My most recent blog post on this topic, "Let's Make RFPs Better –and More Definitive," presented four keys to making your RFP process more efficient and more valuable. At least one of those key points has opened some questions with readers, namely, number 3: “Weed out the financially unstable vendors”.
This statement may have been misinterpreted or be in need of further clarification. For the record, I’m not referring to a few bogeys on the balance sheet, or a couple quarters of missed revenue expectations, but companies at serious risk of being able to continue operations outside of bankruptcy proceedings.
Finance and procurement professionals will evaluate a vendor firm’s financial strength and stability in a number of different ways. And since this area is not my specialty, I’ll refrain from trying to explain the various aspects and indicators that they’d be likely to assess. (That’s another reason why it takes a team effort to execute an effective RFP.) So let’s look at why the vendor with shaky financials has made it to the final RFP stage in the first place.
More often than not a vendor firm doesn’t just jump into this final stage; there’s generally an analysis of the broader landscape of vendors that takes place upfront and through some type of screening assessment such as an RFI (Request for Information). In many cases this initial assessment doesn’t delve into the details and financial strengths or weaknesses of target vendors. Usually this phase is focused on high-level capabilities, with the ultimate goal of winnowing the field down to a manageable size for the actual RFP.
So why do we let the firms with marginal financial strength hang around and go through the full RFP process? In my experience, the most likely reasons are as follows:
- Financials not assessed in pre-screen: As mentioned above, the ongoing viability of participant vendors is not analyzed until the actual RFP process itself.
- Hope: Perhaps based on its technical or service capabilities, the assessors are hoping the vendor’s strengths will be enough to overcome the financial weakness. (But, as they say in the military, "Hope is not a strategy.")
- Compelling technology or service capability: Closely related to the “hope” condition, here you know just enough about the core capabilities of the vendor that, again, it may be enough to overcome the financial issues.
- An existing relationship is already in place: Vendors with multiple products and services may already be under contract with your firm or you may already license other products of theirs.
- They may also be a client: Firms primarily in the banking, insurance, or financial services space may have the at-risk vendor as a current client.
Ultimately, it comes down to a question of risk. Ask yourself: How much risk are you willing to take on regarding the vendor’s financial strength? What would you do if the vendor were to declare bankruptcy? If the vendor were bought out, how might that impact the project for which you are entering into the agreement?
Another aspect of the risk question relates to the size and scope of the project. Smaller, non-mission-critical projects may be willing to take on more risk, as the downside of vendor failure is likely to have less of an impact. Sounds reasonable, but in my experience, if you’re doing an RFP, chances are that there is a fairly significant investment and minimally a level of tactical if not strategic importance to the final outcome – enough importance that the real decision-makers will seldom take the risk of failure due to vendor instability.
In the end, unless the risk is worth it to you, you’ll be better off and likely remove a lot of noise from the RFP process by weeding out the financially unstable vendors early on.