How does procurement evaluate outsource providers?

February 23, 2017 mpotepa

In the RFQ process, procurement should ideally be transparent about answering this question. Too often, however, the sales team at suppliers providing the bid have to “guess” at what they think will be important. The Request for Quote process, if done correctly, is a way for procurement to be able to quantify the elements of value and in many cases, and for the sales team at suppliers to educate the customer on what their true performance capabilities are. The RFQ process is really an opportunity to explore and understand the potential range of performance outcome that are possible. Unfortunately, many outsource tenders are “botched”, often because the procurement organization does not have a full level of understanding of the different forms of performance and value that a third party outsourced provider can deliver to their business and/or does not fully understand what the true business need is. Safety is almost always a primary concern – but there are many five other elements that come into play that should be explored and defined specifically with the customer in the context of the current and targeted business.

Cost – What are the elements of not just the price of the outsourced process, but the total cost associated with operating the process?
Serviceability – What are the elements of service and how can they be measured?
Quality/Safety – How is quality defined? What are the key safety performance issues that are unique to this situation?
Innovation – What are the proposed ideas to drive improved outcomes across all of these other factors?
Contract Compliance – How will the terms of invoicing, payment, and all terms and conditions be defined in the contract? (This is important to know upfront for the supplier!)

These elements may need to be reviewed and defined in specific terms at the beginning of the RFQ process, so that the appropriate set of responses can be appropriately defined in the supplier’s proposal. Each of these elements will have a different impact on cost drivers that will ultimately impact the proposed cost, etc.

Procurement may use a form of scorecard to not only evaluate potential suppliers of services during the RFQ process, but also to manage the on-going relationship after the contract is awarded. Scorecards can be built after the contract is awarded but also defined in more detail in the RFQ response. The weighting of the different factors is also important, and understanding this weighting is fundamental to how the response is crafted.

The RFQ ideally should also include other questions relative to past performance which the sales team should be ready to respond to:

How long have you performed this type of activity?
Who have you done it for?
What is the capability you possess to deliver a solution that meets our needs?
What are the capabilities and quality of the people who will be assigned to perform this work?

In turn, it is essential that a dialogue be established during the RFQ respond process for sales to engage procurement and understand the drivers behind the outsourcing initiative. Procurement should be fully versed on stakeholder needs, and be open and transparent in their willingness (and ability!) to answer the following questions. If procurement doesn’t fully understand the business need, then they need to go out and speak to business owners before they launch the RFQ!

What is the business outcome you are striving to achieve? What is driving the need for this outcome?
Why are you asking suppliers to provide solutions for these outcomes? What is the driver?
What is the reason you are engaged in the outsourcing exercise?
What is the level of continuous improvement you are expecting after the award is made?
What are the transformation costs, including the switch-out costs (if there is an incumbent) that need to be considered in this proposal?
What is the level of pre-and post-award contract savings you are expecting to deliver on the current state?

In many cases, the sales team may not know the exact weights assigned to each of thse criteria. However, these questions can help facilitate an “estimation” of the weights and can help deliver a more focused and coherent proposal. Asking the above questions during customer reviews can help the team to better understand the expectation.

In some cases, the procurement team running the RFQ may not be fully cognizant of the different criteria that need to be considered. This is often the case especially with a “price-conscious” procurement team that is only rewarded for price savings over the current state. The cost of change is a significant factor that should also be well-understood and communicated in these discussions. This could also span the “political” costs, particularly when the incumbent is favored over any new party by local constituents. In many cases, an incumbent to the contract will try to sell the statement that “you can’t do without me, and I’m the only one who knows how to serve you,” while the potential competitor will sell the point that “changing over to our system is easy and will be seamless.” Neither statement is true.

It should also be emphasized that procurement has a responsibility to fully understand the capabilities of potential suppliers in the process. One executive noted:

“As a result of the RFQ, we selected two different suppliers for two different DC’s. We used an identical process, and they appeared both highly qualified based on their respective responses and proposals. One of the suppliers operated flawlessly, and only required two meetings annually to review performance. The other supplier had horrible performance, which required weekly reviews to deal with a stream of continued operational issues.”

To bar against the likelihood that the business will “game” the weights to get their preferred supplier, mature supply management organizations will establish the weights ahead of time. There should be a “referee” who sits on top of the weighting system, and in most cases it will be the company auditor. A good procurement practice will have an audit requirement to define the weights before the RFQ is issued, and not change them during the process.

If as a result of this assessment it becomes clear that the RFQ performance criteria and weights are not aligned with the supplier’s key capabilities, the sales team may make a decision to not pursue the proposal. However, unless these types of questions are asked through engaging the procurement team, the pursuit strategy will not be fully informed, which could lead to a tremendous waste of resources.