My last article, “Let’s Make RFPs Better–and More Definitive,” presented four keys to making your request for proposal (RFP) process more efficient and more valuable. At least one of those key points has opened some questions with readers—namely, my recommendation to “weed out the financially unstable vendors.” This statement may have been misinterpreted or is in need of further clarification. To be clear, I’m not referring to a few bogeys on the balance sheet, or even a couple of quarters of missed revenue expectations, but companies at serious risk of being able to continue operations outside of bankruptcy proceedings.
There are a number of different ways by which finance and procurement professionals will evaluate a firm’s financial strength and stability. Since this area is not my specialty, I’ll refrain from trying to explain the various aspects and indicators that might be assessed—which is why it takes a team effort to execute an effective RFP. So, let’s look at why the firm with shaky financials even makes it to the final RFP stage in the first place.
More often than not, a vendor firm doesn’t just jump into the final stages of the RFP process. In fact, there’s generally an analysis of the broader vendor landscape that takes place up front and through some type of screening assessment, such as a request for information (RFI). Often, 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 and 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 listed below:
1. Financials are not assessed in the pre-screen: As mentioned above, the ongoing viability of participant vendors is not analyzed until the RFP process itself.
2. Hope: Perhaps based on their technical or service capabilities, the assessors hope the vendor’s strengths will be enough to overcome the financial weakness.
3. Compelling technology or service capability: Closely related to the “hope” condition, this is where you know just enough about the core capabilities of the vendor that, again, it may be enough to overcome the financial issues.
4. An existing relationship is already in place: Vendors with multiple products and services may already be under contract with your business or you may already license other products of theirs.
5. 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 the question of risk. How much risk are you willing to take on regarding the vendor’s financial strength? What would you do if they declared bankruptcy? If the vendor was 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 has 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—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.
Tom Roberts has more than 20 years of experience in business technology. He serves as a principal consultant at Doculabs, where he develops strategic plans to help organizations use ECM technologies to achieve their business goals. Follow him on Twitter @tomroberts72 or email firstname.lastname@example.org. This content originally appeared on the Doculabs blog. For more information, visit www.doculabs.com/docublog-news/blog.