Thursday, October 6, 2011

When do you negotiate after receiving a competitive bid or proposal?

That question posed on LinkedIN brought in a lot of comments, both good and bad. I wanted to share my thoughts.

One of the first concerns raised was whether it was ethical or not. The issue of ethics can be resolved by asking one simple question: What expectations did you set? If you set the expectation that there would be no further negotiations and then proceeded to negotiate, that might be unethical. A lot depends upon the circumstances. Is it unethical to approach the low bidder and explain that the price has come in over budget and you need to work with them to help identify ways to reduce the cost? I don’t think so. I don’t think the supplier would see that as unethical.

Procurement should have and use two options. The first option is where you make it clear that what you want is their best offer with no further negotiating. That should be used when you are buying things that are 1.) low cost and 2) low volume and 3) you have well defined specifications. The reason why I recommend it for those situations is you want to manage your time so you can focus on negotiations that will provide a greater return. The negotiation after bid or proposal approach should be used in all other situations. Let me explain why I think that.

First, you need to think about what is actually occurring in a competitive bid process. In every competitive process there Is always an X factor. The X factor is how much does each individual supplier want or need the work. If a Supplier really wants or needs the work, they will work extremely hard on getting the best numbers and they may take less of a return for overhead and profit. If they have plenty of work, they won’t spend as much time working the numbers and what they may provide you is more of a “if I can get it at this price I’ll figure out how to fit it in” type of bid. If they have substantial work and don’t want it, they may simply provide you with what I call a “complimentary bid or proposal”. They will come up with a price that would more than cover the costs and provide a significant profit. They don’t want to win, but they feel they need to respond so they aren’t eliminated from future bids or RFP’s. When it’s a buyer’s market the competitive process will usually get you the best price. When it’s a seller’s market or when you need to deal with a specific supplier it won’t get you the best price and to get the best price you need to negotiate.

Second, where negotiation after bid or proposal really helps is to verify assumptions, requirements, the quality of the design or need for things specified. I wrote a blog on working with supplier to reduce cost and much of that applies here. If all you do is look for your supplier to build or provide you with exactly what you have specified, many will and the cost of that may be far more than you needed to spend. If you negotiate after the bid or proposal you get the benefit of the supplier’s experience in being able to review the design or requirements and question why certain expensive items are specified and whether they are needed. You get the benefit of them being able to look at the product, service or solution and what it would cost them to provide it as it is currently designed and suggest ideas to make it simpler to provide, reduce the amount of labor involved, and improve the quality. If you have a product that is difficult to manufacture you will pay for that in your product cost. The supplier can also look at design from a repair perspective to make sure that its able to be quickly and easily repaired.

If you negotiate after the bid or proposal and only provided a list of functional requirements rather than a complete design, you can work together to understand the need for the requirements. They can identify the costs for certain of the requirements. It allows for sharing of assumptions they included that simply may not apply and could be eliminated with the cost eliminated.

Most important, without the sharing they will go on to produce what you told them to with all the unnecessary costs built in to their cost structure and they will be doing so according to their assumption of what you wanted or needed. Since all those costs are now real to them, your negotiations to reduce the cost will be more difficult. If they can’t change any of those requirements, the cost reduction must come from their profit.

If you have high confidence that your internal design or requirements represent the best, most cost effective solution competitive bidding with no further negotiation may work. If you don’t have that confidence, having negotiations after receiving a bid or proposal helps eliminate the unnecessary costs.

Want to learn more? The companion book "Negotiating Procurement Contracts - The Knowledge to Negotiate" is now available on A hotlink to
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