A Request for Proposal (RFP) is a reverse auction. Unlike a regular auction in which there is a single seller and an audience of buyers bidding up the price of the item, in a reverse auction there is a single buyer facing a crowd of suppliers bidding down the price (and/or increasing the quality) of the solution in play.

Whenever one sees a regular auction on TV or in the movies, there is a large group of people raising paddles in competition with one another. Focus on these words: large and competition. The whole point of a competition is to surface the best price for the seller, in this case, and this requires a large group of people. Not everyone is going to want to bid on this particular item, but you need a sufficiently big set of potential bidders to surface competition in which a number of people are vying for the prize.

What would we call it if there were only two or three people in the audience?

We would call it a failed auction.

It fails to generate any competition. The two or three people in the audience can tell straightaway that the likelihood of a bidding war that pushes the price higher is small, just because there are only a handful of potential participants.

Yet, in the reverse auctions that are Requests for Proposal and Requests for Quotation, a failed auction is the meagre standard most buyers have reconciled themselves to accepting. How many times have you heard the phrase “three bids and a buy” to describe the satisfactory threshold of engagement deemed to be compliant?

Why would buyers accept such an impoverished view? Because that is their “lived experience.”

There are many reasons why suppliers don’t respond to RFPs and RFQs. If we consider with empathy the position of the suppliers, it’s a miracle that anyone responds.

One, it can be expensive to respond to a bid solicitation. Depending on the size of the project, there can be tens or hundreds of questions. This requires pulling people from the line to get into a conference room to brainstorm over the response, or it might entail hiring a consultant for tens of thousands of dollars. This is especially true when the bid solicitation document is written poorly, meaning that it is grammatically incoherent, it asks the wrong questions (revealing the buyer’s lack of domain expertise), or both.

Two, the money a supplier ploughs into developing a well-reasoned response is in the context of uncertainty. Buyers are asking suppliers to spend their own cash to put together a document replete with invaluable market intelligence and confidential information, with no guarantee of winning the contract. (At least, there’s not supposed to be a guarantee.) Smart suppliers convene a committee to decide whether to bid or not, weighing such factors as the size of the contract in question, its profitability, the nature of the firm-to-firm relationship, the incumbent status, etc. Make no mistake. This is an investment committee.

Three, the supplier often thinks that the buyer has determined the outcome before issuing the RFP, inferring this from the questions in the RFP or the behavior of the buyer. This is the complaint we hear most often. We speak with suppliers who tell us that they refuse to participate in RFPs. They’ll cite common rules-of-thumb like, “If the first time I’m hearing about the project is when I receive the RFP, then I have lost already.” Many suppliers, burned by bad buyers in prior RFPs, see the whole process as a rigged exercise in pretending to comply with the buyer organization’s rules. In many cases, they’re not wrong. Or, salespeople see their role as “shaping” the RFP in favor of their solution, applying the logic that every battle is won before it is fought.

Four, buyers defeat themselves by running low-bid auctions, competing exclusively or predominantly on price, instead of having a holistic approach to value. We wrote about this here. Buyers may think that they are saving money in the process, but they often end up incurring far greater expense over the lie of the project with this approach.

Generative AI is the cure for all four of these problems: supplier expense, uncertainty, fairness, and complexity. Generative AI is the path to making RFPs and RFQs competitive.

In the future, generative AI will make it easier to write well-informed, easy-to-understand bid solicitation documents. It will compose automatically and instantaneously a first draft for suppliers, effectively lowering the cost of participating in a reverse auction to the cost of the technology and some incremental editing time. And it will perform the initial review of the proposals, developing a cardinal ranking before the buyers’ committee can opine, thus anchoring the discussion to a dispassionate, unbiased discussion, with a transparent process that makes suppliers believe. Challenges become a thing of the past.

Watch this space. At EdgeworthBox we’ve been collecting data to fine-tune large language models for precisely this purpose. This is all part of our broader effort to help B2B buyers purchase the right solution, from the right supplier, at the right price. Give us a shout,

What do people want from procurement technology?

They want it all.

Outcomes

If we start with outcomes, they want to make sure that they are buying the right solution for the problem at hand.

If you’re going to go through the pain and trouble of a reverse auction like an RFP or RFQ and if you’re going to have live with whatever you buy for a few years (or more), you ought to buy the right good or service for the job.

If there turns out to be a superior product that you could have purchased instead, then you’ll be living with opportunity cost. Opportunity cost could mean unnecessarily higher cost of goods sold or it could mean longer cycles.

Success here means seeing as many suppliers as possible, generating options for the decision, and learning about the problem from vendors who specialize in addressing it. It means having the right market intelligence to know what’s important and what’s not. It involves knowing what kinds of questions to ask.

Cost

In addition to buying the right good or service for the task, companies want to know that they paid the right price.

It doesn’t have to be the lowest price.

They might be willing to pay up for a solution that delivers tremendous value.

What they want is to make sure that they are obtaining the mythical “value for money” we all talk about.

Risk

Every business is a portfolio of risks. Good procurement teams are sensitive to the incremental risks from individual purchases and their impact on this portfolio. Ideally, an individual solution can lower portfolio risk. This is core to strategy.

Chief among these risks is the risk of delayed or suspended delivery from the vendor.

For many solutions, there is more than one vendor in the value chain. How much does the CFO know about her vulnerability to the companies in this chain?

In an ideal world, the procurement team would understand the risk of every subcontractor in this chain. This is known as supply chain visibility.

In practice, visibility is elusive beyond the first couple of tiers. That’s okay if you’re purchasing something with a shallow or flat value chain. Imagine what’s it like if you have a long and risky one.

For example, how many buyers knew their true exposure to Silicon Valley Bank’s failure? In most cases, they would have had no idea if any of their subcontractors in their various value chains were in danger of falling into financial distress because of Silicon Valley Bank’s liquidity woes.

