Use of the Request for Proposal (RFP) procurement methodology to select a management consulting firm is increasingly characterized as inaccurate and expensive, by experts across North America – as a consultant are you aware of what it’s costing you and your clients?
As a business development advisor to North American management consultants, I am constantly reminded how much they dislike having to participate in an RFP. In fact, many have made avoiding RFPs, a business goal for their practice.
Although the RFP process is still touted as a way for buyers to objectively evaluate and select from multiple consulting providers while keeping a lid on costs, far too many RFPs issued by private sector, non-profit or government buyers fail to achieve these desirable goals.
In fact, while vendors and purchasers may still believe that an RFP is the most comprehensive method of procuring suitable professional services, it is increasingly viewed as an unsophisticated, and inefficient, process based on questionable science.
How an RFP Increases Consulting Costs
There are three premiums that must be paid by every RFP user that are not paid, or paid to a much lesser degree, by those using other selection processes: the lawsuit premium, the inaccuracy premium and the inefficiency premium.
1) The Lawsuit Premium: The Price of A Formal Competition
A cost built into in every RFP (consciously or not), is the cost of avoiding any sort of 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 (PMAC) RFP Creator™, marketed as “a CD-ROM compilation by lawyers featuring over 1,000 sample legal clauses for purchasing professionals to use when drafting Requests for Proposals.” 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.
2) The Inaccuracy Premium: A Hidden Opportunity Cost
Imagine engaging an entry-level insurance salesman 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 Warren Buffett could achieve significantly more than the junior salesman.
This “opportunity” cost would never be documented, 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 finances and quality of life. Too many RFPs incur that same 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 advisor understands an industry, while functional expertise demonstrates an understanding of specific business challenges. After all, the primary reason to hire an outside advisor is to manage some challenge or opportunity that an organization does not have the internal expertise to address.
Although issues like 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, Warren Buffett may have won hands down on expertise, but against an eager, new insurance salesperson, Buffet would likely come up short in the areas of customer service, hourly rate and colourfully illustrated processes.
I once reviewed the result of an RFP for communications consulting issued by the purchasing department of a regional health authority. Although they had included a total project budget (a good thing) they heavily weighted the vendor 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 they were 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 Warren Buffett example demonstrated, the buyer could have had the best-qualified vendor for the same total project budget that they had stated in the RFP. Hourly rate was irrelevant.
When I pointed this out to the procurement group they commented that “they had to measure something” in order to differentiate the potential vendors. This anecdote is not to blame purchasing professionals, but simply to point out (i) how difficult it can be to differentiate intangibles like professional services and (ii) how the use of irrelevant versus relevant selection criteria can serve to thwart the objectives of an RFP while seeming to serving them.
Therefore, it is critical that procurement professionals and consultants understand which selection criteria truly matter when selecting professional services partners. Here are some common misperceptions.
Price: 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 different 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 that purchasers not willing to disclose budgets will increasingly find it difficult to attract proposals from the best professional services firms. Conversely, consulting firms that participate extensively in RFP’s for business development may find their professional brand is no longer as valued as it once was.
Several years ago while making a speech 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, “then they all just 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 know 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.
Process: While it’s important that firms have a well-defined process for solving their client’s challenges, all professional consulting firm processes boil down to being substantially the same and based upon the Bounded Rationality Model of decision making as proposed by 1978 Nobel Prize winner and decision theorist Herbert Simon.
All 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.
People and Service: 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 consulting 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 consulting 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 a client feels a special connection to the consulting 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 consultants still hear that their competitors were selected because the purchasing committee “just 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 6 hours notice”, etc.), attempting to evaluate and score claims of superior service in an effort to differentiate professional advisors will be of limited or no value simply because 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 like “For over 20 years, our firm has exceeded clients’ expectations,” and “We have a reputation as a provider of superior service and value for our clients,” etc.
People and service levels are reasons to fire a professional services firm, not reasons to hire them.
Finding, Recognizing and Measuring Expertise
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 now 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, they would have gone to a large consulting firm who would then have tried to source that expertise internally from their network of thousands of consultants.
Today, that buyer can simply type their request into Google to find several experts in only a few seconds. This access to expertise means that the procuring organization now takes a more direct role in the search for, evaluation and selection of an expert. Procurement professionals therefore need to become more familiar with finding and assessing expertise versus simply evaluating cost.
So how does a buyer differentiate an expert from an amateur who simply hangs out a shingle? There are a few basic fundamentals:
Focus: In professional services, expertise is always clustered around a subject area (functional expertise) or an industry (sector expertise), and preferably both.
Credentials: Professional designations, relevant project experience, degrees, industry reputation and legitimate certification collectively support the claim of expertise but are not “expertise” in and of themselves.
Profile: Although not all experts cultivate a public profile, most either have one simply because of reputation within their circles of influence, or create one, to drive traffic to their door. Profile can be divided into the meaningless and meaningful. A meaningless profile is based on “empty” announcements such as new hires, new clients or speeches to the local chamber of commerce. A meaningful profile is one that announces speaking invitations to universities, out-of-market organizations and national or international industry events. It is content-heavy and includes original research or white papers, published articles and media interviews on events of significance.
