Risks of Not Completing Competitive Due Diligence and Negotiation in Sourcing: Part II
May 11, 2012 | Sourcing Strategy
In strategic sourcing efforts that are substantial enough to justify a work plan, three risks are greatly increased if the finalist decision is made too quickly without appropriate due diligence. In our previous post we discussed the risks of not knowing the solution details. In this segment, let's look at risks concerning internal buy-ins and negotiating positions
Risk 2: Weaker Negotiating Position
Maintaining more than one supplier in the negotiation process keeps the competitors aggressive in pricing, encourages them to provide more information on their solution, and often leads them to include additional services as part of the offering, which increases value to your company. Suppliers know they are shortlisted but still have a competitive situation that they can lose. Thus they want to be aggressive because they have made it this far into the pursuit and do not want to lose it now. This keeps your company in a strong position to get the best value.
Consequences of a Weaker Negotiating Position
Jumping to a recommendation prior to completing the due diligence and the competitive negotiation process reduces your company’s bargaining position. Without at least a second competitor you do not have competitive pricing or a solution to validate the approach and solution against. The supplier also knows that you have picked a path that is hard for you to reverse (politically or schedule wise), thus it knows you will have to be more accommodating of its pricing and solution. The effort to reverse your program internally may be difficult, as will potentially re-engaging the suppliers you didn’t initially select.
Benefits of Performing Due Diligence to Overcome Risk
Completing a competitive due diligence effort will strengthen your company’s position in getting the best solution for the business and at the best terms. Rushing through or skipping the due diligence and negotiation can leave you in a difficult situation of potentially sub-optimizing the solution price and quality.
Risk 3: Lack of Internal Buy-in
The competitive due diligence process is usually supported by stakeholders from across the company. Their participation helps attain their buy-in for the selected supplier. Buy-in for the product or solution may be important for adoption within the company, attaining supplier support and overall success of the program. Due diligence (especially for larger-impact products or services) allows time for a broad range of stakeholders to raise questions for the suppliers to address. It also allows for the stakeholders to understand the differences among the solutions, understand the drivers behind the final selection, and positions them to be advocates for the solution because they were part of the process.
Consequences of No Internal Buy-In
When a final selection is made early, instead of after completing competitive due diligence, the decision is usually made by a smaller group within the organization or a single executive. This may create antipathy towards the solution and the perception that the supplier was already known, especially if the selected product or solution impacts stakeholders from multiple areas of the company. Stakeholders may feel their time was wasted since their input was not leveraged. In this case, stakeholders may not be good advocates of the solution, which will impact adoption and value. Stakeholders who feel ignored or undervalued may not provide good effort or insight the next time their participation is requested. Thus taking into account the ongoing impacts of performing competitive due diligence will support a better “buy-in” culture.
Benefits of Performing Due Diligence to Overcome Risk
Executing a competitive due diligence program will drive a better end result for most organizations by:
- Encouraging better internal buy-in by keeping stakeholders engaged;
- Producing better alignment with expectations because the solution is more fully understood, and;
- Achieving better value by maintaining a competitive environment through due diligence and negotiation.
Short term gains in time savings by jumping to a selection and contract earlier frequently result in lower success rates over the mid to long term when compared to selections made after completing the competitive due diligence and negotiation process.
Learn how GEP can help your procurement team with competitive due diligence and better negotiation in sourcing.
