Sourcing & Commercial

The Seven Deadly Sins of Major Contract Procurement (and how to avoid them)

Of all the Latin terminology much beloved of lawyers and contract managers, the phrase that resonates most for me is “Caveat Emptor” which translates as “Let the buyer beware”. When it comes to the procurement of major contracts such as business process outsourcing, managed IT services and large-scale transformation programmes, the failure of organisations to apply some fundamental procurement principles can often have disastrous consequences.

Whilst the “sins” presented below are by no means an exhaustive list, they are amongst the most likely ways to undermine a successful sourcing outcome. In the original seven deadly sins, pride is said to be the sin from which all others arise…when it comes to sourcing, the root cause issue of the sins can often be attributed to a failure to plan appropriately…as the saying goes “sin in haste, repent at leisure”.

Don’t run a competitive process

Unless you are in a sole source marketplace or are in a distress purchase situation (perhaps caused by a failure to plan?) then not running a competitive sourcing process is generally a bad idea. Firstly, organisations are highly unlikely to achieve best value from a non-competitive process, and in fact even assessing good value can be very difficult without appropriate market benchmarking. Secondly, any supplier faced with the open goal of a non-competitive tender is not going to offer their best price when there is little risk of losing the business to a competitor. The same can be said of service levels, transformation timescales or just about any other key metric of the contract. Thirdly, if a non-competitive procurement stalls, for example, if contract negotiations hit the buffers, where do you turn to…?

Having said that its surprising how frequently the concept of a non-competitive process is courted by organisations, either in the erroneous belief that the tender process is too slow and costly and won’t achieve any better outcomes than an exclusive engagement or because senior executives have had their heads turned by an unsolicited offer from a supplier which looks too good to be true (and if it looks too good to be true…)

Let’s be clear, the tendering process does take time and needs to be carefully planned out, but to assume an exclusive supplier engagement is a silver bullet is a mistake. Requirements still need to be formulated, contracts negotiated and drafted, and commercial terms agreed. Going through a tender process such as a Request for Proposal (RFP) will help refine the requirements which will ultimately land in the contract. In a typical procurement the percentage of time which is exclusively related to the competitive element e.g. suppliers responding to the tender and evaluation of supplier responses is typically no more than 20% of the end to end sourcing process.

Don’t have a sourcing strategy

Embarking on any major procurement exercise without a clear sourcing strategy is inviting trouble. After all you wouldn’t go on a major journey without some careful planning and preparation unless you wanted to risk a) getting lost b) ending up on the bad side of town and c) incurring additional costs rectifying a and b!

A good sourcing strategy should set the framework within which you conduct your procurement exercise. Ideally it should be aligned to/informed by your business strategy and objectives. In this respect one of the key things to establish is the balance between the objectives of reducing costs, improving quality, and innovating to drive top line growth. Early agreement on the balance of these objectives will flow down into subsequent stages of your procurement process, e.g. the approach to evaluation of suppliers.

A sound strategy should also set out the high-level requirements to be met, the timescales and resources required for the sourcing exercise, an analysis of the supply market and your recommended sourcing approach.

Don’t be clear about what you want to buy

Although it may seem like a fairly basic consideration, it is surprising how often organisations embark on major procurement exercises with only a rudimentary understanding of what they want to buy. A failure to define requirements up front can result in delays to the sourcing process, ambiguous supplier proposals and sub-optimal commercial terms.

The key again here is good planning to ensure the right business stakeholders are engaged who can clearly articulate the business requirements. If the service being tendered is currently contracted out to a supplier, this may simply be a case of deciding what needs to improve and/or be added and anything that is no longer required going forward. However, if you are tendering a service for the first time it is likely that more effort will be needed to develop the requirements up front.

Whilst there may a temptation to keep requirements high level at the tender stage, a lack of detail can result in widely varying supplier interpretations of the requirement which make comparing/evaluating suppliers proposals nigh on impossible and it only delays the inevitable detailed requirements development to the contracting stage, by which point you may well have committed to a preferred supplier only for commercial negotiations to fail as expectations weren’t clearly set earlier in the process.

Don’t engage/test the market

Failing to understand the market for the services you are looking to procure is a sure-fire way to undermine your sourcing strategy. Engaging with suppliers in the market early can not only help shape your requirements – based on a better understanding of what the market has to offer – it can also demonstrate to the market that you are serious about tendering or re-tendering your services.

