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Table of Contents

Why Does the Contract Price Differ from the RFP Price?

Can you Overdose on Outsourcing?

Outsourcing Helps Worldspan Travel in the Customers' Shoes

Outsourcer Makes Event Reporting Easier For Ingersoll-Rand

The Trust Factor

Outsourcing Service Provider or Buyer Bankruptcy

Law Firm Profitability Requires Non-Legal Expertise

Giving the Processes and the Provider Their Due

Finally, Outsourcing Tackles the Real Value Driver

The Call Center Becomes a Revenue Generator

Buyers who receive responses to their Requests for Proposal (RFP) eagerly look at the price. Then, when it's time to sign the contract, the price is different. In the 20 years I've worked in outsourcing, I've noticed prices go up five to 10 percent, 40 percent of the time. They fall in 60 percent of the transactions, but usually not more than five percent.

Although buyers expect the price to vary during every procurement process, the degree of variation is often a measure of how successfully the buyer and suppliers communicated with one another during the process. Accordingly, improved communication tends to decrease the level of variance. So what causes significant variation in price?

In fact, both buyers and service providers contribute to the variance in price. Here's what causes the variance and what both sides can do to reduce the differential.

Potential Service Provider Contributions to Pricing Variance

When some service providers answer an RFP, they may not aggressively place their best offer on the table during the first pass. There are two reasons for this. First, they fashion their initial response as if they were in a non-negotiated situation. They test the waters to get a feel for where the buyer will draw the line in the sand. There's no need to proffer their best offer if they don't have to. These service providers perceive this to be a part of the usual process of responding to an RFP and the ongoing negotiating that happens well in advance of the formal negotiations.

Second, when a provider goes into a competitive negotiation, the sales team sharpens its pencil. If they really want the engagement, they typically trim their margins and propose a more aggressive price.

Sometimes the provider will take a similar tact and submit a low bid that never sticks at contract time. This is a negotiating tactic - the supplier simply wants to get to the next step. They figure once they're in the final bidding, they can adjust to price upward to match reality.

Potential Buyer Contributions to Pricing Variance

Risks perceived by suppliers (whether real or not) may inflate the initial price tag as well. If the buyer's RFP is fuzzy about scope or service levels, the service provider increases the price to cover the cost of the unknown contingencies. The negotiation process typically clarifies these requirements, further defining the service provider's true risk. This allows providers to reduce their price because they have a better understanding of their actual costs.

The best way to insure the RFP bid and the final price are similar is to produce a top quality RFP. The old business adage of "garbage in, garbage out" certainly applies here. Buyers who want to minimize these price variances must pen an RFP that is surgically accurate in its counts, volumes and service level agreements (SLA). Buyers, describe the services required as completely as possible even if it requires a few extra days or weeks to provide the suppliers with a clear RFP.

Incomplete RFPs force service providers to make broad brush assumptions; this uncertainy almost always drives the price upward. Provide clarity in the RFP if you don't want any surprises.

In the end, if buyers do their homework before they issue an RFP, they will get a more accurate price upfront.

What should buyers do when discrepancies occur? I advise buyers to ask the service provider for a gap analysis that clearly explains the price differential. That will help buyers determine if the provider's assumptions are accurate and reasonable.

A Better Way to Find an Outsourcing Partner

Everest Group's refined methodology radically alters the procurement process. Everest consultants perform a Value Creation Analysis (VCA), which determines whether the buyer should indeed outsource and if it makes sense, which providers are able to supply the services needed. The VCA clearly outlines the business case and includes a range of indicative prices so the buyer has a reasonable idea of the cost. Then Everest works with the buyer to down select to the service providers who can meet its needs.

The buyer then explains its business challenge in great detail to this much smaller group, allowing the prospective providers to come up with a creative solution. The end result better suits the buyer's real needs. The buyer can select a provider based on the solution as well as the price.

Buyers typically cannot compare prices, as in an apples-to-apples comparison, since each provider will offer its own solution. But due diligence (a process of ensuring the details of the services required and the abilities of the service provider) and negotiations keep the cost in line.

Whichever way buyers decide to go in the hunt for the best service provider, having a clear and detailed view of their needs will keep the price variance to a minimum.

Lessons from the Outsourcing Journal:

• Service providers understand that the RFP process requires refinement as the two parties seek further understanding of the opportunity and the related costs.
• Buyers will receive more accurate initial pricing information if they invest sufficient time and effort upfront to provide clear service requirements and data in the RFP as this information reduces uncertainty and risk for the service provider.
• Buyers need to understand that under even the best conditions the price of the potential service to be acquired will fluctuate through due diligence and negotiations, based on continued learnings from both parties, until the contract is signed.
• A Value Creation Analysis helps a buyer test its business case and determine the types of providers who can help. The VCA allows providers to develop solutions to meet the unique needs of the prospects.

Publish Date: April 2003

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Copyright © 2003 - Everest Partners, L.P.

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