Blog

Fixed Cost Deals

A fantastic financial arrangement for keeping payment processing simple. But have you ever audited one?

One of our clients had a professional services contract in place with a clear billing instruction; dependant on the price band of the works instruction, a corresponding fixed fee was to be charged. The definition of the price band of the works instruction was pre-agreed and not subject to any interpretation. So in theory all invoices should have been very straightforward and all should have been to a pre-agreed amount.

They all were not.

How and why? The client had no idea it was even happening, it’s just that we’ve seen this countless times before and knew where to look.

How?

The contract allowed for exceptions where certain work types were considered to be “outside” of the fixed fee arrangement. The rules of engagement were that in these circumstances the supplier was able to contact the client and agree that a separate hourly rate could be applied instead.

Why?

Because the supplier felt that the fixed fee arrangement was “unfair” where more work was required. In essence they thought of the fixed fee as a baseline price not as an average across different types of jobs.

But it is not just suppliers who are guilty of breaking the spirit of these fixed cost deals – buyers can be just as bad.

In another scenario we have dealt with a deal was constructed between two parties for the purchase of electrical goods. Previous years order data was reviewed and an average price per order/item was established. With allowances for inflation, a fixed price deal was agreed to make financial management simpler.

Whilst this worked perfectly well when the buying team were ordering items at, or above the fixed agreed price, orders for lower than agreed price items soon dried up as the team buying felt that order represented poor value. Instead they bought elsewhere as although the deal had been agreed on a global basis, the team were acting on an order by order basis.

So what is the solution – no fixed price deals?

Fixed price deals can and do work. The issue, like most creative deals are that human nature comes to play which breaks the theory behind a deal.

Ensure that prices are not visible to buyers in these scenarios so that they do not second guess the value of a purchase. Conversely, where the supplier is constantly attempting to access rates outside of the fixed structure, introduce harder referral paths so that every request is subject to scrutiny and is measured. In the scenario we discovered the amount of “off rate” requests were captured and fed back as part of performance reviews.

How do I review my legal panel?

Reviewing your legal panel, especially if it has grown organically over a period of years, can be a daunting task. Here are our recommendations to best structure your approach.

Some of the most common issues we find are as follows;
1. You cannot confidently identify every single legal firm you use.
2. Which means you aren’t completely sure how much you spend either by firm or overall legal spend.
3. Most often you will have some details regarding rates and term of engagement but not all.

Step One – Identify your spend

There will be financial data within your organisation detailing the payee and amount. This is your start point.
Then ask your teams who typically utilise legal firms to identify which firms they have appointed over a pre-defined period (usually the past calendar or financial year). Cross reference the firm names with the payees from the finance data
Finally approach the legal firms identified above and ask them to provide invoice data for the same period of time.

By combining these three data points you should have now got a good understanding of which firms you have been using and what amounts you have been spending on each.

WORTH NOTING: Getting your spend data to 100% accuracy is a very tall order and often not worth the effort. Get to within 80% plus then move on to the next.

Step Two – Understanding who you use and why

Now you have a good idea of what your legal spend IS, you need to establish what your legal spend SHOULD BE.
Some good questions to ask;
Are legal firms being appointed unnecessarily?
Do your deployment rules need revising?
Are the right firms being appointed for the right type of matter?

The last question is key and it greatly helps to map out which firms are receiving which type of matter. If you are sharing four new instructions a year with 4 firms who all offer the same expertise, it is safe to say that you have too many on the panel. Likewise if you have hundreds of matters going to only one or two firms its likely you have too few.

Try to capture the reasons behind a legal panel member being go-to firm, and if possible quantify what impact this has on your business. It could be that you have a defence counsel that wins unwinnable cases, you might have an industry recognised expert at another firm or even that yet another firm always sticks to the matter budget so financially there are no surprises.

Finally it is not uncommon, especially in specialist areas, that the loyalty rests with a particular partner rather that the firm itself. Should this be the case, it is important to note for a later step.

