Savvy buyers will often leverage market competition to seek pricing in more than one way, or with greater granularity than they may ultimately contract for. For example, buying organizations will ask for a firm fixed fee and a cost-plus management fee for the work in the bid package. Or, a buying organization may seek within a fixed fee bid the fully burdened hourly rate for a number of classes of workers.
Buying organizations will use these competitive methods to gather insight into each supplier’s underpinning cost structure for the different types of work to be performed during the bid process. Buying organizations are essentially looking to develop a model using different pricing mechanisms. Competitively modeling not only helps assure balanced pricing, but also facilitates comparison of bids against one another in a truly apples-to-apples fashion. And, it often highlights bidder misconceptions surrounding SOW, SLAs, or contract risks through variances in price. Armed with better financial data, the parties can have robust discussions during bid evaluation and negotiation.
Without this due diligence buyers may go with a low bidder only to discover later on that they proposed unsustainable pricing. For example, with poor financial data, the buying organization may see the business case erode (value is not delivered) or worse, completely flip and become negative value. Most pricing models are expressed in a simple spreadsheet; however, some can resemble a small customized software package or a macro-based spreadsheet. The best pricing models allow customers to align a supplier’s payment with value received—in essence validating that a company is “getting what it pays for.” When there is no financial engineering skewing the rates, prices are easily benchmarkable by an independent third party to validate competitiveness of the deal. Validating data facilitates the buying the organization’s ability to renew or extend an agreement without necessitating re-competition, unless a buyer’s sourcing strategy demands it.