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March 2014 Commercial Cash Flow

The Truth about RFPs

March 04, 2014
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A request for proposal (RFP) typically involves more than a request for the price.

In an RFP for services, requested information may include basic corporate status and history, along with financial information. The company or organization looking to hire may want to ensure the company hired is financially able to fulfill the contract.

The RFP may also request information on technical capability, along with an estimated completion period. It is common for the RFP to include customer references that can be checked to determine qualifications.

Discussions may be held on the proposals, often to clarify technical capabilities or to note errors in a proposal or, in many cases, to negotiate on the price.

In most instances, only selected bidders may be invited to participate in subsequent bids, or may be asked to submit their best technical and financial proposal, commonly referred to as a “Best and Final Offer” (BAFO). Subsequent changes can be referred to as the “Best and Revised Final Offer (BARFO).

When a potential client issues an RFP, it can be tempting to throw your hat in the ring. But responding can dilute your brand, undermine your credibility, shave your margin and ultimately devalue your company when it is time to sell.

Here are seven reasons to take a pass the next time you’re invited to respond to an RFP:

1. Tendered business doesn’t stick

Even if you win the work, the same rules that forced the company to tender the RFP in the first place will kick in again and force them to host another beauty contest next time, no matter how good a job your company does.

The value of your business is linked to how repeatable your model is. Acquirers consider RFP-won business as risky and they’ll likely discount the revenue as “one off.” By doing RFP work, you’re running on a hamster wheel instead of building value.

2. RFPs dilute your differentiation

Responding means you are agreeing to be shoved into a box with a bunch of half-rate competitors who compete on price. You’re better than that.

3. RFPs cut your margins

The RFP is structured so that the customer designs the specifications of the job and then you explain how cheaply you can deliver their specifications. The buyer is trying to get the very best price using an apples-to-apples comparison. Do you want to compete on price? If so, don’t expect to sell your business.

4. They decide the rules

The role of an entrepreneur is to conceive of what the market does not know it needs. Nobody thought we would need a thousand songs in our pocket, but Steve Jobs wasn’t reacting to customers’ requests. He was leading them to something better. By responding to an RFP, you let the customer decide how you do your job. Great companies lead their customers; they don’t follow them.

5. They’re rigged

Most RFPs are sent out so the decision maker can say they tendered it. Buyers feed secret information, hints and suggestions to the company they want to win, and more often than not, the decision is made in someone else’s favor before you even submit your proposal.

6. RFPs send the wrong message to your people

When you decide to respond to an RFP, your staff will scramble around pricing the job, writing prose and giving away your intellectual property. They’ll wonder why you don’t have the courage to stick to your business model and why you are willing to let a customer manipulate you like a marionette.

7. RFPs undermine your company's ‘sellability’

We recently did some analysis of the users of www.SellabilityScore.com and discovered that companies with a unique product or service were much more likely to get an offer from an acquirer than those businesses selling a commodity.

Acquirers like buying companies with a defendable, long-term advantage that gives them pricing authority.

But what if you receive an RFP for commercial carpet cleaning services, and you can’t help yourself and you are going after the work?

Then change the definition of what you do, from being a seller of commodities to being the world’s best at what you do.

The next time you get an RFP, reply with something like this:

“Thanks for considering us for your important new project. 

“Here at ABC Widgets, we offer the world’s finest widgets using our advanced seven-step widget making process. It’s a unique system that that allows us to create widgets that keep our customers coming back for more.

“If you’d like to discuss how our unique widget making process could benefit your project, we would be pleased to meet with you.”

Obviously, you aren’t selling widgets, but you get the point.

Four things will happen when you send this note:

1. You’ll spend all of 30 seconds writing it and you won’t waste another moment on the “opportunity.” You’ll go back to serving real customers who actually spend money with you and care about what makes you special.

2. Your staff will be emboldened, and proud to work for a company with a vision and the courage to stick to it.

3. You’ll elevate your status in the mind of the buyer. They’ll realize you know better than to respond to their commoditization call. They may not respond to your offer to meet, but they’ll be curious to see what you have under the hood.

4. The buyer will probably pick another vendor who will be an unimaginative bottom-feeding company desperate for work. And the customer will get what they paid for: Cheap output from a cheap company. Chances are next time they’ll skip the RFP process and call the one company who told them what they really thought of their RFP.

Fighting the urge

While a large project is always attractive at first, consider that the investment to respond to the RFP is much higher, but the win probability could be much lower.

You might only have to win one to be very happy, but you could go broke losing bid after bid waiting for the win. Meanwhile, smaller projects produce less profit to cover the cost of responding to the RFP.

Ultimately, what has the biggest impact on the equation ends up being your win probability. To bid on RFPs successfully, you need to win enough of them (in dollars and in units) to cover the cost of responding to them. So the answer to whether they are worth bidding usually is driven by your probability of winning.

If you go with your gut, you’re probably wasting your time. If you prepare a list of positive indicators and negative indicators and then assess each opportunity against that list, you’ll do much better.

If you start bidding and find that it has potential, even if it is a rocky road, you can improve over time if you collect metrics regarding which indicators correlate with your win rate so that you can continuously improve your list (including how much weight to give each item) over time.

Ultimately, you win more and achieve the best profit not by responding to the most RFPs, but by having the best bid/no-bid indicators so that you only respond to the RFPs that are a good fit for your company.

Fred Geyen is president of the Geyen Group (www.GeyenGroup.com). His background includes commercial product sales and program development for residential, commercial and disaster restoration with ServiceMaster. He has a Leadership in Energy and Environmental Design Accredited Professional (LEED-AP) designation and is on the board of directors with the LMCCA. Geyen can be contacted at (612)799-5111.

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