Step Three – Agree your strategy moving forward

Agree which matters you will look to outsource and which you will keep with your internal teams. Set defined and clear rules which are unambiguous and provide internal referral points for any grey areas.
Having mapped out instructions to firms agree an ideal target number of firms required to give you enough coverage but without reducing your buying power too much.
If you already have billing protocols with your firms, review and revise them. If you do not have any, draw some up. These are essentially a set of guidelines outlining what you consider to be a billable activity and what should be included within the agreed hourly rates.
Finally if you haven’t already done so map out all hourly rates you are paying, by firm.

WORTH NOTING: with several hourly rates per seniority (senor partner down to intern) comparisons between firms can get complicated. If you can, apply a weighted single rate depending on what % each seniority contributes to the total hours billed. It makes comparisons much simpler.

Step Four – Start a formal review process

You can make this as big and formal as you see fit, with a full blown tender process or a light review that covers the important points to get the best results.

As a minimum, we would suggest the following in included:

1. Acceptance of your billing protocols.
2. Agreement to your terms and conditions of engagement.
3. The firms best proposed rate card.
4. Overview of expertise within the firm.
5. Added extras (staff training etc) on offer.
6. How the firm intends to align with your requirements.

Traditionally this exercise is completed via the written word but there is no reason why it cannot be conducted via interviews with the senior partners.

Ensure that all current panel members are invited, as well as non panel firms to enable a better comparison.

Step Five – Complete the review and set up your new panel

Compare the responses and map out the proposed rates from each firm by class of instruction. There will be outliers where the proposed hourly rate is far higher than the average – remove these firms unless there is a compelling reason not to.

If you need to verify the range of rates proposed against a wider data set, try this free benchmarking resource.

WORTH NOTING; Firms who you have worked with for many years will claim that the rate they charged you prior to the review were old and now you are undertaking the review the rates will have to increase. This is the reason for bringing in different firms for comparison purposes as others will most likely be more cost effective.

Make sure that you have competition by class of business in your panel and that the firms know this – set up an instruction structure which rewards good performance.

Finally, if you are choosing a particular firm because of a partners expertise, make sure that any contract you have stipulates that you will follow that partner to their new firm in the event that they move on.

RFP & RFI – The Joys of Tender pt 2 – Writing them

“One of the best tenders we’ve ever experienced; the projected volumes were accurate and the timetable was kept to”

This was genuine feedback we received once –  because we knew our numbers and kept to deadlines (set by ourselves), we were deemed to be good. It appears that the bar may be set quite low.

Giving advice and tips as to the best way to respond to a tender is actually quite a simple thing to do. Giving advice as to how to compose them is not so simple for three main reasons.

  1. Each company issuing will have their own rules, procedures, processes and governance
  2. Most companies will have good quality procurement and supply chain personnel who are running the process
  3. When was the last time a company issuing a tender ever asked the recipients for feedback so as to improve their own process?

In the main its something of a one-way street and feedback is neither sought nor particularly wanted.

So here it is anyway.

(Also let the record show that we have been culpable of some of these!)

COMMUNICATION

Get this right and the responses you receive will be that much better.

  • Clearly describe exactly what it is you are looking for. In detail. It might sound obvious but so many tenders we’ve seen give a good outline at a high level but not at a granular level; are you looking to outsource ALL your volume or just some? Are you looking for a panel of suppliers or just one? Has the decision to outsource been made already or will the tender responses help you make that decision?
  • The written word can be misinterpreted all too easily. The best process we’ve seen was when all tendering parties were gathered together in one room and the requirements of the responses were spelt out. A Q and A followed, then the tender was issued.
  • Be explicit about the amount of information, by section or even question, you are looking for.  If you state that you are looking at brief responses, those submitting the tender have NO idea what your definition of brief is so will err on the side of caution – brief becomes big.
  • Check with your IT department about any limits on e-mail size and compatibility. Responses are going to be big, corporate e-mail accounts nearly always have a limit and recipients need to know both this and whether you can unzip a file or not.
  • Stick to your timetable. You set it after all. If you can’t, don’t go quiet, communicate what is happening.
  • Inform of any decision early and always give feedback. People and companies get reputations and we’ve worked with a number of suppliers who increasingly won’t be part of certain tender processes because they perceive it to be a waste of time. They pour man hours into a process and get, literally, nothing back.

PRESENTATION

This is an external document issued to a selected few in the market – it represents your company and yourself. You might think of yourself as a buyer not a seller, but how the recipients view both you and your company can be greatly influenced by the tender document you issue.

