlist could look something like this:
We are working on a Big Huge Technology Project With Major Strategic Implications. Amy Smith gave us your name, and we’ve selected you as one of our top 3 potential partners to work with. We’d like to set up an introductory meeting to get to know your team and learn about your process. After that, we’ll ask you for a high-level proposals of how you see the project proceeding, and a broad cost structure so we can select our partner. If you’re interested, could we set up a time next week?”
This does a few things:
- It lets the potential partner know exactly what you’re asking of them
- Because you’re specifically identifying the number of candidates, you’re letting them know they have a decent chance at success
- You’re emphasizing your interest in finding a partner based on fit and process, not price. This encourages creativity.
The meetings should then be used to gauge cultural and process fit, and the proposals will tell you both how interested the prospective partners are, and how well they can interpret your objectives, pain points and environment into a plan.
Instead of a process built on mistrust and cutting corners, you will have a relationship based on fostering the best environment for success. We’ve come along way since 1986.