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A possible reason why the CF is paying far too much for the equipment it puts out to bid....
“Imagine if a fraction of the millions of hours spent writing meaningless proposals for professional services RFPs in Canada was instead shifted to productive consulting, accounting or other advisory efforts. Canada’s sharpest minds could increase the profits of our companies and drive social improvements for our communities instead of droning on about their people and process.”
A decent proposal
By Cal Harrison
Illustration: Mike Constable
The RFP method is supposed to objectively select and hire the best professional services for a particular job. But does it accomplish this? The evidence says no
As a CA, are you aware of what the most commonly used method of professional service procurement is costing you? As purchasers and vendors of professional services, CAs need to be well-informed of the deficiencies and costs hidden within the request for proposal (RFP) method. It is increasingly characterized as inaccurate and expensive by experts across North America.
The RFP process has long been touted as a way for buyers to objectively evaluate and select from multiple professional service providers while keeping a lid on costs. Unfortunately, far too many RFPs issued by private sector, nonprofit, or government buyers fail to achieve these desirable goals. That’s because using the RFP process actually increases the cost of buying professional services — such as accounting and management consulting — while decreasing the likelihood of selecting the right service provider.
In fact, while vendors and purchasers may still believe that an RFP is the most comprehensive method of procuring suitable professional services, it is actually an unsophisticated and inefficient process based on questionable science.
There are three premiums that must be paid by every RFP user that those using other selection processes do not pay, or pay to a much lesser degree: the lawsuit premium, the inaccuracy premium and the inefficiency premium.
The lawsuit premium
A cost built into in every RFP is the cost of avoiding a lawsuit by a participant challenging the accuracy and integrity of a selection process.
In 1981, a Supreme Court of Canada decision known as the Ron Engineering case illustrated that “competitive procurement, whether by way of an RFP, RFQ, Invitation to Tender or otherwise, can have serious legal ramifications.”
This means that additional resources must be allocated when writing an RFP document to ensure its accuracy. These resources can range from engaging a lawyer to write or review the document to the lesser cost of using a tool like the Purchasing Management Association of Canada RFP Creator, marketed as a CD-ROM compilation by lawyers featuring more than 1,000 sample legal clauses for purchasing professionals to use when drafting RFPs. Not included in this premium is the potential cost of defending, and possibly losing, a lawsuit based on the clarity of language within an RFP document and process.
Although all selection processes (soliciting referrals, multiple firm interviews, sourcing thought leaders or subject matter experts, etc.) must define the criteria by which to choose a professional services partner, an RFP document and process has a significantly increased obligation to avoid legal issues.
The inaccuracy premium
Imagine engaging an entry-level mutual-fund salesperson to manage your personal investments, even though you could have hired Warren Buffett for the same cost.
In both cases, your funds would still be managed, but it would be reasonable to argue that Buffett could achieve significantly more than the junior salesperson. This opportunity cost would never be documented and would never show up on the financial statements, but as intangible as it is, the cost is real. It would have a significant and direct impact on your quality of life. Too many RFPs incur that type of opportunity cost because of the reliance on irrelevant selection criteria.
In most professional services RFPs, there should only be two equally weighted evaluation criteria: sector expertise and functional expertise. Sector expertise illustrates how well a potential adviser understands your industry, while functional expertise demonstrates his or her understanding of your unique challenges. After all, the primary reason you hire an outside adviser is to create, manage, or fix some challenge or opportunity that you do not have the internal expertise to address within your organization.
Although issues such as service levels, hourly rates and timelines are important, they are criteria that must be met simply to win the opportunity to be evaluated, but they should not be evaluated as part of an RFP. When we allow irrelevant criteria to dilute the evaluation, obvious losers can score higher than obvious winners.
In the previous example, Buffett may have won hands down on expertise, but against an eager, new mutual-fund salesperson, Buffett would likely come up short in the areas of customer service, hourly rate and colourfully illustrated processes.
In a similar real-life example, the purchasing department of a regional health authority issued an RFP for communications services. Although it had included a total project budget (a good thing), it heavily weighted the vendors’ hourly rate in the evaluation process (always a bad thing). The vendor that scored dead last in the area of expertise also scored first in the area of hourly rate (meaning it was the cheapest).
Obviously, this is consistent with natural market forces — we would expect the least desirable competitor to have the lowest cost. Unfortunately, because of the skewed weighting of irrelevant criteria (hourly rate), the least-qualified vendor was selected over all others.
