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Truth In Bidding

March 7, 2011

IACCM research has revealed widespread concern about the integrity of the bidding and negotiation process.  Contracts and Legal practitioners recognize that this is the phase when foundations are laid for future claims and disputes. A recent survey suggests that failure to properly describe, understand or respond to requirements accounts for 40% of failed or troubled contracts. Other data implies that the percentage may be as high as 65%.

This should come as no surprise. Firstly, as with all mating systems, competition creates an incentive for the parties to maximize their attractiveness. Even if that does not lead to outright misrepresentation, it certainly encourages exaggeration of positive attributes and minimization (or omission) of those that are less attractive and could be the source of higher prices or future problems.

In business, the situation is made worse by a tendency to limit interactions between the parties during the bidding phase and to indulge in a negotiation process that they have been trained to view as some sort of game. This results in buyers defining requirements behind closed doors and often divulging only part of the truth to their potential partners. The supplier similarly prepares a proposal behind closed doors and works out how to obscure weaknesses in their capabilities. Each side then excludes participants who might ask awkward questions or probe for the truth, or delays their involvement until it is too late for them to ‘derail’ the deal.

In theory, partners who have worked together over time should be in a better position to judge the truth, but even that is no guarantee of increased success. Changes in personnel and the constant drive for innovation are two factors that may undermine the integrity or validity of the selection process. It is also often derailed by fundamentally incompatible goals that distort the performance of the parties in the execution of their agreement. Prime among these is the issue of price, though the allocation of risk comes a close second.

Ultimately, price is not in fact the most important thing to a buyer. It is the outcome cost that really matters. By focusing on lowest price, they frequently drive up the cost and force dishonesty by the bidder, who can win only by compromising their performance capabilities, and who then spends the post-award phase attempting to recover margin through highly contentious change procedures.

For the buyer, their belief that the supplier will try to avoid or amend their obligations causes the imposition of onerous risk terms, which divert the negotiations from the terms that might assist in reducing risk probability. These weaknesses are compounded by an attitude that it is the supplier’s job to succeed. This causes the customer to ignore key governance and accountability principles, in particular a failure to share in responsibility and allocate the right resources or mutual review procedures to oversee successful delivery.

In summary, we face a syndrome where bidding and selection processes lack due diligence and open, honest interactions between customer and supplier. This leads to unrealistic requirements and commitments. These in turn lead to a risk-allocating contract that establishes an environment of fault and blame. And from there, the relationship governance process offers little opportunity to  keep the deal on track. It may sound complex to fix, but it is not. The situation demands a better planned and more integrated approach, which can best be driven by the customer and will require executive leadership to implement.

  1. Another great and thought-provoking post Tim. Here is my take:

  2. Well said and insightful. Unfortunately with shakier job security, buyers may lack that same insight and / or courage to make those long term corrections mentioned.

    Am curious as to how executive leadership will get this issue on their radar screens. Any thoughts?

    • Chris, I guess the onus is on people like us to assemble the data that shows the scale of benefit that can flow from improvement. But I think also that the recurrent crises that are an inevitable result of today’s extended supply networks will inevitably lead to greater focus and understanding of the need for improved quality in supplier selection – and indeed, for the supplier, in being more selective about its customers.

Trackbacks & Pingbacks

  1. Absence of Truth in Bidding Post Should Get Everyone in the Contracting Pews Standing Up and Shouting AMEN! « Procurement Insights
  2. Absence of Truth in Bidding Post Should Get Everyone in the Contracting Pews Standing Up and Shouting AMEN! « Contracting Intelligence Blog
  3. Buyer & Supplier Magazine - Absence of Truth in Bidding Post Should Get Everyone in the Contracting Pews Standing Up and Shouting AMEN!

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