Enterprises are launching digital transformation programs for numerous reasons. The business may need to address a supply chain issue, make changes in the HR ecosystem, or rationalize corporate operating models due to significant organic or inorganic growth.
Regardless of your reason for launching a transformation initiative, there is often an urgency for change which can cause companies to overlook many of the digital transformation risks at play in their efforts to realize the value of their program. Even seemingly well-prepared companies implementing proven vendor evaluation tactics can fall victim to this urgency.
Recent stats highlight this issue:
- 65% of programs go over budget, with 75% of those programs going 50% over budget.
- 73% of initiatives failed to deliver both growth and bottom-line objectives.
- 55%-70% of ERP programs fail to meet their objectives.
Being blinded by the urgency of your digital transformation initiative can lead to companies selecting reputable vendors that are simply not the right fit for their specific program. Below I discuss some of the primary ways companies fail to evaluate vendors for fit.
Selecting a Reputable Vendor
Selecting the vendors that will guide you through your transformation program is a critical decision. It will likely have a determining factor in the success or failure of your overall program. Companies often select reputable vendors, but their selection process does not always help companies pick the right vendor for their specific program. Of course, no company knowingly picks the wrong vendor to support their transformation program. Instead, there is an internal bias when selecting the vendors that may be the root of budget, timeline, and outcome challenges.
When evaluating vendors, keep in mind your biased assumptions as they relate to these hidden challenges. This includes your incumbent partner vendor, a top-tier vendor that is a competitor to your incumbent, or a low-cost provider you consider as a means of reducing your overall program costs.
Here are the ways these various vendors could provide opportunities to fail at selecting the right transformation partner for your program.
1. Incumbent Vendors
This is the vendor that is currently engaged in other programs within your company.
|Selection Criteria||When it comes to selecting your vendor, it can be easy to default to your incumbent vendor during an evaluation process. Afterall, they know your program and require little onboarding.|
|Moment of Surprise||Incumbents can provide an estimate that appears high, and sometimes it can be the highest estimate of all the proposals received. The estimate may be a function of the incumbent’s deeper knowledge of the company’s processes factored by a non-competitive rate card.
Program teams can also realize unexpected influence from internal leadership resulting from the incumbent leveraging ties within the company. Additionally, companies are often unable to realize the competitiveness of the incumbent’s rate card unless they have access to market data. Companies also may realize too late that program scope is lean on vendor accountabilities because of the vendor’s preexisting relationship with the company.
|Areas of Risk||It’s naïve to assume the incumbent’s rate card is competitive. Limited access to market rate data is an impediment to the program team and prevents the team from negotiating for competitive terms.
An incumbent’s attempt to gain additional information or influence the decision process through exercising a pre-existing relationship with the client’s senior executives will result in a distraction of the due-diligence selection process. Incumbents often apply top-down pressure on the selection team to shorten the selection and contract development process.
|Exposure||A non-competitive or internally influenced proposal process can spillover into understated scope, vague contractual language within deliverables and assumptions, and low vendor accountability resulting from weak program governance structure.
Minimizing the commercial portion and taking shortcuts in the selection process will often expose the program to non-competitive commercial terms.
Do not expect the incumbent’s assumed knowledge of your operations will be reflected in the scope of their proposal. All vendors will cover their uncertainty within their estimate with contract language so that at the conclusion of the design phase, all required changes will be addressed in a change order.
|Consequences||Companies often assume their incumbent has a complete understanding of their business and their transformation program objectives and will provide a competitive proposal. However, this assumption often leads to program failures.
Non-competitive commercial terms coupled with an altered proposal development and selection process will be realized through unbudgeted change orders. These change orders result from gaps in functional and technical scope, unstated client responsibilities, resource performance issues, vendor accountability gaps, quality of work issues, and from extending timelines due to poor governance.
2. Reputable/Competitor Vendors
System Integrators that are known within the industry that appear capable of doing the job.
|Selection Criteria||These vendors are often regarded as heavyweight contenders within their industry. This group of vendors are often seen as highly successful and too big to fail.|
|Moment of Surprise||Sometimes estimates from these vendors reflect partial scope due to their incomplete understanding of the complexity of your operations. There are cases where an understated estimate is due to a misinterpretation of requested scope. Due to these and similar circumstances the estimate is considerably lower than the incumbent’s estimate.