The irony is that, as the Buffett example demonstrated, the buyer could have had the best-qualified vendor for the same total project budget that it had stated in the RFP. Hourly rate was irrelevant. When this was pointed out to the procurement group it commented that it “had to measure something” in order to differentiate the potential vendors. This anecdote is not to blame purchasing professionals, but simply to point out how difficult it can be to differentiate intangibles such as professional services and how the use of irrelevant versus relevant selection criteria can serve to thwart the objectives of an RFP while seeming to serve them. Therefore, it is critical that procurement professionals understand which selection criteria truly matter when selecting professional services partners.
Hourly rates and total project price are irrelevant in the selection of a professional services firm and neither should ever be requested in an RFP.
This is because there are usually several potential approaches to the scale and scope of a professional services project and it would be futile for a procurement group to attempt to define them — which would have to be done, in order for any firm to provide a reasonably accurate price for the project.
Instead, an RFP should always clearly state a total project budget. Appropriate vendors will self-select in, or out, of an RFP process based primarily on the project size as defined by the budget and clearly stated project outcomes. They can then define the scope and scale of their deliverables within their proposal, using the budget as the constraint.
An RFP without a budget stated is a red flag to vendors, and many professional services firms now refuse to participate in an RFP if no budget is provided. This means purchasers not willing to disclose budgets will increasingly find it difficult to attract proposals from the best professional services firms.
Several years ago at a purchasing seminar, I stated that the worst thing a purchasing person can do when using an RFP to buy professional services is to exclude a project budget. Immediately, a rebuttal was offered. “But if I give them the budget,” stated the attendee, “they are all just going to come in at that budget.” He was right. But he failed to recognize that as a distinct advantage for both the vendor and the purchaser. When everyone’s price is the same, the buyer can compare expertise and value across a consistent price spectrum and purchase the services of the best expert they can afford.
From the vendor’s perspective, the proposal writing process can focus on driving value into a clearly defined budget, instead of trying to guess what makes sense for the client to invest in a solution.
While it’s important that firms have a well-defined process for solving their clients’ challenges, all professional services firm processes boil down to being substantially the same based upon the Bounded Rationality Model of decision-making, as proposed by 1978 Nobel Prize winner and decision theorist Herbert Simon.
Within the constraints of limited information processing, judgemental heuristics and satisficing, professional services firms go through a four-step process to assist their clients: identify the problem, generate solutions, select a solution and finally, implement and evaluate the solution.
Although vendors may customize this basic process by extending or consolidating steps (in an attempt to brand it as their own unique process), almost none will ever achieve a truly proprietary process based on unique primary research. For this reason, process is an unreliable differentiator of suppliers.
To totally discount people and service would be irresponsible because a horrible deficiency in either could compromise the success of a consulting project. However, having appropriate people and service levels is simply the cost of entry to the dance for a professional services firm — all firms must have people, as well as some reasonable level of service, simply in order to be in business.
Contrary to the popular belief that your most important resources go up and down the elevator each night, people in professional services firms are entities that have similar skills, education and experience and are also quite mobile.
Therefore, buyers should focus their evaluation on the expertise of the firm, not the individuals within it. The worst reason to hire a firm is because you feel a special connection to its staff. This is a sign that no meaningful or relevant criteria have been evaluated in the RFP or that they have been ignored altogether.
Unfortunately, too many professional service providers still hear that their competitors were selected because the purchasing committee felt more comfortable with the people in the other firm. Uttering any version of this sentiment should be an embarrassment to anyone in a professional procurement role.
Although service standards may be a reasonable mandatory criterion in an RFP (must be able to meet in person upon six hours notice, etc.), attempting to evaluate and objectively score claims of superior service in an effort to differentiate professional advisers will be of limited or no value.
Most firms will not be able to supply any meaningful, objective proof of their own service standards. Therefore, proposals will be rife with biased clichés such as “for over 20 years, our firm has exceeded clients’ expectations,” and “we have a reputation as a provider of superior service and value,” etc. People and service levels are reasons to fire a professional services firm, not reasons to hire them.
A professional services firm is hired to solve a problem or optimize an opportunity that the client does not have the expertise to address internally. Buyers must therefore focus on proof of expertise in their selection process.
In his book The Cult of the Amateur: How Today’s Internet Is Killing Our Culture, author Andrew Keen suggests that the Internet has permitted amateurs with questionable credentials to position themselves as professionals simply because they now have the medium to do so.
