More bids equals higher cost?

I don't like "Requests for". What buyer (or seller) hasn't been through innumerable "RFx" Requests for Proposals, Quotes, Interest, Information, etc. They are used by buyers to help them understand what the market can offer, and create competition amongst suppliers so the buyer can lower their procurement costs and, ideally, increase the quality of their supply chain.

Many organizations also like them as they structure their buying decisions in an "open and fair" manner. What is needed to understand a broader impact of these approaches is to understand that buyers don't act alone, they have counterparts on the sell side that are going to react to the approach. The sell side reacts with approaches and analysis such as "Bid Management", "Pursuit Costs", and "Success Rates". I'll give some brief examples of each below. The objective of the buyer should be to lower pursuit costs and improve seller's success rates up while not impairing the benefits of competition.

Bid Management
What buyers, and more rarely the sellers, sometimes fail to understand is that RFx often increase the cost and impairs the quality of the supply chain. Here's an article "To bid or not to bid ..." by Mark Whitley on the Institution of Engineering and Technology website that touches on some of these issues. Mark talks about bid management as a growing field of expertise and lays out the standard project management imperative triangle of time, cost, and quality. In his discussion of cost he advises that bidders consider more than direct bid costs such as bought-in costs and travel and also consider opportunity cost (what else could the team have done instead of bidding for a particular job).

Pursuit Costs
From a buyer's perspective I like to understand the pursuit costs and the related success rate. Pursuit costs are simply the costs that your bidders incur pursuing your business. These costs occur within and external to formal competition. In one memorable discussion with a white-box PC retailer I was told that his industry employed twice the number of sales people relative to revenue to service my account than they did on average for all their other accounts. It was an interesting discussion as the retailer viewed this as evidence of his industry demonstrating to us our importance. I viewed it as evidence that we were paying too much (sales costs on average were about 10%, but for us this rose to 20%) for our PCs.

Success Rate
It turns out that we not only bid our PC business to often, but we also invited to many bidders to each competition (and punished those who did not regularly bid by not inviting them into future bids). These actions had the impact of lowering the industry's success rate in competing for our business and success rate directly impacts a buyers cost. The success rate is the percentage of bids that result in revenue. If a seller bids for 10 jobs and wins 3 their success rate is 30%. Sales management tends to be pretty obsessed with success rates. Obviously a sales organization wants to increase its success rate, but it also simply wants to be able to forecast it. Sales teams spend a lot of effort building and managing the "sales pipeline" in order to be able to generate revenue. If you are on the buy side and can help to improve success rates while maintaining adequate competition everyone comes out ahead.

In another category of spend for a large client we were bidding several hundred millions of dollars for professional support for information technology services. Several thousand firms and individuals were qualified to bid and every offer over $25,000 was open to each and every firm. Some offers would receive hundreds of bid responses. The success rate for bidders was very low, and benchmark analysis showed that this was reflected in our price for these services to be high relative to the market.

Procurement teams that work to understand these market dynamics and then to structure their offers to increase competition while lowering pursuit costs and increasing success rates will end up with better suppliers at a lower cost.