When Is An RFP Overkill? The One-Month Spend Rule.

Spend a buck to find a dime

And soon you’ll lose your cash and time

 

Shop with focus when it counts

For rewards in large amounts

 

Do you ever get the feeling you are spending dollars and only saving dimes? Comparative shopping or sourcing can be overdone – there are times when the better decision is end the analysis paralysis and buy.

 

Then again, sometimes that can be an excuse. Which is more common at your organization: over-thinking a purchase or buying too quickly? Excessive negotiations, or not enough?

 

The One-Month Spend Rule

An RFP can be a lot of work, so it’s important to gauge when it’s worth it and when it’s overkill. It may seem obvious to conduct a robust RFP for a complex, large dollar, multi-year outsourcing project… but what about for inter-office shipping?

The effort you invest should scale with the purchase. To figure out the right amount, I share a guideline with my clients called the One-Month Spend Rule.

 

When to use the One-Month Spend Rule

If you are not sure you are getting the best solution the market offers in a certain area, or if you are not confident you’re getting competitive pricing.

 

How the One-Month Spend Rule Works

Identify roughly what you spend on that item/area every month. Now, invest up to that amount in a competitive research or an RFP process. For example:

  • You spend $6,000 per year on shipping (~$500/month) – invest up to $500 shopping it out
  • You spend $10,000 monthly on IT support – invest up to $10,000 shopping

What does it mean to “invest” money in an RFP-type process?

 

Invest the Money – Inside

Time is money – a truism that is often ignored. You don’t have any “free time” and neither does anyone who works for you. If you or your team spends time managing a process, that is an expense.

Tip: It helps to have an hourly rate in your mind for your own time and those that work for you. It should be a round number, easily multiplied, and higher than they’re actually paid. (Because people are worth more than they are paid, right?) You should also have an “hourly rate” for your free time outside of work, as I illustrate below:

 

EXAMPLE

My cable/internet/phone bill is about $150 per month.

I haven’t shopped it in a while, and I suspect I may be able to get better service and pay less.

My time at home is worth $50/hour.

Applying the One-Month-Spend rule, I should spend up to 3 hours shopping my cable.

Don’t forget about switching costs: if I have to spend two hours configuring my new setup (or waiting for the cable guy) that also goes into the cost along with my time doing web research and talking to providers.

 

Why the One-Month-Spend Rule Works

There are exceptions, but this approach usually works, and here’s the math:

  • In many areas it’s viable to save at least 5%
  • Saving 5% means you’ll have a payoff in less than two-years

Will it always work? No, you may find you were already getting the best the market had to offer. In that case, you’ll have spent your money to gain peace of mind. (Maybe that’s worth it, maybe not.)

But if you apply this a few times, you’ll also find areas where you save 10%, 20%, or far more. It’s a winning long-term strategy.

 

Invest the Money – Outside

If you don’t have the bandwidth or expertise on your team, then get help from an experienced consulting or sourcing company. That will greatly reduce your time required, though you will still have to confirm requirements, meet with possible vendors, and monitor the process. An expert running your RFP should also produce better results and pricing if you choose well.

How do you find the right person or company to hire? We’ll cover that in another article, but if you need to know soon give me a call 703.944.9676.

 

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