How many CFOs understand some of the indirect consequences of regional bank difficulties for the companies in their value chains? If there is a regulatory clampdown in the face of a slowing economy with already weak commercial real estate, what does that mean for credit and liquidity in the small and medium-sized companies involved in these chains? How would the CFOs of their customers know?

Implementation

Ideally, we could flip a switch and the solution would be usable. There would be no integration. There would be no need for ongoing IT support. It would be like turning on the tap in the kitchen. Get water when you need water.

Research has shown that a small percentage of digital transformation projects make it all the way to the finish line.

Anyone who invests in procurement technology wants to see it work.

Transactions

Obviously, CFOs want to keep transactions costs low. The people from different parts of the firm who get forced into buying committees (where an increasing amount of the heavy lifting actually takes place) want shorter cycles. The bureaucracy can be mind-numbing.

Bonus

A great advantage of the best contemporary technologies is that they connect people. Too often, procurement is a siloed event.

For procurement to be a truly strategic endeavor and, more importantly, for it to be seen as one, it needs to reach outside. It needs to include people from the rest of the organization, connecting them with conversations and data. And it needs to work with others outside the company, including potentially other buyers and, certainly, its own suppliers. Collaboration is the key watch-word for a post-Covid world racked by trade wars, supply chain disruptions, and inflation.

This is what we have built at EdgeworthBox. Key tools for collaboration and conversation around structured data, ready access to market intelligence in the form of public sector documents and your organization’s accessible history of supplier interactions, and easy supplier risk management that includes value chain visibility. Give us a shout. We’d love to speak.

Some people argue that a buyer should always prefer a closed network. They argue that, in an open network, the buyer can lose control because a third-party is required to operate it. They argue that openness is not necessary if the buyer can attract suppliers onto its own system with respect to ease of connection and access costs. They argue that a direct relationship is necessary for deeper collaboration, implying that direct relationships are impossible on open supplier networks. They represent that open supplier networks are more vulnerable to data breaches. And they argue that using an open supplier network exposes the buyer to the risk that it goes away like MySpace.

What is the benefit of control and what are the costs of control of the supplier network?

Ostensibly the benefit is deeper collaboration. Such collaboration requires direct contact, but a closed network is not necessary for such direct connection. For example, hybrid social networks like Twitter permit both general communication (the “Tweet”), as well as direct one-to-one communication (the “DM” or “Direct Message”). A hybrid approach is sufficient for promoting deep collaboration. It is a false dichotomy to argue that the only alternative to a closed network is an exclusively open one. Many networks that we might characterize as open are actually hybrid networks.

The buyer’s relationship with the supplier is never unique; they have many customers. Every buyer that forces their suppliers onto a closed network, even one with no upfront costs, imposes incremental work that leads to a higher total-cost-of-access. Each closed network will have its own idiosyncratic onboarding requirements. Suppliers will have to engage with multiple systems. This artificially imposed complexity translates to higher transactions costs that suppliers undoubtedly pass on to their control-oriented customers.

Arguably, open networks are less vulnerable to data breaches because they have more scale to support a greater investment in security measures than myriad smaller closed buyer-operated networks.

Saying that open supplier networks are one step away from disappearing like MySpace is a straw man argument that ignores the strengths and weaknesses of the particular open network to be considered as an alternative. There are plenty of open/hybrid networks that have proven to be sustainable, long-lived, and robust including Facebook, Twitter, Snapchat, LinkedIn, and Instagram.

The buyer’s more significant cost of control is that the buyer will alienate some suppliers, leading to missing potential solutions and discouraging competition on price. Ironically, this cost of control will increase as the perceived value of open supplier networks increases in the marketplace.

Buyers get the most out of suppliers when they make it easy for suppliers to give them what they want. Suppliers want the ability to sell with a fast cycle and low transactions costs to as many potential customers who are a good fit and with whom they can develop deep, long-lasting, collaborative relationships.

A hybrid network helps them find new customers, in addition to the buyers with which they are engaged already. This benefit draws suppliers into the network.

Consider, for example, company A and company B. They sell different, non-competing products to a common type of customer, with some overlap between their customer lists. They would benefit from being able to discover new customers in each other’s customer lists. A hybrid network can enable this easily. If company A and company B are both on the same supplier network platform, then they can see each other’s customers arrayed on the buyside.

This applies equally to situations in which company A and company B are divisions of the same parent, or companies in the same private equity portfolio.

Common, standardized onboarding means that buyers can solicit suppliers even if there is no pre-existing vendor-of-record relationship, confident that vetting suppliers for risk can take place subsequently in an expedited fashion. This massively expands the list of potential suppliers a buyer can solicit with a Request for Proposal.

A hybrid network in which suppliers use the service and all of its tools for free is another way to lower transactions costs for suppliers and encourage them to engage.

Suppliers also want to meet other suppliers with whom they can pool resources to compete jointly for projects of greater scale or wider scope, enabling them to see customers they might not be able to access independently.

A hybrid network also permits controlled channels of communication on either a single-buyer-to-single-supplier basis or a single-buyer-to-many-suppliers basis, with these channels fully customizable by end users.

This is what we have built at EdgeworthBox.

EdgeworthBox is a platform for the procurement technology stack that seeks to address the tax imposed on buyers by lack of time, budget, and market research. We make it easy to generate competition by accelerating the time to onboard new suppliers, so that buyers can solicit vendors with whom they have no pre-existing vendor-of-record relationship. We enable easy access to market research with databases of live and historic RFP activity in structured format. And we connect buyers and suppliers to one another for the collaborative sharing of intelligence about the markets in individual vertical categories. Check out this short video for a quick overview. Give us a shout.

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