With a bit of analysis this can and should be done. The first look should be how far is the price from other bid price submissions. If it does not cluster closely to other submissions, more questions need to be asked or the tendering document (RFP) may have been misunderstood. To arrive at a more analytical approach one would use annual reports for public company vendors or industry numbers for private company vendors. Briefly the calculation is as follows: Start with the total average annual price submitted; Subtract the average net profit from reports (around 10%); Subtract the Sales and General Accounting cost from the reports (SG&A) - generally between 15% and 25%; Subtract 8% of the average annual price submitted for the average risk factors that vendors assign to each opportunity; Add 10% of the average annual price submitted if there is provable evidence that the vendors view this opportunity as a validation deal; Subtract 10% for the initial transition or transformation. If the resulting number is less than 50% of the average fully projected internal cost, the bid price is extremely aggressive and a full analysis should be conducted, preferably together with the Vendor (proponent).

The Vendor is obligated to monitor and manage the equipment in the contract as inspected during the Vendor due diligence as conducted and likely documented in the contract. When changes to the equipment are contemplated and executed during the term of the contract, the decision should be made with Vendor input and agreemnt. This ensures service level and price continuity. If Vendor agreemnt was obtained verbally in good faith, this should be documented. If not, this will likely need to be resolved by the two parties (Conflict Resolution). In addition, we suggest a review of the contract language dealing with Change Management and Scope Management.

The market has conditioned buyers and sellers to work with this rule of thumb. The 20% is not, in our experience, based on empirical data or analytical research. The savings compared to the internal provision or services always need a very complete and accurate analysis. Generally, the sources of potential savings are: procurement value (or "deal heat"), financial leverage of vendor assets, use of vendor excess capacity, true business model scalability and true economies of scale, labour arbitrage (geography and industry sector), and deep process expertise for the activities in scope

The vendor due diligence process is important for both sides. Specifically, buyers want to ensure that the agreement is not signed with many "subject to due diligence" statements. The vendor needs to verify that the solution proposed will work for the price proposed. However, practical reality shows that vendors use the due diligence process as a fact finding mission to argue for price increases (more than the bid price). While the buyer should assist the vendor in good faith to have access and conduct the due diligence process, the buyer's team assigned to assist the vendor should be made fully aware of the potential pitfalls of the process. Memebers of this site have access to a sample of the content of such awareness training sessions.

It is positive to see that the problem is recognized by both buyer and seller. While far from trivial, this is a resolvable problem, in particular since you seem in agreement. We suggest that you look at: Co-marketing; Collaboration in geographies or industry sectors; Sharing some of the savings achieved by the buyer as a direct result of vendor actions; and, Exchange of shares between the two companies. . It is important that any one of the suggested instruments of sharing be well developed, documented and go beyond simple marketing statement of intent. If they have no clear, measurable, documented, and signed economics they will not work.

This answer assumes that by "conventional" pricing the question refers to resources based pricing model. We observe that as Business Process Outsourcing (BPO) is taking hold, transaction based pricing models are preferred more often. If modeled and priced correctly transaction based pricing is preferable since it based on price units controlled by the end user of the buyer. If transactions in scope are not readily found commercially in the market place beyond one seller and one buyer this poses serious market discipline, comparability and benchmarking problems. We also suggest that the following aspects of the pricing model be given extreme attention: Minimum transaction volume guaranteed by the buyer; Tiered transaction pricing; Caps on transaction unit price increases; Early termination fees; Audit and verification rights for the transaction counts underlying data; Firm obligation to maintain up-to-date standards (if transactions are regulated).>>

The request would be unusual if 100% of the services require little or no capital deployed by the vendor. The prevalent billing practice is to bill in advance for resources that are capital based (similar to paying rent in advance), and in arrears for services based on time and materials (similar to contract and consulting work).

The answer to your question is in the difference between SALES (i.e. billing) and PROFITS. The whole vendor incentive plan needs to ensure that the incentive offers more profit to the vendor when the sales are reduced (in particular as a direct result of vendor hard work!). As a buyer, you are at an advantage that your are paying with 10 cents on a dollar. We suggest that when crafting and negotiating this plan you ensure that the negotiator on the vendor side is compensated on the profitability of the deal, rather than the sales in the deal (as it is often the case with sales representatives).

Conventional daily (or hourly) rates give more control over the choice of resources to the buyer. However with this control the buyer retains the risk of what is the best mix of resources for the project. Conventional rates create a serious contradiction if the buyer wants to buy at fixed prices, or not to exceed pricing, or a prescribed quality. To balance risks, controls and have the onus on the vendor to optimize the project deliverables and cost, we recommend considering blended pricing, fixed or not-to-exceed project price, and a prescribed quality of the work result.

Generally, outsourcing as an action reduces the overall risk inherent in performing the activities in scope. The rationale is that in the self-provision scenario, all risks are retained by the prospective buyer organization. A well balanced outsourcing arrangement ensures that (1) some of the risks are transferred to the vendor, and (2) the risks associated with the vendor performing according to the contract or not are transferred to the vendor.

To deal with this issue the recommended choice is to base the selection on Risk Adjusted Scores and Pricing. The Risk factors allocation should be done based on specific questions asked in the tendering process. While Outsourcing generally is a reduction of the risk taken by the buyer (by sharing it with the vendor), the past experience and approach of the vendor may introduce new risks.

If the objective is to compare the vendors, their submission and approach including the risks that each pose, the answer is yes. There are several methods to view and deal with risk. Most often companies create a list of risks and document the mitigation approach. We found this approach lacking. The risk assessment, factoring and adjustment should be done by the evaluation body. If the evaluation body is expanded to a larger group, such risk assessment can be done by using simple voting technology to collect it, and consensus building techniques (such as Delphi) to conclude. We prefer to quantify the risks and consider them in the price of a submission through the proper risk adjustment methodology. Quantification methods vary widely. Members of this site have access the Risk Adjusted Pricing Framework used by TAU Group.