Request for Proposal (RFP)
Request for Proposal (RFP)
A request for proposal (RFP) is a purchasing and procurement instrument that enables buying organizations to solicit high-quality products and services from the market at the most favorable prices; this is done by selecting potential suppliers through competitive bidding. Organizations issue RFPs with the ultimate objective of eliminating lengthy price negotiations for the supply of goods and services. RFPs are designed to achieve special partnerships or contractual relationships between buying parties and supplying agencies by spreading mutual benefits and the value addition of competitive advantage.
BENEFITS OF AN RFP
Typical RFPs have open specifications that leave the preference of response formats and structures to the absolute choice of suppliers, so that the stated requirements can be met by many suppliers. Indeed, open specifications provide suppliers with the opportunity to express their distinctive characteristics through their creative and innovative standards. Buying organizations can then use this information to gauge the individual capabilities of each supplier.
RFPs enable both small-scale and large-scale organizations to access markets and purchase products and services either directly or indirectly by utilizing the benefits of price transparency induced by competition among suppliers. Therefore, buying organizations can use RFPs as leverage for obtaining substantial price reductions and generous discount without having to participate in any negotiations with the suppliers. RFPs further portend the advantage of achieving significant market accessibility for small organizations when sourcing for products and services because RFPs enable organizations to discover opportunities for lower prices by initiating business-to-business relationships.
RFPs comprehensively summarize the preferential characteristics for products or services which buying organizations intend to achieve by spending on the acquisition of particular inputs. RFPs also indicate the long-term and short-term business objectives behind the acquisition of assets by organizations. Consequently, it is incumbent upon suppliers to base the perspectives of their offerings on the detailed insights of the buyers' specifications. An ideal RFP has the following key features:
- Price quotations
- Contract duration
- Performance limits
- Stipulated business requirements
- Item listings
- Guidelines for responding
- Submission deadlines
- Evaluation criteria
- Contacts for channeling inquiries
- Address of the company or organization
All these features are backed by stringent conditions through which organizations monitor the compliance of suppliers to the set guidelines for purchasing and procurement. For example, the U.S. military equipment acquisition system emphasizes innovation and reengineering as the prerequisite conditions for considering suppliers.
The use of RFPs by organizations to specify procurement requirements is viewed as a systematic and best
practices gesture that is closely linked to the transaction cost theory and resource-based theory.
TRANSACTION COST THEORY
Proposed by Ronald Coase (1910) and Oliver E. Williamson (1932), transaction cost theory (TCT) weighs the cost of acquiring goods or services from the market place against the cost of acquiring the same goods and services from within an organization. TCT focuses on the key aspects of transaction costs, asymmetrical information distribution, and asset specificity. Aspects of transaction costs include: costs for searching and bargaining, costs for bargaining and decision-making, and costs for policing and enforcing new structures vis-à-vis an organization's operational standards. The aspect of asymmetrical information distribution recognizes the fact that different parties involved in a transaction experience uneven access to information, a situation that may call for closer cooperation between or among the different parties for purposes of mutual benefits.
Advanced by John Kay (1704–1780), resource-based theory (RBT) recognizes that each organization is characterized by unique sets of resources, opportunities, and core competencies. According to RBT, a firm can pursue competitive advantage by exploiting and combining its distinctive characteristics such as corporate architecture, innovation, and reputation, which are difficult to emulate. The idea of corporate architecture revolves around organizational characteristics such as the capacity to create, utilize, and store knowledge, as well as such characteristics as transparency, organizational flexibility, and employee cooperation. Innovation defines the capacity to reduce costs, improve service or product qualities, introduce new products and technologies, and emphasize best practices; this can often only be achieved through collaboration with other players external to the organization.
The arguments presented by the proponents of the two theories are in tandem with the primary purpose of RFPs, which is to contribute to the profitability of a firm by acquiring products and services of the highest qualities at the least possible total cost. Ultimately, the derivative satisfaction of the organization entirely depends on the acquisition of reliable supplies.
REQUEST FOR QUOTATION
Although an RFP is closely related to request for quotation (RFQ), the two forms of requests exhibit quite some considerable differences. In most cases, RFQ's serve as the preceding step to RFPs. Buying organizations use RFQs as tools for comparing quotes in situations where products or services are extremely commoditized or standardized. For example, an organization seeking hotel accommodation services in a particular city can use an RFQ to source for the best prizes because of the standardized nature of accommodation rates of different hotels.
