Considerations in preparing a Request for Proposal
Martin Cotterill and Brian Meenagh
1.
INTRODUCTION
1.1
An important part of any successful outsourcing engagement is the work undertaken upfront
by the Customer in defining its requirements and identifying and evaluating the suppliers best
suited to meeting its requirements. Much of this work is captured in the preparation and
subsequent evaluation of a Request for Proposal (“RFP”).
1.2
This white paper sets out some considerations for Customers in preparing a RFP. It describes
the purpose of the RFP process, provides guidance on evaluation criteria and outlines the
importance of timing in maintaining competitive leverage.
2.
THE PURPOSE OF THE RFP PROCESS
2.1
The primary functions of a competitive RFP process are:
2.1.1
to increase the level of certainty and confidence that the Customer is able to place on
the solution proposed by the suppliers. This includes the technical, commercial,
operational, legal and relationship elements of the proposed solution;
2.1.2
to identify the supplier that meets the Customer’s requirements; and
2.1.3
to facilitate the negotiation of a contract with the preferred supplier from a position of
leverage with all major issues agreed prior to down-selection, which usually results in
a severe loss of the Customer’s leverage.
RFI EVALUATION CRITERIA
Commitment to the Industry
Scalable and robust technology platform
Market leading range of service offering
Track record of successful partnering and relationship management
Cultural fit, to include innovation and creativity
Market competitive and strategically aligned financial arrangement
Consistency of
pricing bids
Pricing structure and
framework
established in the
RFP
RFP EVALUATION CRITERIA (BASICS)
Performance commitments
Commitment to put meaningful risk against
performance and outcomes
Pricing evaluation
Scope Definition
Technical and Operational solution
Governance approach and
methodology
Compliance with terms
Consistency of
performance
requirements and
scope
Value
Adds
Known constraints
and requirements
DOWNSELECT
2.2
The basic shape of the RFP, and the fundamental requirements that it must address, are
therefore driven from the criteria upon which these outcomes will be evaluated and
determined by the Customer. The diagram above illustrates the funnelling process that
underpins the determination of price and requirements and the selection of the preferred
supplier as part of the procurement process.
3.
DEFINING CORE EVALUATION CRITERIA
3.1
The core set of evaluation criteria for the RFP should include a minimum set of basic
elements that will underpin the deal and drive the contract that the Customer eventually signs
with the preferred supplier. For an outsourcing deal these elements should include evaluation
of the following items.
3.1.1
Performance commitments
(a)
(b)
3.1.2
What level of performance will be delivered by the supplier:
•
from day one (maintaining existing levels of performance that are
defined, agreed and priced); and
•
through the term (improving the current levels of performance to a
new set of defined service levels as a result of the implementation of
the supplier’s solutions)?
Whether the performance levels are defined, adequate and measurable.
Commitment to put meaningful risk against performance and outcomes
(a)
What is the service credit regime and the level of fees put at risk by the
supplier?
(b)
What benefits will be delivered and committed to by the supplier through their
improvement initiatives?
(c)
Whether such commitment is meaningful (e.g. financial, through a risk/reward
proposal).
The Customer should also consider whether the RFP (and ultimately the contract)
differentiates between:
3.1.3
•
“service performance” measurement, i.e. employing service level metrics and
measures that correlate to the service lines in the Description of Services with
service credits providing the contractual “teeth” to drive performance; and
•
“business performance” measurement with a business outcome-driven scorecard
and corresponding metrics and measures that are aligned to the Customer’s
annual objectives (with a risk reward component whereby the supplier places a
percentage of its fees at risk against outcome delivery and has the ability to earn
enhanced fees for superior performance over the whole scorecard).
Pricing evaluation
(a)
Whether the pricing proposals can be compared with certainty.
(b)
How certain is the price?
(c)
Is the pricing structure acceptable?
(d)
How stable is the price to changes in the Customer’s business and customer
base?
(e)
Whether the price meets the Customer’s base case.
The pricing structure should determine the charging basis and provide the Customer
with pricing control, variability (where appropriate) and certainty. This initial analysis
in the development of the RFP requirements document will determine what service
lines are charged on what basis and how granular each pricing unit needs to be for
the purposes of validating prices against the Customer’s base case.
There are three main types of pricing units that may be used depending on the level
of variability and control required by the Customer:
•
fixed-price elements: for services that have no sensitivity to volume variation;
•
unit-based price elements, which include:
•
o
“wide units” for services that should be desensitised to volume variation;
and
o
“narrow units” for services that are volume sensitive and for which a high
degree of month by month variation is acceptable; and
day rates: for additional services that cannot be accommodated within the fixed or
unit pricing structure.
The key consideration for the Customer is ensuring that the pricing units for the
service lines correlate to a resource unit that the Customer is in control of rather than
one that the supplier can control (such as pricing on a time and materials (T&M)
basis). The pricing structure can often employ all three types of pricing units across
the service lines to maximise certainty and predictability or roll up into a single unit
price with day rates for out-of-scope services.
3.1.4
3.1.5
3.1.6
3.1.7
Scope definition
(a)
How adequate and certain is the scope of services?
(b)
How is the Customer protected through the term of the agreement with the
preferred supplier from change?
(c)
What flexibility is built in to the scope so that it can evolve (e.g. technology
neutrality, platform portability)?
(d)
Has the supplier understood and accommodated the Customer’s existing
environment?
(e)
Is the division of responsibilities well defined and understood?
Technical and operational solution
(a)
Is the preferred supplier’s solution understood and acceptable?
