Sorting Vendors into Piles: The Proper Role of an RFP

“We’re going to issue an RFP next Tuesday. You will get it at the same time as the others.”

As executives, on both sides of the conversation, we’ve never heard a more discouraging set of initials: R-F-P. After all, it’s a best practice, isn’t it? And practice we did. We set up committees, held reviews, visited client sites, worked on consensus and then set the procurement dogs loose to hound our presumptive winner. Conversely, when we were selling to Fortune 500 companies, we hated receiving blind RFPs. RFPs were laborious exercises that dredged up our worst school memories as our main hope for victory lay in setting the RFP requirements well before its being issued.

Russell Bostick, MVP Advisory Group

At some point, all of us, both vendors and clients, have experienced a situation where the RFP became a process and not just a tool. Procurement is the process. Therefore an RFP, is just that — a tool — and a fine one in the right hands.

Based on our experience, we find that the decision to issue an effective RFP primarily lies in an organization’s ability to answer these five questions clearly.

1. How important is this purchase to the company?

RFPs are expensive for both the vendor and the client. Is the problem worth issuing an RFP? This means adding up both real and imputed vendor and client costs, not just the out of pocket vendor cost.

Donn Vucovich, MVP Advisory Group

The amount of effort spent on the procurement process should relate to the strategic importance of the acquisition. For insurance, if the procurement is for a benefit of less than $500,000 annually, issuing a full RFP is too costly. Conversely, if the program will add $2MM to the bottom-line, expending $100,000 is a good value for the clarity that an RFP provides.

2. Is the procurement process being used to educate the staff on wants and needs?

This is the dirty secret of RFP processes – the game may be more about creating internal consensus and signaling that the project is ‘real’ rather than selecting a vendor. If learning is going to be more than 20% of the time spent on the RFP, then carriers and brokers should do that without the RFP tool. If necessary, clients should consider using an RFI (Request for Information) approach to create consensus and winnow the prospective suppliers down. This is less costly and won’t frustrate the suppliers. Product demonstrations, interaction with key vendor thought leaders, and the selective use of advisory services helps greatly here.

Once an RFI in completed, a RFP can be issued to 2 or 3 prospective suppliers. This approach shortens the timeline for project initiation, signals that the project really is funded, and leads to better contract language.

3. How many directly comparable suppliers are there, really?

In our practice, we rarely recommend that a client issue RFPs to more than five suppliers. Why? In effect, as with an auction, you only need two to play to get a qualified, high quality offer. Asking more vendors to respond than that indicates that you don’t really know what you need and that the RFP may be more of a search for free consulting than a funded initiative. Furthermore, as with all mathematics that involve combinations, the marginal cost per unit goes up, rather than down, as you add prospective suppliers.

4. How difficult is it to stop and start over with the tool/supplier/project?

An RFP creates a clear historical reference to what a client and a vendor thought was needed at a point in time. If the investment may stop, and will be difficult to restart, then an RFP provides a viable means of going back to the key vendors without losing much time or money. In addition, an RFP provides a much clearer way to hold client and vendor staff accountable for the original goal and their performance in achieving it.

5. Will the contract for the service/product/result be a simple, one-time cost or a complex, reoccurring cost?

If the contract and its associated service is a one-time cost and is simple, an RFP just isn’t necessary.

When they are complex, the RFP (and the RFI that may precede it) is an on-ramp to the contract and ensures a higher quality statement of the results expected. In these scenarios, observant vendors recognize that their answers will become legal language and are very attentive to assuring the quality of their proposal.

Summary

Carriers, brokers and agents should avoid RFPs unless the purchase will be for a complex program that involves significant time and money. Buyers must avoid letting the tool become the process. The result should be an investment that creates value while addressing risk and the ability of both parties to meet their obligations.

About the Authors: Russ Bostick and Donn Vucovich are the managing partners of MVP Advisory Group, a management consulting firm focused on developing and executing superior strategies for business and IT.

Bostick was Executive Vice President of Technology and Operations, CNO Financial Group (formerly known as Conseco Insurance). At CNO he was responsible for all IT as well as the shared services for claims, policyholders, the agent call center and records management and print output for Washington National, Bankers Life and Casualty and Colonial Penn insurance companies. Prior to CNO, Mr. Bostick was the CTO for Chase Insurance, the insurance arm of JP Morgan Chase.

Vucovich was President, Shared Services at Hub International, the 10th largest insurance broker in the world. At Hub, he was responsible for non-financial operations, technology and real estate. Prior to Hub, Mr. Vucovich was responsible for the Global Business Technology Solutions (BTS) practice of Navigant Consulting. Prior to Navigant had a variety of senior IT and business roles at CNA Insurance and founded a consulting firm focused on business intelligence solutions.