  • If you are using a previous tender template and are editing it for a different commodity, do it carefully.  There have been countless examples seen where a reference to (for example) underground drainage services has been included in a tender for electrical goods. It makes little sense, lets people know what your last tender was for and shows a rather generic approach to the commodity. No one like to receive generic tender responses, so don’t issue a generic tender!
  • The background information about your company is actually very useful and important. Increasingly we’ve seen this get better and better, focussing on the wider group then narrowing it down to the area buying the good or service. This is the one chance you get to sell your company before the tender recipients get to sell theirs.
  • Does the look and feel of the tender issued match other publicly released documents from your company? It really should – fonts, sizes, colours etc all give a really good impression to the recipients. We once had a tender blocked from being released because we’d ignored some marketing guidelines; as much as it annoyed us at the time because we were on a tight deadline, we should have got it right first time.
  • Seriously, why would you use excel for lengthy worded tenders? For numbers, obviously; for short responses and yes/no answers, maybe; for big old worded answers; NO. Please no. It is such a bad format to use for responses, it looks bad, it feels bad. Those of us on the receiving end of these tenders waste too much time wrestling with the constraints of the format rather than focussing on the content. If you  REALLY have to use it, explain why as part of the opening blurb – you’ll get a lot more respect.

CONTENT

  • Only ask what you can measure or assess. Otherwise, what’s the point? Tenders are too big as it is.
  • Keep it relevant. We’ve seen some really odd questions in the past that make very little sense to the commodity we are bidding for.
  • Be clear on the rules of the response. If you’ve asked for costs, each company will have their own way of responding which is going to make scoring each response REALLY hard. For example, clarify that costs are to include/exclude VAT, delivery, rebate or any other variable.
  • Don’t try and blag the technical detail if you don’t know it. The companies you have tendered to are experts in the field and will spot it a mile away.

 

 

RFP & RFI – The Joys of Tenders – Top Tips

Thanks to modern governance the tender process is now standard in most industries where suppliers are appointed and contracts are awarded.

Having spent too much time on both sides of this process, i.e. being a both a tenderer and tenderee on multiple occasions here are our top tips for completing an RFI (Request for Information) or RFP (Request for Proposal).

General

Read the pre-amble, the explanation notes, the covering letter, everything. 

Then read it again. Research the company who has issued the tender, research the person or people who have issued the tender. Where is the company going? What are their key objectives? What press stories are there? What is their “burning platform”? The more you understand what the company wants from a supplier on the tender, what the bigger picture looks like, the better your chances of success.

Nothing stands out or irritates more than a generic tender response that could have been written for anyone.
  • The same applies for when you submit any questions – make sure you have read it properly as you might be advertising the fact that you’ve not taken the time to understand what has been asked.
  • You need a team to be able to submit a good response. Tenders are long, can contain masses of information, and lets be honest can be really, really dull to complete (try writing them). It’s easier to lose your way than not – allocate sections to different team members then bring it all together.
  • Get someone who is not familiar with the subject matter and who has not been involved in the drafting to proof read the final version. The number of times they will simply not understand the point you are trying to convey will surprise you.
  • Follow the instructions to the letter. This includes format (yes, excel for a lengthy worded response is not great, but there might be a reason it is in that format), numbering, word limit, and even yes/no answers only. We’ve binned tender responses in the past when the numbering got so wrong we couldn’t follow the response properly and ground our teeth when despite clear instructions PDF documents were returned instead of the Excel we requested. And don’t fire blanks – this leaves those scoring wondering if you missed the question/couldn’t answer/got bored/something else.
If instructions cannot be followed at a tender stage, the implication that the client takes away is that you are going to continue to do this throughout a contract.

This is always a tricky area – you are desperate to show off all that your company can do, but time and time again you need to ask yourself a very important question; does the potential client actually care/need to know?

From experience if an RFP/RFI is clearly stated and unambiguous in what it is seeking and what you really want to get across is nothing to do with this, leave it out. Easier said than done and nearly always snuck back in,  those who will score your response are far more likely to assess that you have not read the instructions/are inflexible in your approach/ do generic only, rather than sit back and go “Wow, didn’t think we wanted that but we do now!”

