Earlier this week, SmartCompany published an article about the challenges facing SMEs who put their hands up for competitive tenders, written by Robyn Haydon. Outlining key findings from her own research in the space, Haydon explained how the competitive tender process is more often than not “a source of strain” for SMEs, and a “massive drain” on their businesses.
In this response to Haydon’s article, David Markus, founder of IT services company Combo and SmartCompany contributor, argues the problem runs even deeper.
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 a recommended retail price (RRP) of $2000 excluding GST. Wholesale price might be $1700 each. So the winning bidder offers them up at $1750 each. On paper, 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 other things that took up two days of resources. The total cost to the bidder was $1000 and they made $4000, for which they managed finances and did some admin. So at the end of the day the SME 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, and the 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 is the winner and SMEs are sucked dry by a no-win tender process that should never have been run. Three 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.
- 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 Requests for Proposal 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); and
- 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.
Do you have other suggestions for how the competitive tender process could be improved? Leave a comment below or email us at [email protected].