Others argue that the Internet enables us to identify experts without having to rely on traditional networks. For example, 10 years ago, if a firm required the assistance of a throughput process optimization expert in the area of vehicle manufacturing, it would have gone to a large consulting firm that would then have tried to source that expertise internally from its network of thousands of consultants.
http://www.camagazine.com/4/1/8/5/3/index1.shtml
“Imagine if a fraction of the millions of hours spent writing meaningless proposals for professional services RFPs in Canada was instead shifted to productive consulting, accounting or other advisory efforts. Canada’s sharpest minds could increase the profits of our companies and drive social improvements for our communities instead of droning on about their people and process.”
A decent proposal
By Cal Harrison
Illustration: Mike Constable
The RFP method is supposed to objectively select and hire the best professional services for a particular job. But does it accomplish this? The evidence says no
As a CA, are you aware of what the most commonly used method of professional service procurement is costing you? As purchasers and vendors of professional services, CAs need to be well-informed of the deficiencies and costs hidden within the request for proposal (RFP) method. It is increasingly characterized as inaccurate and expensive by experts across North America.
The RFP process has long been touted as a way for buyers to objectively evaluate and select from multiple professional service providers while keeping a lid on costs. Unfortunately, far too many RFPs issued by private sector, nonprofit, or government buyers fail to achieve these desirable goals. That’s because using the RFP process actually increases the cost of buying professional services — such as accounting and management consulting — while decreasing the likelihood of selecting the right service provider.
In fact, while vendors and purchasers may still believe that an RFP is the most comprehensive method of procuring suitable professional services, it is actually an unsophisticated and inefficient process based on questionable science.
There are three premiums that must be paid by every RFP user that those using other selection processes do not pay, or pay to a much lesser degree: the lawsuit premium, the inaccuracy premium and the inefficiency premium.
The lawsuit premium
A cost built into in every RFP is the cost of avoiding a lawsuit by a participant challenging the accuracy and integrity of a selection process.
In 1981, a Supreme Court of Canada decision known as the Ron Engineering case illustrated that “competitive procurement, whether by way of an RFP, RFQ, Invitation to Tender or otherwise, can have serious legal ramifications.”
This means that additional resources must be allocated when writing an RFP document to ensure its accuracy. These resources can range from engaging a lawyer to write or review the document to the lesser cost of using a tool like the Purchasing Management Association of Canada RFP Creator, marketed as a CD-ROM compilation by lawyers featuring more than 1,000 sample legal clauses for purchasing professionals to use when drafting RFPs. Not included in this premium is the potential cost of defending, and possibly losing, a lawsuit based on the clarity of language within an RFP document and process.
Although all selection processes (soliciting referrals, multiple firm interviews, sourcing thought leaders or subject matter experts, etc.) must define the criteria by which to choose a professional services partner, an RFP document and process has a significantly increased obligation to avoid legal issues.
The inaccuracy premium
Imagine engaging an entry-level mutual-fund salesperson to manage your personal investments, even though you could have hired Warren Buffett for the same cost.
In both cases, your funds would still be managed, but it would be reasonable to argue that Buffett could achieve significantly more than the junior salesperson. This opportunity cost would never be documented and would never show up on the financial statements, but as intangible as it is, the cost is real. It would have a significant and direct impact on your quality of life. Too many RFPs incur that type of opportunity cost because of the reliance on irrelevant selection criteria.
In most professional services RFPs, there should only be two equally weighted evaluation criteria: sector expertise and functional expertise. Sector expertise illustrates how well a potential adviser understands your industry, while functional expertise demonstrates his or her understanding of your unique challenges. After all, the primary reason you hire an outside adviser is to create, manage, or fix some challenge or opportunity that you do not have the internal expertise to address within your organization.
Although issues such as service levels, hourly rates and timelines are important, they are criteria that must be met simply to win the opportunity to be evaluated, but they should not be evaluated as part of an RFP. When we allow irrelevant criteria to dilute the evaluation, obvious losers can score higher than obvious winners.
In the previous example, Buffett may have won hands down on expertise, but against an eager, new mutual-fund salesperson, Buffett would likely come up short in the areas of customer service, hourly rate and colourfully illustrated processes.
In a similar real-life example, the purchasing department of a regional health authority issued an RFP for communications services. Although it had included a total project budget (a good thing), it heavily weighted the vendors’ hourly rate in the evaluation process (always a bad thing). The vendor that scored dead last in the area of expertise also scored first in the area of hourly rate (meaning it was the cheapest).
Obviously, this is consistent with natural market forces — we would expect the least desirable competitor to have the lowest cost. Unfortunately, because of the skewed weighting of irrelevant criteria (hourly rate), the least-qualified vendor was selected over all others.