And if the RFP/RFI is ambiguous or the questions seem, well, wrong? (It certainly happens.) Fill in the tender as requested, THEN suggest some alternative models/propositions/all the lovely information you are desperate to tell them at the end. BUT BE BRIEF – it may not get read very carefully if at all.

  • It goes without saying but put your best foot forward. Countless times on a post tender site visit we have found that, for example, an IT system is fully compliant/ISO rated, but the tender response said it wasn’t.  The person answering the questions assumed if their company didn’t hold the certificates it didn’t count, even though the question referred to the system itself.
  • But don’t stretch the truth.  If the answer is that you don’t do something, you don’t do it. Post tender visits will expose any areas where you’ve pushed the limits and as soon as they are found, you will be out of the running.
  • There are good ways to answer no. You know something is really important to the potential client and you just don’t do it. So your answer is a no with a caveat (but only if you are being honest); we don’t do it today, but we are going to work on it right now and would love to show you our progress should we get through this process step. Any answer that states you don’t do it but will IF you get the contract only gets slightly better scores than an outright no – remember that at this stage the potential client is looking at commitment up front.
  • Remember that it is your company as well as your product or service that is being evaluated. The potential client is looking for cultural alignment NOT just a great service so one without the other can leave you short.
  • If the format allows, show what you mean. Some of the best responses we’ve ever scored didn’t just explain control systems or delivery portals they included screen shots SHOWING exactly what they did and how impressive they were.
  • Don’t go “off-piste”.  Remember that this is a comparison exercise between you and your competitors – if you don’t follow the process/format then that makes the scoring that much harder and won’t put you in the best light.

Commercials

We have run multiple tender programs across very diverse commodities and services. Whilst not every one was focused on the financial outcome as the main driver, it ALWAYS made the top 2 or 3. We’ve had submissions where Company A was twice the price as Company B and it goes without saying that Company A didn’t last too long in the process. We’ve also had scenarios where Company C were half the expected/incumbent supplier cost and we simply couldn’t believe it was either true or sustainable.

  • Price competitively. – you know your industry and what you can / can’t put forward and still hope to win.
  • Ensure that if you already include aspects in your price (such as delivery etc) SPELL THIS OUT – those scoring are aware of the need to establish the total landed cost of the product.
  • CLARIFY aspects such as VAT inclusion etc so the submitted price is totally unambiguous.

Submissions and next steps

Having put your business on hold for 2 weeks, you’ve managed to get your final response ready. You’ve checked and re-checked the format required, if it’s a portal you’ve already tested that the connection and password works not having just left this till the 11th hour. Your attachments are in the right order, correctly labelled and formatted. You’ve either killed a printer or two getting a hard copy or two together, or hopefully just ruined your outlook memory limit with your submission. You hit send.

Here is what usually happens next;

  1. Chances are the size of the e-mail will mean it will bounce back. We’ve yet to see a note about outlook limit on attachment sizes on issued tenders, which is remiss and annoying.
  2. You re-send in smaller e-mails with an explanation note.
  3. It goes quiet.
  4. You ask for confirmation that all received OK.
  5. You get it.
  6. It goes quiet again.
  7. The first deadline promised regarding feedback comes and goes.
  8. A general note comes out saying that there have been delays in the process and a new deadline is given.
  9. That deadline comes and goes……..

We’ve rarely seen any timetable kept to from a company issuing a tender. Often there are good reasons for this but often its just poor planning – internal delays were not factored in, something else happens which drags the promised resource away etc.

The reality is that there is not much you can do here, however unfair it might seem – after all, you had a MUCH more aggressive timetable and you managed it as a smaller company with less resource! However, we would advise you keep track of the following;

  1. Note all deadlines, especially any that concern expiry of the incumbents contractual period (if known).
  2. Don’t be afraid to politely chase – you are keen to work with this client after all.
  3. Note time validity. Most tenders will ask for prices to be kept valid for a period of 90 or 120 days – as you approach that time limit you are within your rights to politely point this out.

Final Thoughts

  • No news normally is not a good thing – the more communication the better but this is a rule of thumb only.
  • ALWAYS ask for feedback – it might help you on the next tender.
  • EVEN if you won the contract – learn what worked well!