Vendors love when budgets are included in the RFP. This enables them to fit their proposal around the budget, naturally ensuring they spend every penny of it. As a customer you have to be careful: Some might argue that transparency on both essentially make for more open and honest discussions, but most decide not to disclose the exact budget.
Here are a few things to consider before deciding whether to reveal your budget:
- No bargains: Most experienced vendors will not offer anything at significantly below your budget. They will be concerned that this will make their proposal less credible. Also, vendors always grab an opportunity to make some money.
- All offers will be priced the same: This might make it a bit easier to compare different proposals, as price is now out of the picture. Remember that there is no correlation between price and quality!
- Some bidders may disqualify you: The upper-tier vendors will abstain from bidding if the budget seems too small. In some organisations this could be an effective way to eliminate some vendors, e.g. if there is a strong push from some stakeholders to consider an expensive vendor.
- Project scope and setting expectations: If you reveal your budget, the vendors will find a way to spend it in order to âmeet your requirementsâ. Usually what happens when you don’t reveal your budget is that vendors go beyond your requirements and try to win you over on additional ideas and visions they might have for you. This is less likely within the constraints of a fixed budget.
- Licensing vs. partners: Often systems integrators and software vendors have a friendly relationship when it comes to licensing and commission. If the budget is clear, then the two parties will fight the battle without your knowledge, resulting in an offer that spends your entire budget. If you don’t give them a budget to share, the subsequent negotiation will be much more dynamic, and you’ll have more control over how the cake is cut. Often licence prices and integration can be reduced, if the bidders sense that they are close to being selected.
So should your budget be included or not? We generally recommend that you don’t do it, as the cons outweigh the pros. You want the vendor to come up with a sensible price, and you want to see exactly what that price includes. Then you can always negotiate your way out of it, and the end result will hopefully be a better (and cheaper) solution. A final word: Remember that discounts of up to 50% are not unusual on commercial software.
Thanks for the valuable input to: Ian Truscott (@IanTruscott), Kevin Cochrane (@kevinc2003) and Piero Tintori (@pierotintori).
Jon Marks August 17th, 2009 17:13
I think you should give a fairly big range as I discussed with Janus in the comments to this post: http://www.jboye.com/blogpost/why-do-you-act-against-expert-advice/
You can still get a bargain – the vendors that pitch at the top of the range are always scared other people will go lower. And I thin k it is a good thing for you if the vendors that cannot do anything in your budget disqualify you.
Regarding your “Project scope and setting expectations” comment. I think that if you don’t reveal your budget, you get lots of sizzle (additional ideas and visions). If you reveal it, you get more steak (concrete prices and plans).
Finally, I guess it might be different when you’re talking about procuring a product like a CMS which has a price. Maybe then you don’t need to reveal the budget. Howerver, when acquiring services (such as the implementation) the price depends entirely on the effort and I think giving a budget range here is good for everyone.
Jon
Rob Stocks August 17th, 2009 17:13
When you are working on your requirements list, you should develop enough market knowledge to understand what sort of ballpark you are playing in. I agree with Jon when he suggests posting a range.
In the sales process we refer to it as “feeling the purse” and try to aim a solid solution at the customer. The RFP process is time consuming on both sides and giving a budget range will help eliminate people who fall well above the top. If we see a range, we can frequently present a prospect with solutions at either end of the range that meet different requirements or meet requirements in different ways.
Selecting a CMS vendor is not a one shot deal. It is the start of a relationship and relationships start with a conversation. A budget range sets the framework for that conversation. We all know that you don’t want to spend the top limit, and that the bottom limit is likely wishful thinking. Somewhere in the middle is a solution we can all live with.
Jon Marks August 17th, 2009 17:13
Just to add to the above. I’ve seen 2 RFPs in the last few months in which client didn’t specify a range and got something like this (I’m paraphrasing, of course):
2000 Ford Taurus SES – $2,482
1993 Toyota Camry LE – $3,582
2008 Lexus LS 600h L – $99,995
2002 Hyundai Sonata GLS – $4,300
They wanted to buy the Lexus, but their procurement was having none of it. They had to extend the RFP to attract more responses that allowed a “like for like” comparison. If think they’ve even had to go back to the Ford, Toyota and Hyundia salesman and ask them what they could do for more money … If the RFP had given a range (say $75,000 – $150,000) they’d have saved themselves a load of time and effort.
Philippe Parker August 18th, 2009 17:13
The project you’re trying to deliver needs to meet a business case. That business case is based on a budget. If you go over that budget, the project isn’t viable. If you’re under that budget, so much the better, but the point is to deliver the project, not to save money.
The RFP needs to articulate the business case so that vendors can propose a solution to meet it. That should include the budget, though I’d recommend retaining 15% contingency.
The budget doesn’t come from market knowledge. It comes from business benefit. If no one responds, then you know your business case isn’t viable. If everyone responds with the same price, you get to pick the solution that best meets your requirements without worrying about bargains. If you give too large a price range (I was recently quoted between £5,000 and £100,000) then suppliers will think you’re an idiot.
Clients need to be certain about what they’re willing to spend and be honest and open about it. This will lead to better relationship with your eventual supplier.
Contented Management » Why do projects cost so much? August 20th, 2009 17:13
[...] also Peter Sejersen’s article on whether you should reveal your budget when inviting [...]
David August 26th, 2009 17:13
This is a great discussion, and one that I agree with 100% and have advised many clients to follow. Being the owner of the RFP Database (http://www.rfpdb.com), I see more than my fair share of RFPs, and it’s amazing how many issue projects that are clearly pie in the sky, and they’ve got to be, because there is no way they have the budget to pay for what they’re asking. And it’s not just corporate, but government and non-profit as well. Everyone who starts defining a project goes overboard with their wants, well beyond their needs, without any sort of idea of what they’re actually asking for will cost. By providing their budget in the RFP it saves companies from wasting time on a project that is asking for a Bentley with the budget of a KIA. And when they don’t get any bids back but receive comments along the lines of “you were asking for too much with too small a budget” they often revise the RFP and re-issue it.
The more information you can provide in a RFP the better. Think of it less as trying to get a bargain and more as trying to find the right vendor for the job.
philippe bodart September 14th, 2009 17:13
Nice post.I agree that the vendors would like to know the financials of an organisation they do business with.It is a custom that needs to be included in the budget that is ent to the vendor and is followed in every organisation.As RFP carry a lot of significance especially when cms management is involved