When it comes to Mergers and Acquisitions, one major contributor to the valuation process often gets overlooked: company culture.
Digging Holes with RFPs – Part 1 of 3
When looking for a strategic partner, most businesses rely on one of three options: they ask peers for referrals, they embark on a Google search, or they generate an RFP. While there’s a time and place for most processes, I’ll demonstrate that – for complex business challenges like marketing – an RFP is probably the worst way to pick a partner.
The premise of the RFP
In theory, an RFP sounds great. It purports to provide the buyer with a tool to level the playing field, and the rationale goes something like this: By comparing apples-to-apples, the buyer can wrangle the best price while maintaining quality and transparency. Even better, all the work is foisted on the RFP respondents, so the buyer is able to make a minimal time/money commitment to the process. For the issuer of an RFP, the process seems like a dream comes true…
An RFP is perfect…for digging ditches.
RFPs are fantastic for picking a vendor to solve a simple problem with a simple solution. Designed to commoditize the service being provided, RFPs are an ideal tool for buying well-defined services and products. So, when you have a simple problem like, “dig a ditch, 30 yards long and 3 feet deep,” the RFP helps to pick your perfect ditch digger. You can craft the RFP with all sorts of caveats and specifics like, “the ditch must be finished within 1 week,” or “the ditch digger must account for any unforeseen problems, like rocks and underground utilities.” With a relatively simple objective, the buyer can control the definition of the problem and solution, and get the lowest possible price.
But what happens when a problem ISN’T simple?
And here’s the rub with RFPs: While they might be a useful tool for commodity-based services or simple solutions for simple problems, they’re blunt instruments for selecting a partner to help with your complex business problem. If you’re considering issuing an RFP, stop now and read my top 5 reasons why this is a bad idea:
- Most RFPs produce a lose-lose outcome. From the start, the RFP sets up an adversarial relationship: the buyer tries to use the RFP to maintain costs while the seller uses the RFP to limit options. Cynical sellers win the work then recapture margin through change orders; cynical buyers use the signed RFP like a club, asking for more work at a fixed price. In the end, no one wins – a thin-margin seller produces sub-par work and a buyer forced into signing “change orders” goes over budget.
- You don’t know what you don’t know. As a buyer, you’ve developed an RFP in an attempt to solve a problem. The RFP outlines the scope of the problem (maybe), and the respondent is tasked with guessing how they’ll meet your challenge. Do you really want to trust your business to a guess? If a problem is so complex that you can’t fix it, and you need to hire an outside expert, it’s probably complex enough to necessitate some real analysis and hard questions. Even more importantly, your view of the challenge may only be a part of a larger issue. RFPs encourage tunnel vision, while business challenges require a wide-angle lens.
- RFPs eliminate the best candidates: I know of many well-run businesses that simply have a “no RFP” policy. Why? Expense! Responding intelligently to an RFP is a lengthy endeavor; the odds are long and your business ties up resources it could otherwise use to generate profits. I’d rather use effective marketing tools elsewhere, save a ton of money, and charge my clients less. That’s a win-win.
- RFPs tell the buyer exactly what they want to hear (not what they need to hear): We all know the truth hurts. Unfortunately, it’s usually the truth that moves our business forward. RFPs by nature are designed to give us only the truth we WANT to hear (“yes, I can solve your problem!”) not the truth we NEED to hear (“Your problem is actually more complex, expensive, and time consuming than you think.”) Smart business owners realize the value in tough questions and hard answers (unsophisticated buyers flip to the last page of the RFP and read the price).
- RFPs miss the oranges: If you’re looking for a unique business – one that approaches problems and solutions unlike any other in the marketplace – then an RFP is probably a poor way to find your dream partner. Your well-intentioned request for proposal creates an "apples to apples" comparison, but what happens when your business doesn't need an apple? What if an "orange" is just the right way to leap ahead of the competition? What if there's only ONE company that produces oranges, and your RFP effectively says, "tell me how you're like an apple?" Remember – if an RFP is the right tool for a commodity, the inverse is true as well (it's the wrong tool for a custom solution).
Some lines of work are indeed a great fit for RFPs. If I were in the business of buying raw materials for my manufacturing plant, for instance, an RFP is a solid option for picking a supplier. There is very little that differentiates one commodity supplier from another, so the driving force (price) fits in line perfectly with a bid-type structure.
When it comes to Kinesis it's a wholly different situation. When we hire professional service providers and outside experts (something we do frequently and successfully) we steer clear of RFPs. Instead, due diligence, reference checks, and values alignment form the foundation of partner selection. In part two of the series, I'll outline this process, and show how you can get great partners each and every time.