Measuring RFP Savings… But Doing It Right

In the procurement department, the relationship to the supplier is also a central focus with performance measurement. The services, prices, and quantities established in supplier agreements are essential parameters for the efficiency of procurement and its added value for the company...

Why is it so important to measure RFP savings?

If the goal of strategic procurement is to achieve savings, it has to influence the aforementioned parameters to its benefit. In reality, procurement attempts to take advantage of competitive pressure by means of tenders, etc. in order to reduce offer pricing or improve services and quantities. Additionally, systematic negotiation processes help it to achieve further savings.

Background

Spend management is confronted with the challenge to efficiently measure the aforementioned RfP savings in a manner that is comprehensible for everyone and to inform management (in an aggregated form) as promptly as possible. The following primary questions arise in this regard:

  • What key indicators or methods of measurement are suitable for this?
  • How can we plan RFP savings?

Planning is the requirement to subsequently identify and analyze deviations and thus to be able to improve medium-term methods and processes in procurement.

Principally, we differentiate between four areas of planning and measurement:

  1. The competitive effect, which emerges through tenders,
  2. monetary (ultimate) success through direct negotiations with suppliers,
  3. the “scope savings”, which relate to the services/products and quantities to be supplied, and
  4. knowingly assumed additional costs (e.g. due to quality aspects)


Planning and Measurement of RFP Savings


Image 1: Planning and measurement of RFP savings in InitiativeTracker by Orpheus


RFP savings can be utilized as valuable key indicators in procurement management only then if it is planned and measured. If there is a lack of careful planning, the subsequent actual figures can hardly be classified. Furthermore, target/actual deviations cannot be calculated, which are indispensable for modern and actively controlling spend management.


Image 2: Target and actual values for the active management of RFP savings


Images 1 and 2 show InitiativeTracker, with which all key indicators discussed here are planned and measured. You can find more on this topic at InitiativeTracker.


Measuring the Key “Competitive Effect” Indicator

The competitive effect describes the price variances of offers within a tender. Image 3 illustrates one potential form. We assume that savings potential can be demonstrated alone by the fact that procurement allows multiple suppliers to engage in competition with another in a tender. The tender fulfills a very important transparency and benchmarking function for procurement because it reveals both the average price level as well as high or low outliers.


Image 3: Competitive effect in a tender


There are multiple variations for measuring the key indicator of procurement success, the “competitive effect”:

  1. Range of all bid prices
  2. Range without considering outliers (see Image 3)
  3. Measurement based on the standard deviation
  4. Consideration of bids that are very close to the average
  5. Measurement of the effect, especially of new suppliers

Measuring the Key “(Ultimate) RFP Savings” Indicator

In addition to the competitive effect, which is automatically generated rather implicitly by the supplier, those savings that are achieved through the active negotiation performance of procurement should also be measured within the scope of spend management. The so-called “RFP savings” can be likewise calculated in multiple variations:

  1. Measurement of the difference between an initial offer price and the negotiated price
  2. Measurement of the difference between a reference price, which does not necessarily have to correspond with an bid (e.g. the average price), and the renegotiated price
  3. Like variations 1 or 2, however, we do not measure against the renegotiated price (in the sense of a target price), but rather against the actual order price

Important: In the example specified in this case (see Image 4), the price of the “winning bid” from the tender serves as a reference point for measuring savings.

Image 4: Measuring RFP savings

The example in Image 4 uses the price of the “winning bid” from the tender as a reference point to calculate RFP savings. As such, only that price improvement that is achievable based on the best price of all relevant offers (excluding outliers) applies as RFP savings in procurement.

In contrast, if we include supplier-specific RFP savings or the average price of all relevant offers as the reference point, the maximum possible effects would be significantly greater.


Measuring the Key Indicator of “Knowingly Assumed Additional Costs”

Apart from “classic” key RFP savings indicators, additional KPIs allow the performance of procurement to be validated in even more detail. The key indicator of “knowingly assume additional costs” can be sensibly used, for example, if we want to measure which monetary effects – in the sense of knowingly excluded savings – were the result of the decision model of the tender. It answers the question: “What is the cost of not opting for the lowest priced offer?”


Measuring the Key “Scope Savings” Indicator

Another example is so-called “scope savings” – a supplier is often awarded a tender due to his lower price, however, he subsequently retrieves additional budgets, e.g. via “change requests”, such that significant additional costs relative to the offer price arise. In many cases, they can only be measured after some weeks or months and therefore remain generally unrecognized.

The formerly lower bid often “emerges” as very cost intensive. Scope savings precisely measure these additional costs. Strictly speaking, they would have to be added to the RFP savings in order to be able to measure RFP savings adjusted by scope savings.

Orpheus - Procurement Performance Management 2016
Procurement Performance Management 2016

We offer you a holistic solution for increased transparency, potential analyses and measuring your procurement success regarding indirect purchasing with our DataCategorizer, SpendControl and InitiativeTracker modules.

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Managing Director - Orpheus GmbH
Dr Jörg Dittrich
Managing Director Orpheus GmbH
 
"The introduction of a Spend Management system is a highly profitable step that is essential for a company’s cost position."

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In this blog you will find expert knowledge about initiative management and project management in strategic procurement. InitiativeTracker is a software for planning and monitoring your sourcing initiatives, controlling your procurement organization and measuring your procurement performance.

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