We’ll talk about perceives later, for now let’s focus on how we make a vendor believe there is a credible threat as it is this risk that will drive them to sharpen their pencils and make the best offer they can.
Competitive Tension relies on a foundation built from six parameters:
- Culture
- Specification
- The market
- Probity
- Variation control and performance management
- Reputation
Culture
A critical ingrediant for establishing competitive tension in procurement processes is ensuring the organisation has a culture of driving competition across their suppliers. If the organisation has a track record of rolling contracts over, entering into negotiations without understanding market drivers or simply getting one quote, then it will be difficult to establish an environment where vendors feel they are competing for opportunities. An indicator of a business that does not have a culture of driving competition is one where the first reaction when a new requirement appears is to speak to a favourite vendor.
An organisation that does not have a culture of developing and retaining competitive tension is more likely to leak information, write poor specifications and make poor market engagement decisions.
Changing such a culture does not occur over night. It is a process that will take between six and twelve months and will rely heavily on support from senior management.
Specifications
Good specifications must clearly articulated requirement with no bias. If a specification is not clearly written, it generally favours any company that is already working with the organisation, as they can fill in the gaps through existing knowledge or through engaging with internal contacts if the culture is weak in this area. Any bias in the specification either through lack of information or through too detailed a specification focused on a particular solution to a requirement will disable part, and possible most, of the market from competing effectively. Write specifications in a way that allows the market to define and propose the solution to enable innovation, optimisation of the solution and attract the widest group of potential suppliers.
Another issue caused by poor quality specifications is that if a vendor does not clearly understand the details of the requirement, they cannot effectively calculate the cost of delivering it. In defence, they will pad the quote by increasing the number of projected hours, or the margin on a good, to avoid risk of squeezed margins through under quoting. Padded quotes not only increase the cost of the engagement, they also reduce the ability to analyse the real optimal pricing point.
The Market
The core of this one is making sure you only invite genuine competitors for the goods or services required. Including companies that are not genuine competitors will skew the outcome, waste time of everyone involved in the process. In companies with a poor culture, it is a common tactic to select the preferred supplier and a couple of suppliers that are not competitive. In this way they get the outcome they want and meet procurement policies on paper at least. Have they actually achieved value for money though?
There are two parts to the market aspect of establishing competitive tension. The first is making sure you understand the market. Failing to understand the market will increase the likelihood that key supplier is over looked or you may include uncompetitive suppliers.
But what happens if you scan the market and find there is little or no competition? This is where the second part comes in and you need to “develop the market”. This sounds like something that only a large manufacturer or retail chain could undertake, but developing the market is often achieved through simple internal actions that simply widens the available market.
For example, can you bundle requirements to make work more attractive to a wider range or higher tier of supplier? Conversely, can you unbundle requirements to attract smaller suppliers? Can the requirements be adjusted, eliminating proprietary components where ever possible. Are there any suppliers that are marginal, have you engaged with them to find out what it would take to bring them into the process? Can the requirement be outsourced as a package, can an interstate/international supplier be attracted?
Look at all your options to access enough genuinely competitive suppliers into the process as you can.
Probity
The definition of Probity is having strong moral principles; honesty and decency. Enforcing probity in procurement will give the market confidence that they will:
- have their commercial data protected
- have a fair chance at winning work
- trust the organisation to assess them in line with the published requirements
You can see that without this level of trust will enable two thing’s, the vendors will be more likely to include critical details that will enable good decision-making, and they know that is they make a good offer, they have an equal chance of winning the work.
Variation Control and Performance Management
What has variation control and performance management got to do with competition in the market? If vendors know they can get on-board with a low upfront price and then vary the contract repeatedly to make a profit margin, then your competitive process will be severely hampered. Vendor must know that a request for a fixed price is a fixed price with no options to vary the scope or the value.
Equally, the market must know that ongoing performance is assessed and under-performance dealt with effectively. This way you are less likely to have the best resources offered in the process and the cheapest resources provided for delivery.
Reputation
All of the parameters mentioned above, implemented effectively and consistently, will shift your reputation in the market. Unless the organisations reputation is for driving effective competition and awarding contracts to the vendor that has made the best offer, vendors will not compete. For example, in some environments it is not unusual for incumbent contractors to consistently win back additional contracts for the same work. If a vendor you have approached asks, “is there an incumbent for the requirement now?”, your organisation probably has a reputation for poor culture and a lack of probity. Often they will not offer, or they’ll put forward a poor quality offer just to demonstrate interest in case a real opportunity comes up without expending too much effort on what they see as a forgone conclusion.
Perception
Remember I picked out “perceives” as a keyword in my definition, and here is a kicker. If you establish a culture to drives competitive processes and a reputation in the market for probity, in some cases you don’t even need to have real competitive tension. This is very powerful in those situations where you get caught out. A new project has a tight timeline, a key function just failed or a storm has jut shorted out some critical equipment. You don’t have time to do a detailed market scan and you just have to get the work done, so you are going to approach just one supplier.
Don’t take any other shortcuts! Build the request documentation like you always do, issue the request lie you always do, and without confirming or denying, the vendor will assume they are competing for the work and you will get a better value offer without any effort.
Conclusion
Competitive tension is the easiest and most cost-effective way of significantly improving the quality and value of supplier offers. It isn’t a single trick or shortcut, it is a mindset, a paradigm, you might say a way of life. Vendors need to know that they can win the work, and the way to win the work is by submitting the best offer, not by networking with stakeholders. If the culture is weak enough at the outset, implementing this regime of probity, clear specification and targeting the right supply market can produce savings of up to 30% to 40% on individual procurement’s.
Got any ideas on competitive tension or other methods used to drive value for money and cost savings? The leave a comment below and share.