The Hazards of RFPs for Complex Projects

Archive | Upgrade to Premium | Advertise

🎣 The Catch Up

Hi there,

I’m trying a few new things this week…

1. I added a “key takeaway” section so you get the key insight from tonight note right at the start. You can read the full note if you want more meat on the bone.

2. I recommended a book I greatly enjoyed below the Sunday Night Note.

Once you’re done reading today, please vote in the survey at the end of the email and leave a comment to let me know if you like these new sections or if they should be blasted into oblivion!

Have a great week ahead.

Best,

Joël

P.S. In case you missed it, my Deep Dive article was free this month! Read it here to get a taste of premium for free:
Accounts Payable Automation - Where to Start

🔑 Key Takeaway

No time to read the rest? Here’s the key takeaway:

1. A Request for Proposal (RFP) is a double edged sword. It can be a great tool to source a precise, immovable requirement (e.g. a commoditized service).

   For complex service sourcing, RFPs can actually stifle innovation and raise risk.

Read the full 🌙 Sunday Night Note below for the “why”.

🌙 Sunday Night Note

Your RFP Is Working Against You!

When you release a Request for Proposal (RFP) to the market, you are creating a multi-party prisoner’s dilemma…

The prisoner's dilemma is a classic scenario in game theory where rational individuals face a choice that can lead to either mutual cooperation or betrayal.

Each player must decide whether to cooperate with the others and stay silent on a crime perpetuated together, resulting in a favorable outcome for all, or betray the others, potentially gaining a personal advantage while causing harm to the other players.

However, regardless of the other player choices, betraying them always offers a higher individual payoff, leading to a scenario where all players are incentivized to betray each other, despite mutual cooperation yielding the best overall outcome.

Here’s an example with 2 witnesses being asked individually to “spill the beans” on a crime:

What would you do?

When you put out an RFP, you are essentially the police in the above scenario. But instead of threatening bidders with jail time, you are incentivizing them to give you the best deal to get a contract/revenue for their business.

This can work well in a scenario where the RFP requirements are:

• Very well defined

• The scope has a very low likelihood of changing

Why?

Information asymmetry… The bidders don’t know what the others are bidding so they might as well bid their best offer if they want the work!

I would categorize the above as “commoditized” goods and services. For example, a cleaning contract. You want a cleaning crew to come clean your offices every 2 weeks. The square footage and tasks you want completed are very well defined and won’t change.

For commoditized goods and services, the traditional RFP framework stimulates innovation and drives prices down.

At the opposite end of the spectrum, you have complex goods and services. These are characterized by the fact that they are:

• Hard to define precisely

• The scope has a high likelihood of changing over time

A few examples that come to mind:

• Software development or implementation projects

• Complex construction/renovation projects

• High-Tech manufacturing (aircraft, spacecraft, medical devices, drugs, etc.)

• Legal/Consulting services

For complex goods and services, I would argue that using a traditional RFP may in fact stifle innovation and raise the risks associated to cost.

Let me make my case…

If you approach a complex good or service RFP in the same manner you would for commoditized goods or services, the default assumption for everyone involved is that you are attempting to minimize the price.

The problem is, you’re also typically requesting proposals for a topic/domain that isn’t your expertise. Otherwise, you wouldn’t be looking for a supplier…

This creates an additional kind of information asymmetry…

You can’t properly evaluate the bidder responses because you don’t know the knowledge domain very well… This creates an incentive for bidders to leverage this asymmetry to gain an advantage over other bidders.

Let’s illustrate what is likely to happen with another 2-bidder example:

If results are what you are after, you want bidders to propose realistic, doable projects. You want to live in reality and adapt consequently. You want the situation in green.

The problem?

In a prisoner’s dilemma with a single round (e.g. a 1 round RFP), if the players are rational and the game is played only once with no possibility of future interaction, the dominant strategy is to “betray” the others regardless of the other player choices. This remains true if you add more bidders (a multi-party prisoner’s dilemma).

Furthermore, the likelihood of this happening increases as the projected project value (and therefore lifetime value of the contract for the bidders) increases.

In fact, no less than 92% of megaprojects (which always requires suppliers of some kind) come in over budget or over schedule, or both.¹

If you’re not careful about how you set up your RFP, who you deal with, how you run it, etc., you will most likely end up with the situation in red.

Your RFP will give you choices between a number of bad options.

Why?

Well, bidders figure once they have their foot in the door, they can maneuver their way to delivering some sort of project with scope changes, timeline and cost overruns. They “live to fight another day” after the RFP process, so to speak.

Now I hear you in the back: “This doesn’t ALWAYS happen. We’ve run complex project RFPs before and been satisfied with the relationship and results.”

You are the exception.

Bidders may start by bidding honestly… But eventually, they either change their practices because they never win anything or get out of the bidding game…

That’s a terrible outcome for any megaproject.

So, what’s the fix?

If the success of your complex project is truly important to you, ditch the traditional RFP. Try Agile Sourcing or something like it.

Use a collaborative solutioning method that focuses on:

• Validating supplier domain knowledge in your context (e.g. proofs of concept)

• Validating value!

• Aligning incentives

If your policy is too rigid, change it.

If you don’t have the power to do that in your organization, campaign for it.

And if all else fails and you end up stuck in an RFP evaluation exercise, add as many questions as you can that validate the 4 points above.

Otherwise, you’ll soon be welcomed into the 92% and wonder why…

P.S. This definitely applies to most digital procurement projects where you are looking for an integrator or software provider.

Footnotes

¹Flyvbjerg, B., & Gardner, D. (2023). How big things get done: the surprising factors that determine the fate of every project, from home renovations to space exploration and everything in between.

💭 Quote of the Week

💎 Diamond in the Rough

I just finished a great book. I think everyone who does any sort of project work would greatly enjoy it as well.

Here’s what to expect:

How Big Things Get Done

The Surprising Factors That Determine the Fate of Every Project, from Home Renovations to Space Exploration and Everything In Between

📊 How Did I Do This Week?

Best comment from last week:

Tip of the cap good sir. You’re the reason I keep going.

Vote and leave a comment to get featured next week.

🎁 Earn Prizes

If you 💗’ed today’s edition, share it with another digitally-minded Procurement professional and earn prizes.

You currently have 0 referrals, only 1 away from receiving the Monthly Top 5 Link Archive.

What is the Monthly Top 5 Link Archive?

Share your personalized link with others:
https://newsletter.pureprocurement.ca/subscribe?ref=PLACEHOLDER