Another surprise is the vendor’s behavior can appear distanced or reflect a limited willingness to negotiate if they perceive a strong bond between the perspective client and the incumbent vendor.
|Areas of Risk||All vendor initial proposal estimates reflect the output of the vendor’s estimation methodology. The process yields industry averages of effort, complexity, scope, and risk based on information they have collected from many sources, including your RFP content.
The competing vendor’s limited understanding of the client may prevent needed corrections to the estimate that the incumbent’s estimate should reflect. The competing vendor knows there are gaps within their estimate and expects their estimate will be improved as the vendor learns more about the program.
The competitor vendor may provide a proposal of services on your highly customized and strategic areas in countless ways. Your risk anxiety should increase if their response does not recognize known areas of complexity highlighted in your RFP content.
|Exposure||A proposal based on industry averages is not uncommon, but the client needs to understand the existence of gaps between the “industry average” output and the client’s needs. The client also needs to understand the known and unknown risk they will carry with the acceptance of an unvetted contract.|
|Consequences||Although these companies appear too large to fail in your transformation, you may have failed in managing their participation and management of their proposal.
Companies not appreciating the value of informing new vendors on core and strategic areas of their operations are reducing the client’s opportunities for success. Unfavorable outcomes may include unintentionally eliminating a viable new vendor that may offer a proposal with solid solution or the client can be surprised by a significant post-design change order.
Companies that do not provide a transparent and competitive bidding process with incumbent and new vendors will shortchange stakeholders, damage both professional and company reputation, and land a financially uncompetitive agreement.
3. Low-Cost Vendors
This vendor is invited to the bidding process for the purpose of lowering the cost of the program.
|Selection Criteria||This vendor is appealing simply because someone in the client’s organization has the belief that the presence of a low-cost provider will lower the cost of proposals submitted by the incumbent.|
|Moment of Surprises||The moment of surprise is when trying to leverage a low-cost vendor’s estimate to drive down costs, you realize the incumbent or other higher priced vendors will not react to the lower cost estimate from a vendor they do not see as a peer company.|
|Areas of Risk||Your negotiation position with the other vendors is diminished because you appear to be positioned solely on price and not value or scope.
Significant proposal price differences seen in proposal evaluations can be a distraction from evaluation of scope and governance in proposals received from all the competing vendors.
|Exposure||An unwanted distraction can be created because of a tactic that will yield limited results. The tactic may be perceived as having an impact if competing vendors swap higher priced resources for lower cost, junior, or unqualified resources.
Additional levels of work will be required by the internal team to evaluate the low-cost proposed scope, staffing pyramids, resource location and availability, skills, and experience in the various workstreams.
The proposal evaluation team may need to explain to senior leadership why a higher priced proposal is preferred over a much lower cost proposal. In some cases, these low-cost vendor proposals can be 30% of the recommended proposal, but these same proposals are not equivalent delivered value.
|Consequences||The confusion caused by using one vendor to drive the price of the program will have the opposite effect in the long-term. Labor arbitrage by the competing vendors resulting in a lower proposed program cost can quickly be consumed as the impact of lack of skill or experience lands within the program team.
Lost time and lost opportunity to improve the eventual selected proposal will be purchased at a premium during the execution of your program. The company has the potential to lose credibility due to this tactic if the marketplace perceives cost as preferred over value.
Ways to Set Your Program Up for Success
Companies can take a significant step to meeting their program’s timeline and budget objectives as well as deliver both growth and bottom-line objectives when their vendor selection is driven by:
- Prioritizing value over price.
- Obtaining market intelligence and relevant benchmarks to set realistic expectations.
- Providing vendors transparency to improve bidirectional communication, expand focus on critical areas of scope, and lower prospects for missed incorrect assumptions or missed communications.
- Providing internal transparency of the RFP process, including timeline, selecting vendor participants, and criteria for awarding the contract. This will allow all internal stakeholders to understand their role and respect the integrity of the selection process.
- Facilitating a continuous dialogue with senior leadership of their role and progression of the process to reduce unwanted pressure and misunderstanding.
The Bottom Line
Transformation initiatives are major projects that rely on strong vendor partnerships. To select a right vendor for your specific program goals, it is critical to craft a strategic vendor evaluation process that considers these hidden challenges and your own bias. Understanding how the incumbent vendors, competitor vendors, and low-cost vendors will position their proposals during this process is an essential step towards picking the right vendor for you.
UpperEdge has toolsets and proven methodologies to help you select the right vendor for your program. If you are evaluating vendors for your transformation initiative, reach out to see how we can help.