In business, people take a lot of things for granted. “We’ve always done things this way,” they say. That’s true, but a more relevant question is, “Would we do it this way if we were starting from scratch?”
With the Request for Proposals process, the answer is likely no.
Consider the evolution of the RFP. You can imagine industrial companies in the 19th century looking to purchase blocks of commodities like copper of a specific grade or wool for their mills. Commodities have a standard grade. They are fungible; one pound of prime beef is the same as another pound of prime beef. When we isolate characteristics related to quality, then the sole remaining factor is price. Buyers want to pay the lowest price. The supplier that is most motivated to sell will be most aggressive on price, perhaps reflecting an excess inventory that costs money to finance.
The RFP process, or more accurately, the Request for Quote process, is optimized for purchasing commodities where there is only one deciding factor.
There are several issues that derive from this, though.
One, we have trained buyers to focus on price as the dominant factor in selecting solutions. The problem here is that not everything is a commodity. When we need to distinguish between solutions across multiple dimensions, trying to reduce the problem to just one leads to sub-optimal outcomes. We may end up paying the lowest price today only to forego higher revenue or to incur higher costs in the future because we picked the wrong proposal.
Two, we have come to rely on the convenience of the RFP. Because it’s a process with which we’re familiar, we default to the RFP, ignoring the possibility of any other approach. We’ve baked it into our compliance policies. We won’t get fired for running an RFP.
Three, we presume to have enough category knowledge to be able to write a bid solicitation document that will generate plenty of responses. We assume that if we issue an RFP, suppliers will respond with plenty of free information either because they understand what we’re looking to buy or because they’ll do anything we ask in the hope of obtaining our business. The lazy default of the buyer is to be arrogant about their power relative to the supplier base.
The truth is that when it comes to complex procurement, we are not purchasing commodities. We need a process that is designed for the thing that we’re buying and we are blind to the possibility of alternatives to the RFP because of administrative inertia. We shouldn’t assume that we know more than the suppliers or that we are very good at communicating our intent. Writing is difficult. Most people struggle with it as individuals. Things can only get worse when we start crafting a bureaucratized instrument by committee.
Charlie Munger was an American lawyer and investor with a legendary track record. He was famous for his wisdom, expressed in clear language. These consisted principally of a set of mental models that enabled him to understand the world. Here’s Farnam Street discussing one of Munger’s favorite techniques: inversion.
‘It is not enough to think about difficult problems one way. You need to think about them forwards and backward. Inversion often forces you to uncover hidden beliefs about the problem you are trying to solve. “Indeed,” says Munger, “many problems can’t be solved forward.”
…
‘Despite our best intentions, thinking forward increases the odds that you’ll cause harm (iatrogenics). Thinking backward, call it subtractive avoidance or inversion, is less likely to cause harm.
‘Inverting the problem won’t always solve it, but it will help you avoid trouble. You can think of it as the avoiding stupidity filter. It’s not sexy but it’s a very easy way to improve.’
To apply this approach to the RFP, let’s start with the desired outcome and think about all the steps that it would take to get there, moving backwards in time.
When we purchase something significant or complex using a reverse auction like an RFP, we want to solve a problem. It’s more than that, though. We want to solve the problem as quickly and efficiently as possible while paying a reasonable price. We want to buy the right solution, from the right supplier, at the right price.
To solve the problem, first we need to understand the problem. It’s not enough to state it. We need to pull it apart. We need to assess how it interacts with other parts of the system of our enterprise. We need to think about the things that can go wrong. We need to understand the tradeoffs and conflicts in our existing approach, so that we can appraise how our solution will impact all aspects of the organism.
We also need to understand all the different options on the market and why suppliers made the choices they did in coming up with the variety of products we confront.
Moving backwards in time from our optimal outcome, the most immediate step is having a way to evaluate the options in front of us. Ideally, we have been able to convince a large number of suppliers to present us with alternatives. We have a representative sample that is indicative of the diversity of solutions from which we could choose. We don’t need every solution provider to offer us a sample solution. We just need to know that we have considered all the broad types of solution.
We need a way to compare these surfaced options that systematically helps us to pick the right one across multiple dimensions, not just price. To make an informed decision about how this will work as a system within the enterprise and the complexity of all its myriad moving parts, we need people who understand all those pieces and how they complete the puzzle to be part of the process.
Moving backwards another step, we need multiple suppliers to engage with us. It’s not sufficient to have a sophisticated evaluation process if we don’t hit the critical mass of proposals. We have to convince people to engage with us. This means we have to reduce their costs significantly. (It might even make sense to pay their proposal costs up to some reasonable limit.) But to really get suppliers to plug into our conversation, buyers need to showcase the problem in a way that appeals to their interest in the problem in the first place. We need to include them in the definition of the problem so that we can elicit from them their intelligence about the market. Ideally, the buyer enterprise doesn’t develop their requirements in a vacuum but relies upon the supplier knowledge to help them refine the specifications before suppliers begin to write their proposals.
Moving backwards through the decision tree, before looping in the suppliers, the buyers must have detailed conversations with all of the stakeholders within their enterprise, including staff who face the problem this procurement intends to address.
The one common denominator to all of this, and the thing that is underwhelming in most RFPs, is collaboration around various groups of people. There are fractal levels of groups starting with the prime contractor and its subcontractors (i.e., the supply chain). There is the internal committee of stakeholders who contribute to the process (and also those who will be affected by the final decision). There is the possibility of joint purchasing across organizations.
Collaboration is key. This is where the RFP process fails. This is the source of the iatrogenic effects of linear thinking and a forward progression through the problem that fails to also look backwards from the desired end. This is what nobody tells you.
The ideal solution will include these groups in direct collaboration from the beginning of the project to identify the full reach of the problem and to surface as many ideas as possible about how to solve it, in an inclusive manner that encourages feedback and engagement. This is not an adversarial competition in which buyer and supplier are arrayed on opposite sides of a zero-sum negotiation, but rather a collaboration to generate a long-lasting, transformation.
Incidentally, this lack of collaboration in the current status quo is a key reason for the failure of most digital transformation projects.
At EdgeworthBox, we have built a platform for collaboration that spans these different layers: the supply chain, the internal stakeholders, and partner organizations. We have built a platform that removes the frictions inhibiting genuine sharing of information. We enable inversion of the problem for complex procurements. If you’re a commodity buyer or someone purchasing small amounts, a traditional P2P system is what you want. But if you’re buying complex, long-lived, strategic solutions for critical problems, then you want EdgeworthBox as a layer in your procurement technology stack. Let’s talk.