In addition to seeking specific price per unit for items, an ideal RFQ spells out the exact descriptive details for items such as quantity, quality, referees, skills, competencies, terms of service, transportation, shipping, tax settlement responsibilities, and terms and conditions. As such, price comparisons form the basis for choosing and engaging suppliers. Other forms of sourcing requests that can be used by buying organizations in procurement processes include request for tender (RFT) and request for information (RFI).
DESIGNING AN RFP
Many organizations have developed standardized RFP templates as a way of entrenching RFPs into the routine activities of the organizations. This is because standardized templates provide organizations with the advantage of accelerating the timeframe for procurement processes, especially in large firms which deal with high volumes of products and services. However, it must be noted that the use of standardized and automated RFPs does not guarantee a procurement process that is free of errors and administrative hitches.
The diversity of business requirements and customer demands can only be harnessed effectively if procurement processes are tailored to suit each and every need. Automated RFP software tools and standardized forms create uniformity of response that makes it difficult to ascertain differences in the qualities of products that different suppliers offer. Moreover, such a standardized approach makes it difficult for the buying organizations to base the vetting criteria on the creativity and innovative standards of the suppliers, especially in the outsourcing of large-scale services and transactions.
Therefore, the optimization of product and service qualities at the least possible cost should always be the overriding principle for composing and designing an RFP. This can only be achieved by designing an RFP that takes into account the diverse and competitive nature of the procurement environment. In this regard, an effective RFP should exhibit the following characteristics: define service boundaries; demonstrate flexibility; pronounce the criteria for evaluating performance; state discrete conditions; and establish contractual and binding relationships.
Defining Service Boundaries. An RFP must be as explicit and self-explanatory as possible, especially when sourcing for technological commodities or services that are complex in nature. An RFP must clearly state and define the scope of responsibilities, relationships, or partnerships
between the buying organizations and vendors. Buying organizations must never take the procurement process for granted by assuming that vendors are always ready to respond to any kind of an RFP without considering what the RFP offers. For example, an RFP that does not create a balance between possible risks and achievable benefits is unlikely to ignite much enthusiasm among suppliers, thus eliminating a competitive bidding environment.
Organizations can avoid such eventualities by designing RFPs that promote a competitive bidding environment with the potential to attract multiple suppliers who possess high qualifications for providing the best qualities of goods and services at favorable rates. Organizations can also achieve clarity on the nature of services being procured by preceding the issuance of RFPs with RFIs and RFQs. This will eliminate the likelihood of vendors misinterpreting the buyer's requirements because of ambiguity and uncertainty posed by buyer expectations.
Demonstrating Flexibility. RFPs that require lengthy and complicated selection processes may lock out potential suppliers. Similarly, RFPs with rigid response structures and overstated compliance conditions automatically disqualify many potential vendors from participating in procurement processes. These problems can be avoided through a comprehensive but balanced approach that ensures the organization is guarded from unqualified suppliers and at the same time leaves adequate room for suppliers to maneuver their aspirations. A flexible RFP also demonstrates the transition strategies for switching from an incumbent to a new supplier or for adopting new products or services from suppliers.
Pronouncing the criteria for evaluating performance. An ideal RFP should spell out clear guidelines for performance under specified conditions, either by means of a test or through the use of initial sample products and/or services. Other evaluation items—such as the criteria for passing tests as well as acceptable standards of performance—should be outlined with clarity and certainty.
Stating discrete conditions. In practice, RFPs should clearly indicate standards for passing or determining the fitness of required products or services. The specific requirements of the purchasers should always form the centerpiece of communications between the buyers and sellers of goods and services.
Establishing contractual and binding relationships. An RFP should have the capacity to bind a contractual relationship between a buyer and supplier. Consequently, an RFP should stand out as a reliable document against which comparisons between what a supplier finally delivers and specifications for orders can be based. In the event of a dispute in a future date, an RFP can be referenced as a primary document through which a purchaser and a supplier established a framework for contractual relationship. However, due diligence must be observed to ensure that the legal implications of each and every specification contained in an RFP do not contradict limits set by the national and international standards of environmental, health, business, and/or safety regulations.
