The art of the no-bid contract
- 16 July, 2008 12:01
Major deals struck without competitive bidding raise eyebrows, whether they take place at a public company or a government agency. But "sole sourcing," as it is called in the enterprise, can often be the best way to go, especially for multi-year deals well upwards of $10 million.
I spoke with a couple of experts in this area.
Peter Iannone, COO Americas at EquaTerra, a consultancy that advises companies on how to improve their processes, often by helping them evaluate competing bids from large outsource service providers, is upbeat about sole sourcing. And why not, when about a third of EquaTerra's business comes from companies that ask it to evaluate a sole-source deal for market competitiveness.
Philip Fersht, research director of BPO, offshoring, and IT services at AMR Research, provided good balance to Iannone's enthusiasm.
One of the major benefits of sole-sourcing a project is time to completion. The faster you can get your transaction/negotiations done, the quicker you will get to the benefits.
"A big outsourcing deal can take eight months," Iannone says, "while sole-sourcing can be 30 percent faster and cheaper because you're not tying up staff."
Vendors obviously like the idea as well, Iannone says, and they may be more flexible on price.
Why? Think about it. IBM, again as an example only, is probably saving anywhere from $2 million to $3 million on a bid. On a typical large bid, Big Blue will probably pull together a tech team, a design team, a negotiations team, and a pricing team -- 30 to 40 people -- and fly them in, get the RFP, and evaluate it for the design of a new datacenter. That can take four to five months of dedicated time. And then, when all is complete, the bidder can still be left holding the bag. Either they don't win the bid, or I imagine even more aggravating, the company gets acquired by another organization that has no interest in doing the deal.
In addition, if you go to IBM on a major deal, for example, to outsource your datacenters, and say, "Look, I won't put this out to bid, but I want your best design people and I want some value add," you have a great deal of leverage.
Value add might be tapping into the IBM expertise on RFID technology, something that wasn't planned for in the original proposal.
Fersht warns that such demands work best when you already have a working relationship with the service provider in question. Much of the success of such propositions hinges on trust and familiarity.
Use a third party to evaluate the deal
Of course, as Fersht points out, companies such as EquaTerra exist to ensure their clients get a good deal whether sole-sourcing or bidding out projects.
But that is not a bad thing. In a major deal, that evaluation can cost as much as six or seven figures.
"Bringing in a third-party adviser is highly advisable, especially if the client doesn't have the internal procurement skill sets," Fersht says.
Iannone goes one step further, recommending you use an outside law firm to evaluate the deal as well.
Laying out service levels for both parties in a sole-source deal is where it gets interesting, Fersht says. When signing up for a long-term relationship, you want your vendor to build a training ground for your IT employees by taking advantage of the vendor's talent. You also want to incent the vendor to deliver the latest upgrades, top consultants, and to ensure constant quality.
"If you are just doing a six-month gig, you are just getting pricing," Fersht says.
Although sole-sourcing can be advantageous for a large project, it does not preclude multi-sourcing with a number of vendors for different projects.
"Unilever, BP, Nike all use two to three vendors just for IT. While infrastructure is pretty much a commodity market, where multi-sourcing comes into play is in niche areas for your industry -- service providers who have real knowledge that they can bring to the table," Fersht says.
Sole-sourcing for a long-term deal, multi-sourcing to capture the expertise of industry experts, competitive bidding for short-term projects -- it sounds like a plan.