It is important to bear in mind from a supplier’s perspective that there is a significant cost of bidding for large contracts and they will be weighing up this cost against the likelihood of winning the contract. Particularly if you have an incumbent supplier for the services you are tendering, you may need to convince the market that you are serious about re-tendering otherwise suppliers could get cold feet and decide to concentrate their resources on more “winnable” opportunities.

This market engagement process is often formalised through a request for information (RFI) process prior to tendering, however a more informal “soft market test” engagement will be extremely helpful in developing relationships with key suppliers as well as further refining your requirements prior to tender.

Don’t be realistic about the timescales and effort involved

One of the most prevalent failings in major contract procurement is to under-estimate the time and resources required to achieve a successful outcome. Assuming there is an incumbent supplier in place, initial planning for re-tendering a major managed services or outsourcing contract should typically commence 18-24 months prior to the end of the existing contract term.

Leaving it too late to start the sourcing process is often the root cause of one or more of the other sins outlined here such as failing to detail requirements or not engaging the market and it also risks your organisation sleepwalking into a cliff edge scenario with your incumbent supplier, where you are left with little alternative but to extend an existing contract on unfavourable terms.

One mistake organisations often make is to squeeze the amount of time that suppliers have to respond to tenders in order to hit an arbitrary deadline. This is a false economy however, as it inevitably leads to a reduction in the quality of supplier proposals resulting in more effort being required in the subsequent stages of the process and/or a sub-optimal contract.

Good planning starts with your sourcing strategy which should set expectations early in the process around the time required to successfully complete the procurement and the key resources needed to support the process. It’s worth remembering that as well as the core team involved in the sourcing process, there will be requirements for input from business subject matter experts and supporting functions such as finance, HR and legal. These people will all have day jobs, so their involvement in the process, including in some cases backfill arrangements, needs to be carefully planned out.

Don’t stay close to your incumbent supplier

As the well-worn saying goes “keep your friends close and your enemies closer still!” That’s not to say that your incumbent supplier is or should be considered an enemy – hopefully far from it – but whatever your view of their performance, you should in most cases resist the temptation to exclude or drop them from your re-tendering process too soon.

Whatever your view of them and how they have performed to date, the fact they are your incumbent supplier almost certainly means that they will have a better understanding of your requirements than anyone else. For sure their performance may not have always lived up to your original expectations, but can you honestly say you’ve been faultless in managing them? (For more information on some of the challenges of major contract management see my earlier article on contract lifecycle management). If you can learn from your own shortcomings in this respect this may provide invaluable input into your requirements going forward.

Let’s face it, even if you are intent on changing supplier you will need your incumbent’s support during the re-tendering process, both in terms of providing information about how the current service is delivered and for supporting an orderly transition of the service to any successor supplier. Whilst your existing contract may give you certain rights in this regard, a contract isn’t a substitute for goodwill.

Don’t have a clear evaluation process

How you are going to evaluate supplier proposals is a key consideration in any major contract procurement. A failure to develop a clear evaluation approach can risk you making the wrong sourcing decisions and in the worst case can leave your whole procurement process open to challenge from suppliers (as can be the case in public sector procurement).

For major contracts simply relying on the lowest price alone is unlikely to yield the right outcome. The goal is to achieve best value, this being the optimal combination of service quality, price and commercial terms. The starting point for getting this balance right will be when developing your sourcing strategy and the weighting you have placed on the relative importance of the objectives of reducing costs, improving quality, and driving top line growth. Clearly when procuring a contract that is key to supporting your organisations competitive advantage, the quality of the supplier’s proposed service/solution is likely to have a significantly greater weighting than price alone.

Getting agreement on your evaluation approach ahead of receiving supplier proposals reduces the risk of key stakeholders in your organisation retro-fitting the evaluation process to match their subjective assessment of suppliers and can demonstrate a clear line of sight between your key business objectives and your sourcing outcomes.

Sins into virtues

Traditionally the seven deadly sins had seven contrary virtues such as humility, kindness and abstinence – the practicing of which was said to protect one against temptation towards the sins. When it comes to major contract procurement, as already mentioned, the key to overcoming the sins is careful planning – know when your major contracts are up for renewal (or plan sufficiently ahead when tendering a new service) and develop a clear sourcing strategy to guide you through the process and keep your key stakeholders aligned.

There’s no getting away from the fact that major contract procurement is complex and challenging. It’s worth considering if and where you would benefit from independent professional advice and support through the process. Peru has a wealth of experience in supporting clients through complex procurement projects as our case studies highlight and we can help you to avoid many of the common pitfalls. Don’t leave it too late to start developing your strategy and plan…Carpe Diem!

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