In a recent post here on Sourcing Innovation, we endeavored to explain how sometimes old-school works just fine with a case study from EC Sourcing Group that illustrated how a mid-size apparel retailer was able to use an old-fashioned multi-round RFX to streamline their ocean freight bid and reduce their costs by 19%, a savings significantly larger than what was expected in a time of rising costs.
Another situation where tried-and-true works just fine, also courtesy of EC Sourcing Group, is with respect to the purchase of certain classes of enterprise software that can now be considered a commodity. For example, a diversified manufacturing organization required an Enterprise-Wide Automated Travel & Expense Solution. Since this was a piece of relatively non-strategic software that carried a hefty price tag by the time license fees, maintenance fees, and, most importantly, installation fees were taken into account, and since there are a large number of providers of such solutions which have, more or less, similar features and functionality, the organization decided, with the help of their e-Sourcing provider, that the best approach was to use a multi-round e-Negotiation that began with an RFI/RFP and finished with an e-Auction.
After a detailed needs analysis that documented their current platform, functional requirements, integration requirements, and organizational processes, the e-Sourcing team constructed an RFI with over 100 qualitative questions designed to capture all of the information required to determine whether or not the provider’s platform could meet the organizations needs along with a RFP with over 50 line items designed to break out all of the relevant cost components to allow apples-to-apples comparisons and identify potential cost savings opportunities.
Each of the responses was scored by each team member against a pre-defined rating and then the suppliers was ranked automatically using the RFX software. At the end of the first phase, after the scorecards had been reviewed and analyzed, the decision was made that the top four (4) vendors who could meet the basic requirements would be invited to the auction, with the initial bids in the RFP used as starting bids. Before the auction, the bids ranged from approximately 575K to 1.425M. After the auction, the bids ranged from approximately 545K to 635K. In other words, the auction reduced the spread from approximately 850K to 90K, with one vendor reducing its bid by almost 45%! (Full case study.)
In the end, the organization was able to select the solution with the best price/value ratio (using a weighted auction where the ranking from the RFI and the RFP affected the final rank) at a cost that was significantly less than what they would have achieved using a straight-forward negotiation where the vendor would have charged literally as much as it thought it could get away with. The reality with enterprise software is that most vendors will try to charge as much as they think the customer will bear, which is often much more than what the software is really worth. The best way to get a good price on commodity enterprise software is to open up the sourcing process and use competition to your advantage — something that is easily done with any decent e-Negotiation suite.