While measuring the wrong indicators is a critical failure of many RFPs, equally devastating is measuring the right ones with flawed methodology.
Chris Jones is a Fellow of the Canadian Association of Management Consultants and an expert in the RFP process as it relates to management consulting. In a March 2006 article in Summit Magazine, he lists a series of changes buyers can make to improve the evaluation process to save time and money for both vendors and buyers.
Throughout his recommendations, Jones encourages procurement groups to shift from general statements to explicit statements in an effort to increase measurability and objectivity in RFPs. Although it may seem obvious that all selection criteria must be objectively measurable, the intangible nature of professional services makes this a greater challenge – and an area in which RFPs have been sorely lacking.
Jones argues that a simple switch to explicit language provides greater direction to the vendor and the selection committee. Instead of stating “The project manager should have ‘strong experience’ in managing projects of this type,” Jones recommends asking “Does the project manager have five or more years experience in managing projects of this type?” This example is typical of an immediate and costless change that can significantly streamline the selection process.
Other experts support Jones’ concerns about the measurement process.
Dr. Alex Zhykharyev, holds a PhD in Applied Decision Theory and Operations Research in Toronto and is the author of the article “Weigh The Scales: The Constraints of Measurement Theory on the Proposal Evaluation and Selection Process.” Zhykharyev argues that “advanced” decision-support software products used by many government departments to evaluate proposals may in fact provide arbitrary scoring based on “meaningless statements.”
Simply shifting between measurement scales (interval versus ratio) in an RFP scoring scheme can potentially generate opposite evaluation results. Zhykharyev’s writing substantiates the concern that a seemingly scientific process may be far more random than it appears.
3) The Inefficiency Premium: The Purchaser Always Pays
Blair Enns is President of Enmark Performance Development, one of the world’s leading sales and marketing advisers dedicated to a unique subset of the consulting industry - advertising agencies. Enns likes to remind his clients that there is no such thing as the cost of selling, only the cost of buying. Nowhere is this statement more accurate than when using an RFP process to purchase professional services. The reasons why are obvious, yet rarely discussed.
Firstly, in most for-profit consulting firms, many hours are spent responding to RFPs – most of which are not won by the firm. These unpaid hours are factored into the rates subsequently charged to other paying clients, meaning that every consulting client is paying a premium to support the inefficient buying processes of other potential clients.
So if the standard RFP process is inefficient, vendor rates will be higher than if the standard buying process is efficient and consumes less of their time.
Profit-oriented vendor firms will not take a loss to absorb the inefficient practices of their potential clients. It’s ironic that most RFP documents include a statement indicating that all costs associated with the preparation of a response to the RFP must be borne by the vendor when, in fact, they are always borne by the purchaser.
Secondly, Enns points out that managing partners are aware that their billable hours factor in compensation for the inefficiency of responding to RFPs and therefore, are willing to adjust their rates downward if that inefficiency is removed.
Although one of the basic premises of an RFP is to increase competition in order to drive down the prices, it actually succeeds in achieving the opposite. A buyer is more likely to receive a reduced rate if they avoid the RFP process and negotiate exclusively with one vendor. Not only can the vendor eliminate the RFP premium from the price, they can more easily optimize proposed solutions because of access to buyer information that they would not normally have in an RFP process.
It’s Time to Change
Buyers have the opportunity to create strategic advantage for their organizations when procuring a professional services firm. However, they must first abandon their reliance on the constraints of the traditional RFP process.
An organization can achieve better value and reduce the cost of procurement by first identifying what budget makes sense to invest in a solution, then meeting with the top two or three expert firms in the industry and functional area of need. After comparing their relative expertise, the process should be to invite one firm to propose an agreement for services - a collaborative, instead of adversarial approach that generates a more valuable proposal.
In other words, instead of wasting time and money with RFPs providing faint hope to dozens or hundreds of firms that could do the work, clients should only solicit a few experts that should do the work.
While such a change may seem like a great leap of faith in terms of accountability, transparency and objectivity, this becomes a non-issue when we acknowledge that the traditional RFP process is no guarantee of integrity.
The process is, in fact, malleable enough to shroud inappropriate actions in a veil of legitimacy. Many would agree that it was the easy manipulation of the RFP process that enabled the Canadian government’s massive sponsorship scandal, even though significant resources are allocated within that organization to maintain the integrity of that process.
Imagine if a fraction of the millions of hours spent writing meaningless proposals for consulting RFPs around the world was instead shifted to productive advisory efforts. The world’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.
Traditional RFPs have demonstrated limited usefulness in procuring consulting services. It’s time for purchasers to address the concerns of the consulting and business community and radically change or abandon this archaic process for more accurate and cost effective means of finding, evaluating and hiring the consulting firms that are right for them.
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Cal Harrison is the President of www.BeyondReferrals.com, and a frequent speaker and writer about issues relating to selling consulting services. A version of this article first appeared in CA Magazine in January 2008.