The irony is that, as the Buffett example demonstrated, the buyer could have had the best-qualified vendor for the same total project budget that it had stated in the RFP. Hourly rate was irrelevant. When this was pointed out to the procurement group it commented that it “had to measure something” in order to differentiate the potential vendors. This anecdote is not to blame purchasing professionals, but simply to point out how difficult it can be to differentiate intangibles such as professional services and how the use of irrelevant versus relevant selection criteria can serve to thwart the objectives of an RFP while seeming to serve them. Therefore, it is critical that procurement professionals understand which selection criteria truly matter when selecting professional services partners.
Hourly rates and total project price are irrelevant in the selection of a professional services firm and neither should ever be requested in an RFP.
This is because there are usually several potential approaches to the scale and scope of a professional services project and it would be futile for a procurement group to attempt to define them — which would have to be done, in order for any firm to provide a reasonably accurate price for the project.
Instead, an RFP should always clearly state a total project budget. Appropriate vendors will self-select in, or out, of an RFP process based primarily on the project size as defined by the budget and clearly stated project outcomes. They can then define the scope and scale of their deliverables within their proposal, using the budget as the constraint.
An RFP without a budget stated is a red flag to vendors, and many professional services firms now refuse to participate in an RFP if no budget is provided. This means purchasers not willing to disclose budgets will increasingly find it difficult to attract proposals from the best professional services firms.
Several years ago at a purchasing seminar, I stated that the worst thing a purchasing person can do when using an RFP to buy professional services is to exclude a project budget. Immediately, a rebuttal was offered. “But if I give them the budget,” stated the attendee, “they are all just going to come in at that budget.” He was right. But he failed to recognize that as a distinct advantage for both the vendor and the purchaser. When everyone’s price is the same, the buyer can compare expertise and value across a consistent price spectrum and purchase the services of the best expert they can afford.
From the vendor’s perspective, the proposal writing process can focus on driving value into a clearly defined budget, instead of trying to guess what makes sense for the client to invest in a solution.
While it’s important that firms have a well-defined process for solving their clients’ challenges, all professional services firm processes boil down to being substantially the same based upon the Bounded Rationality Model of decision-making, as proposed by 1978 Nobel Prize winner and decision theorist Herbert Simon.
Within the constraints of limited information processing, judgemental heuristics and satisficing, professional services firms go through a four-step process to assist their clients: identify the problem, generate solutions, select a solution and finally, implement and evaluate the solution.
Although vendors may customize this basic process by extending or consolidating steps (in an attempt to brand it as their own unique process), almost none will ever achieve a truly proprietary process based on unique primary research. For this reason, process is an unreliable differentiator of suppliers.
To totally discount people and service would be irresponsible because a horrible deficiency in either could compromise the success of a consulting project. However, having appropriate people and service levels is simply the cost of entry to the dance for a professional services firm — all firms must have people, as well as some reasonable level of service, simply in order to be in business.
Contrary to the popular belief that your most important resources go up and down the elevator each night, people in professional services firms are entities that have similar skills, education and experience and are also quite mobile.
Therefore, buyers should focus their evaluation on the expertise of the firm, not the individuals within it. The worst reason to hire a firm is because you feel a special connection to its staff. This is a sign that no meaningful or relevant criteria have been evaluated in the RFP or that they have been ignored altogether.
Unfortunately, too many professional service providers still hear that their competitors were selected because the purchasing committee felt more comfortable with the people in the other firm. Uttering any version of this sentiment should be an embarrassment to anyone in a professional procurement role.
Although service standards may be a reasonable mandatory criterion in an RFP (must be able to meet in person upon six hours notice, etc.), attempting to evaluate and objectively score claims of superior service in an effort to differentiate professional advisers will be of limited or no value.
Most firms will not be able to supply any meaningful, objective proof of their own service standards. Therefore, proposals will be rife with biased clichés such as “for over 20 years, our firm has exceeded clients’ expectations,” and “we have a reputation as a provider of superior service and value,” etc. People and service levels are reasons to fire a professional services firm, not reasons to hire them.
A professional services firm is hired to solve a problem or optimize an opportunity that the client does not have the expertise to address internally. Buyers must therefore focus on proof of expertise in their selection process.
In his book The Cult of the Amateur: How Today’s Internet Is Killing Our Culture, author Andrew Keen suggests that the Internet has permitted amateurs with questionable credentials to position themselves as professionals simply because they now have the medium to do so.
Others argue that the Internet enables us to identify experts without having to rely on traditional networks. For example, 10 years ago, if a firm required the assistance of a throughput process optimization expert in the area of vehicle manufacturing, it would have gone to a large consulting firm that would then have tried to source that expertise internally from its network of thousands of consultants.
http://www.camagazine.com/4/1/8/5/3/index1.shtml
