23 February 2015

Try to avoid competitive tendering

In business to business (B2B) trade companies are looking for - and, in most cases are also achieving - undeniable advantages through competitive tendering. It makes it possible to systematically choose suppliers, get information about the options available in the market, evaluate supplier candidates' ability to understand client's requirements and make estimates of potential cooperation fluency. And the icing on the cake, competitive tendering also provides a quite reliable picture of the value of various options in relation to their price.

But ill-advised and performed tendering can be detrimental not only to the buyer and the selling company, but also to our entire economy.

Buyers or sellers do not need to powerlessly follow the challenges of competitive tendering world - with the right strategies it is even possible to improve competitiveness of a firm.

Buyer shall not get renewal impulses

Narrow-minded tendering easily solidifies buyer's development activities to focus on marginal product improvements and extensions. Instead of keeping eyes and ears open for new external ideas and solutions to make bolder innovation leaps, strict requirement definitions reduce the role of supplier partners as an implementer of buyer´s prevailing worldview.

A system integrator, for example, believed to know the future software needs so well that the implementation of major components could be effectively outsourced through competitive tendering. As a result, hourly charges of acquired work fell, but on the other hand, the life-cycle cost savings were not achieved. At the same time, the existing vendor partnerships, producing continuously new insights and innovations, were destroyed, affecting negatively company's competitiveness.

In particular in Finland, there is a pressing need for cooperation with supplier companies, instead of the rigid tendering principles. According to a research paper, companies in the country rely too heavily on internal know how and resources in generating new product ideas. Similarly, the companies invest more lazily than their international benchmarks in projects, which generate new businesses or entirely new, genuine innovations. And since customer experience improvement and customer engagement often occur with new business models, achieving higher margins often remains a dream.

Seller's growth and profitability challenges

In principle, competitive tendering gives a selling company an equal footing to compete with other sellers, and in general, competition makes tougher and stronger. The problem is that participation in competitive tendering is shaping a company in a way, that makes opportunities for profitable growth narrower and narrower:
  • Detailed definition of the solution to be acquired, to make a comparison of the proposals easy, leads to price emphasis on the selection criteria
  • For sellers, this means, in addition to thinning margins, also collapsing opportunities to stand out from the competition through innovation
  • In the longer term, the development of competitiveness thus focuses on marginal product improvements, increasing operational efficiency and continuous cost-hunt 
The company gets stuck, therefore, in the vicious cycle of competitive tendering, see the picture below.

Vicious cycle of competitive tendering will destroy company growth and profitability. 

There are many companies in this vicious cycle, just now, small to large. A story of a component supplier, based on my own experiences, is illustrative: Customers complained about the prices and through competitive tendering compared them and the characteristics of our products with those of the competitors. As a result, we focused on adding new features to our products based on customer requirements. The competitors did the same, so customers did not see big differences in the solutions, and prices came under increasing pressure. We had to shave our cost structures. The story did not have a happy end...

Boost for the economy and companies

The vitality of Finland's economy and its enterprises is dependent on the diversity, dynamism and innovation capabilities of the ecosystem. One of the main drivers are new products, services and business models. But this is not enough, innovations also need customers. Especially for SMEs and startups it may be difficult to acquire far-away reference customers. And if you can not find nearby customers, who have the courage to look over the tendering practices to new innovations, you are missing another important growth driver. 

But there are a lot of things that can be done to improve the situation:
  • Buyers can enhance the role of suppliers from being a mere implementer to becoming a true, active innovation partner
  • Sellers can, through their own actions, affect buyers´ views before decisions on competitive tendering have been made, thereby increasing the weight of their own strengths in purchasing decisions - or thus even been able to completely avoid competitive tendering
  • With targeted public incentives and measures in place in our domestic markets, there is a possibility to create more willingness to acquire and deploy innovations.