(b)
Does the solution address the Customer’s solution requirements and map to
a defined transition plan with committed milestones and deliverables?
Governance approach and methodology
(a)
Does the Customer have certainty and confidence in the supplier’s ability to
manage the services and perform the obligations?
(b)
Has the supplier demonstrated its capability in managing a deal of this nature
and how is this manifested in the governance of the contract, services and
business relationship?
(c)
Has the supplier accepted the Customer’s change management regime and
restrictions on the effect of change on the pricing?
(d)
Is the supplier’s response to the Customer’s governance, risk, compliance
and audit requirements acceptable?
(e)
Is the supplier’s proposal for reporting the necessary management
information and data sufficient for the Customer to effectively manage the
contract, discharge its legal and regulatory obligations and run its business?
Compliance with terms
Each main section of the RFP (e.g. Pricing, Service Levels, Governance and Change,
Transition, Description of Services and Exit Management) should contain a set of key
terms that can be evaluated and ranked for compliance so that the critical “red” and
“amber” issues can be negotiated prior to down-selection. Prior to selecting a
preferred supplier, the Customer should determine whether:
(a)
there are any outstanding “red” issues on the legal terms and conditions;
3.2
3.3
(b)
there are any outstanding “red” issues on the key terms for each of the main
sections of the RFP (e.g. Pricing, Service Levels, Governance and Change,
etc); and
(c)
the “amber” issues are understood and form an acceptable base from which
negotiations can proceed.
To enable the Customer to be able to assess the core evaluation criteria, the responses from
the suppliers will need to exhibit certain common characteristics, i.e.:
•
scope certainty;
•
consistent solution and transition proposals based on a set of common requirements;
•
consistency of pricing proposals and the ability to make comparisons between
suppliers;
•
consistent structured performance level proposals against each main service area;
•
proposals based on a common set of baseline data and information as to current
environment, volumes, constraints and assumptions; and
•
comparability of responses to each of the key terms and requirements.
The RFP must therefore be structured so that it facilitates these response characteristics and,
ultimately, allows the Customer to evaluate the criteria from the supplier’s proposals and
define the base from which the eventual contract is formed.
Pricing
Requirements
and structure
defined in RFP
Service Level
Requirements
(Day 1)
Pricing
Units
defined
Base
Case Financial
responsibilities
defined
Consistency of pricing bids
Pricing structure and framework
established in the RFP
Transformed
Service Levels
requirements
Service credit
mechanism
Scope
definitions
Defined
interfaces
with retained
organisation and
third parties
Pricing
evaluation
Performance
measurement
requirements
CONTRACT
BASIS
Governance
approach and
methodology
Change
management
process defined
Scope Definition
Technical and
operational
solution
Scope certainty
Solution requirements
Transition requirements
Performance
commitments
Risk against
performance
outcome
Benefit
realisation and
any risk reward
Compliance
with key
terms
Defined
constraints
Solution requests
SWIP provided
resources
Current
environment
information
Governance
requirements
defined
Exit
management
terms defined
Contract
management
requirements
defined
Compliance
requirements
defined
Responsibilities
matrix
Legal
Asset
terms
treatment
defined defined
Security and
BCP
requirements
defined
3.4
The diagram above defines key elements (the outer ring of the diagram) within the RFP that
underpin each of the core evaluation criteria and drive the response characteristics.
3.5
These elements can then be structured into a RFP form that will map to the contract form so
that the transition from RFP to contract development and formation is as efficient as possible.
In the sections that follow the starting points and process by which this is achieved are set
out.
4.
TIMING CONSIDERATIONS
4.1
The quality and timing of the definition, interrogation and evaluation process has a direct
impact on:
the ability of the Customer to structure a deal that capitalises upon the leverage of a
competitive process; and
4.1.2
the ease or difficulty with which the Customer can achieve its desired commercial and
contract terms.
The golden rule is: the greater the level of definition that can be achieved up front the lower
the overall effort to achieve the desired result. This is illustrated in the diagram below.
Defining requirements up front can dramatically compress the overall timescales for the deal
and reduce the amount of “agreements to agree” left in the contract, which only promote
uncertainty and ambiguity and increase the number of dimensions along which change can
operate.
RFI
4.2
4.1.1
RFP PROCESS
DOWNSELECTION
Failure to resolve key deal issues up front
and define the key requirements of scope,
performance and price results in increased
effort and difficulty to achieve optimal deal
outcome
Effort in defining deal requirements up front
minimises re-work, ensures greater
efficiency of effort and maximises leverage
for better deal outcome
EFFORT
RISK
PROJECT TIME
The “Golden Rule” – the importance of defining requirements up front
5.
SUMMARY
The creation of a comprehensive and detailed RFP which sets out the Customer’s technical,
operational, commercial and legal requirements and subsequent evaluation of that RFP is an
essential factor in determining the success of any outsourcing engagement.
Latham & Watkins has prepared a number of templates and evaluation tools to be used by
the Customer in the RFP process. Please contact [email protected] if you would like to
receive further information or discuss this topic further.
This white paper is intended to introduce current and prospective clients to some of the issues
Latham typically handle in outsourcing transactions. It is neither a comprehensive issues list
nor a complete discussion of the listed issues, and it should not be treated as legal advice.
CONTACT
Martin Cotterill
+44.207.710.1161
[email protected]
www.lw.com
Justin Cornish
+27.72.036.613
[email protected]
Brian Meenagh
+971.2.813.4844
[email protected]