The challenge of competitive tenders for SMEs

Pitch ideas

If you pitch for an opportunity of any size and scale with a business or government customer, it is likely you will need to do so via a competitive tender.

For example, Commonwealth Government procurement thresholds trigger competitive tenders at $80,000 for non-corporate entities, such as departments of state and parliamentary departments.

According to AusTender, the federal government alone spent $47,354 million buying goods and services in the last financial year, and issued 64,092 supplier contracts. Its target for SME participation by contract value is 10%, and last year, 26% of contracts ($12,309 million) were awarded to SMEs.

All this sounds very promising.

Yet you are not alone if you find competitive tenders a source of strain, and a massive drain on your business.

Competitive tenders have been around for a long time now. And buyers will argue that they are working — to a point.

Unfortunately, however, the competitive tendering system is broken in ways that buyers simply don’t get to see, because suppliers are too scared to tell them.

Recently I surveyed a range of suppliers I work with to find out what they really think of competitive tenders and dealing with procurement; 37% of respondents were SMEs.

The resulting comprehensive report, Smiling But Sinking, shows competitive tendering is increasingly challenging and difficult for suppliers, mostly in ways that are entirely preventable.

Here are some of the key findings from this study.

Firstly, tender timeframes have dramatically decreased, and suppliers are now given only half the time that they need to respond.

Almost all survey respondents (97.6%) said tender deadlines are getting shorter, while response requirements either have not changed or have increased.

Most said they are given two weeks to respond to a tender in their business or industry (52.8%), while almost the same percentage (50%) said they believe four weeks is reasonable.

A third of respondents said they had “very often” been forced to take staff out of their day jobs for a significant period of time when they were not expecting to, in order to cope with the demands of a tender.

A whopping 72.2% also said they had “often” or “very often” received a tender at a difficult time, such as the week before Christmas, with a requirement to respond over a holiday period or peak working period when they were short of resources.

Secondly, vague, inadequate and confusing tender documentation is putting pressure on suppliers to figure out what buyers want, while their requests for clarification frequently go unanswered.

Three quarters of respondents had “often” or “very often” seen poorly defined tender requirements that generated confusion among, and questions from, themselves or other suppliers.

A third said that they had “often” or “very often” asked clarifying questions about a tender, only to receive no answer, or an answer that came too late to be useful.  

Finally, despite the significant effort they expend in responding to tenders, suppliers continue to get inadequate feedback to help them improve.

A solid majority (63.9%) had been told they lost a tender because of their ‘price’, without any other useful feedback on their submission.

In the past 12 months, 50% of suppliers said they “often” or “very often” received no feedback; a further third said that they didn’t receive feedback on some occasions, and only a small minority had not had this experience.

As one respondent put it: “Any feedback would be great”.

Why is this happening, and what can we do about it?

Smiling But Sinking aims to lift the lid on what’s wrong with competitive tenders, because they are the very first transaction that sets the tone for how buyers and suppliers do business together.

For buyers, it contains nine quick wins they can implement immediately.

My hope is that this study will start to break down some of the communication barriers that exist between buyers and suppliers, helping buyers to make improvements to the competitive tendering system that will generate goodwill, collaboration, and better results for everyone.

NOW READ: Should clients pay for tender and request for proposal submissions?


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David Markus
3 years ago

Is the tender process stealing from the SME sector?

There is an even bigger problem with the tender process in the SME sector. On small tenders that SMEs go for the cost of responding is often high on a per responder basis. The company that wins the tender will make a small profit from it but overall the SME sector makes a loss.

Let me explain by way of an example. A council puts out a tender for new printers. It would like 100 of them and each one has an RRP of $2000 ex GST. Wholesale price might be $1700 each. So the winning bidder offers them up at $1750 each. The council on paper has saved $25,000. The vendor has made $5,000 gross profit.

However, with the tender the vendor had to answer lots of questions, negotiate a price with the upstream distributor get pricing for transport and various things that took up 2 days of resources. total cost to the bidder was $1000 and they made $4000 for which they managed finances and did some admin and at the end of the day the SME company turns a net profit of $3000 on the sale. Great! No actually its not and here is why.

There were 12 companies that thought they could compete for the sale who also wanted to win and they each invested $1000 in effort as well.

Total cost to all bidders as a group is now $12,000. net loss to SMEs is $9,000

The printer manufacturer who works through a channel distribution model still makes $170,000 no loss here but that money just went off shore to a Chinese manufacturer.

Big business the winner SMEs sucked dry by a no win tender process that should never have been run. 3 quotes would get the council the same saving and leave something in it for the bidders.

The rules for this game as set by Government policy need to change and the real flow of money needs to be taken into account.

Some suggestions:

Work on a set of rules that ensure tenders represent enough value to the winners that it is really worth bidding for by considering the bidders gross profit in the deal after likely cost of goods. Respect the time of the respondents.

Use more RFP by invitation only and have the procurement people put more effort into finding the right vendors to invite so it is smaller groups competing.

Pay for the effort that goes into responding especially when the tender calls for a design piece to be done just to figure out what is required. (this would also stop procurement departments from going on fishing trips when they are not ready to buy)

Stop running open tenders for IT equipment purchases of less than $1,000,000 the cost of manufacture reduces the potential gross profit too far.