More buyers than one might think use a piece of legacy software or some combination of email and spreadsheets to manage their procurement activities. In these cases, the buyer bears the cost.
But with more contemporary software such as ERP modules (installed or cloud-based), or source-to-pay SaaS-suites, there is some controversy over who should pay. Depending on the system, buyers pay, suppliers pay, or they both pay.
The correct answer to the question of who should pay is the arrangement that leads to the optimal outcome in which buyers obtain value-for-money: buying the right product from the right supplier at the right price.
On the face of it, the old-timey answer to this question is that suppliers should pay. Buyers with this mentality think that suppliers should be grateful for their business. But, if Covid has taught us anything, robust supply chains are built on a bedrock of good relationships and mutual understanding. Gratitude does not mean servitude.
Buyers should be just as thankful for access to reliable vendors, too.
The best way to ensure value-for-money is to see a wide spread of solutions from a diverse array of suppliers, competing for the buyer’s business.
Buyers should want to encourage suppliers to respond.
On the margin, there will be suppliers who cite a pay-to-play fee as justification for not responding to a bid solicitation.
International trade agreements recognize this obstacle explicitly. For example, the Canada Europe Trade Agreement prohibits charging suppliers a fee to see procurement opportunities at every level of government.
(Arguably, the bureaucracy that buyers impose on suppliers ostensibly for risk management purposes and the difficult user interfaces of some of these systems are also barriers to trade. But I digress.)
Perhaps the old timers hearken back to a day in which suppliers were predominantly order takers. “How much can I put you down for, Bob?”
The sales cycle now is much more sophisticated. Committees of interested parties from the buy side try to do as much research as possible before they speak with a salesperson from any supplier. Conversations start at an advanced stage. It is a journey.
In this context, a good salesperson is a consultant to the buyer. The salesperson is paid a contingency fee by the supplier for finding the right buyer. The right buyer is a customer who will be sticky and who will grow with the vendor because the problem-solution fit is good. Sales helps the buyer to understand her problem and why the supplier’s solution is the best problem-solution fit at the price.
Buyers obtain significant market intelligence and product knowledge from a good salesperson. Should the buyer go with another company’s wares, this consulting is effectively free (or at least blended into the margin earned by the supplier from selling other things to the buyer in question).
If you are a buyer reading this, put yourself in the position of the supplier.
When a vendor receives an RFP or an RFQ (generally, an “RFx”), they need to make an investment decision.
The sophisticated suppliers will convene an internal committee to review the RFx. This group weights the benefits of responding against the costs of participating. Think of this as “value-for-selling.”
How much revenue will the contract generate if they win? What will the margin of a successful bid look like? What are their chances of winning? Can they generate equivalent margin with greater certainty of victory elsewhere?
Against this, rational suppliers must consider how much it will cost them to respond, knowing that they might not get the contract. It is not uncommon for a proposal to cost thousands of dollars to develop, requiring the revelation of confidential information.
Also, what is the nature of the relationship? Do they feel that they need to put in a bid, with no intention of winning, just to satiate the buyer’s expectations of their participation? In financial markets, market-makers will put together a “cover bid” for customer inquiries in situations in which the margin isn’t attractive but they feel that they need to do so for relationship purposes. There is an art to crafting a “cover bid” so that the buyer feels you were competitive, but you “just” missed it. In some markets, say for obscure currency pairs at odd hours, market makers are really competing, not to win the deal, but to be the highest cover bid.
Are you, as a buyer, designing a process with fees, bureaucracy, and a terrible user experience that lead the best suppliers to either reject you or to phone in a cover bid? How is that driving value-for-money?
EdgeworthBox was built for Procurement v2. We sit as a layer in the procurement technology stack to augment the existing approach to RFPs/RFXs. We do this by adding proven tools from financial markets to whatever you are using currently. These include central clearing of vendor administration and data, as well as social networking.
With EdgeworthBox, buyers can onboard new vendors rapidly, enabling the solicitation of suppliers who have no antecedent vendor-of-record relationship. We have public and private repositories of structured data of live and historic RFPs and historic contract data for market intelligence and speedier RFP cycles. Our social networking functions include profile pages for advertising organizations and individuals, as well as a messaging platform that connects buyers to buyers, suppliers to suppliers, and buyers to suppliers. Suppliers join for free. Buyers pay an organization license with unlimited seat licenses. Give us a shout or take us for a free trial.