SEE ALSO Purchasing and Procurement
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"Request for Proposal (RFP)." Encyclopedia of Management. . Encyclopedia.com. (April 23, 2017). http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/request-proposal-rfp
"Request for Proposal (RFP)." Encyclopedia of Management. . Retrieved April 23, 2017 from Encyclopedia.com: http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/request-proposal-rfp
Request for Proposal
Request for Proposal
A Request for Proposal (RFP) is the process by which a corporate department or government agency prepares bid documents to acquire equipment or services. RFPs are frequently published in the legal documents section of pertinent newspapers or in trade journals covering the industry in which the department operates. The RFP can also be distributed to a list of qualified potential bidders that have already been contacted and prequalified as eligible by the agency or department. "Qualified" is a key word in answering or preparing any RFP. Qualification frequently depends on follow-up investigation on the part of the hopeful bidder, and careful wording of the original RFP.
RFPs are primarily associated with government agencies, since their responsibility to get equipment and consulting talent under the most beneficial circumstances possible is closely monitored by the press and tax watchdogs. Some private companies also employ RFPs, though, usually when purchasing commodities or services that do not bear directly on the company's own products or services.
ELEMENTS OF AN ATTRACTIVE RFP
Some RFP work requests are of a scale beyond the scope of small or mid-sized companies, but others provide such businesses with valuable opportunities to expand their client base and operations. Before bidding on an RFP, however, entrepreneurs and business owners should make sure they fully understand the nature of the work request.
For instance, some RFPs are decidedly more informative than others. When scanning an RFP, vendors should make certain that it specifically describes what needs to be delivered or executed to fulfill the needs of the company or agency that posted the notice. In order to do so, it is often necessary for potential vendors to educate themselves about the nature of the agency or corporation that has issued the RFP. Vendors should also inquire whether the work request could translate into additional work on associated projects down the line. For instance, if the equipment will eventually be networked to a building that is not yet built, but is in the long range plans of the agency or company, a vendor may decide that a low price on the initial RFP is viable if it advances its prospects for a more long-term arrangement down the line.
Before making any bid, vendors should also check the RFP for other factors that might influence their response. Some possible questions follow:
- Will the asked-for equipment be subject to notable environmental conditions or regulations?
- If the equipment will be used in foreign countries, is the equipment compatible with the standards of those nations?
- Will ancillary costs associated with design, production, transportation, or some other aspect of delivery eat into the profit margin to an unacceptable extent?
- Are the RFP and the equipment or services it seeks legal under local, state, and federal laws?
- Is the RFP asking for both equipment and service? (Companies that sell equipment might not be able to adequately service it, yet that service performance may be written into the RFP in a separate section from the equipment specifications; responders must know they can fulfill the entire contract before answering it.)
- Are deadlines and performance clauses contained within the RFP reasonable?
- Will the RFP agency require the winning vendor to sign a performance bond that guarantees delivery of goods or services by a certain date?
Most companies and agencies that submit work requests provide prospective bidders with ample time to study the RFP before the deadline. Some companies give vendors as much as one month from the time the RFP is published before the bids are due. This allows bidders time to tinker with their bids, possibly allowing them to seek out new vendors of their own to help meet the needs of the RFP.
STAYING ON THE BID LIST
Companies wishing to bid on RFPs should monitor the legal notices in local newspapers and trade magazines, and contact the purchasing departments of corporations and government agencies likely to request services and equipment. They should investigate the requirements to be added to the "bid list." Finally, once the company has fulfilled all obligations necessary to be added to the list, the company's leadership needs to make certain that it stays on that list.
Government agencies and corporate departments are sometimes reluctant to delete vendors from bid lists because of fears that such cuts will elicit charges of favoritism. Nonetheless, establishments issuing RFPs do seek to keep bid lists to manageable size, since every bid requires scrutiny. One favored way to keep the bid list down is to require potential vendors to refile every few years. Another is to ask vendors to provide certain information about their companies, such as past sales and experience or number of employees available to service the account. Such requirements cull the number of bidders down, eliminating companies that are too disorganized or feeble to keep up. Conversely, a small business that meets all such requirements in a timely fashion is essentially serving notice that it has its act together.
Companies seeking RFP business should also be cognizant of the fact that winning bids are not always exclusively a matter of providing the lowest cost or the highest level of customer service. Some corporations and government agencies give special consideration on their bid lists to minority- and women-owned companies.
see also Competitive Bids
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Stasiowski, Frank A. Architect's Essentials of Winning Proposals. John Wiley & Sons, 2003.
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Hillstrom, Northern Lights
updated by Magee, ECDI
"Request for Proposal." Encyclopedia of Small Business. . Encyclopedia.com. (April 23, 2017). http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/request-proposal
"Request for Proposal." Encyclopedia of Small Business. . Retrieved April 23, 2017 from Encyclopedia.com: http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/request-proposal