Five Billion Reasons to Change the RFP in Canada

In June of 2015 I delivered a Tedx Talk on why we need legislation in Canada to change the way governments hire professional services firms. It’s a an 18 minute video suggesting Qualifications Based Selection replace the current low-bid RFP process which you can watch here or you can read the transcript below. I have made a few edits to remove broken sentences etc. but the essential elements are all there.

Five Billion Reasons to Change the RFP In Canada

I’d like you to do me a favor here for a second. Think about something that used to be done in Canada quite commonly but isn’t done in Canada anymore. Let me tell you some of the things that I’ve thought of when I thought about this.

We used to remove tonsils. When I was a kid, we would go to elementary school and you’d walk into class and the teacher would say, “Billy won’t be here for the next 7 days because he’s having his tonsils removed.” You’d say, “Lucky Billy. Why can’t I have bad tonsils?” All the ice cream he can eat and 7 days away from school.

But then you think about that as an adult and you realize, “Some kid had to go to the hospital for a couple or 3 days. There’s some pain and suffering. The healthcare system incurred a cost. Parents may have had to take a week off of work to look after this kid.” All the while, knowing that it wasn’t really an effective cure anyway.

At some point somebody said, “You know what, maybe we shouldn’t do what we’ve always done. We should do something different.” So here’s an example of a procedural and policy change that changed something we used to do in Canada a lot to something we don’t do very often now. I can’t think of more than 1 or 2 kids that I know of today that have had their tonsils out.

Something else we used to do a lot in Canada is drive without seatbelts. Do you remember doing that? January 1st, 1976, Ontario was the first province to legislate the mandatory use of seatbelts. About a decade or so later, all of Canada had followed suit. But I remember being an 11 year old kid leaving Manitoba to go see my relatives in Ontario and just as we’re approaching the border, this would be like June ’76, my dad said, “Boys, find the seatbelts.” Think about that. “Find the seatbelts.” Say that to your kids today in the car.
So I take my skinny 11 year old arm and I go digging underneath the backseat of that 1971 Plymouth Fury 3 because that’s where the seatbelts were from the day of manufacture – they had never been brought out or used. You’d find one end over here, and one end over there and you’d click them together. There are about 4 kids in that one seatbelt but you were compliant. There was going to be no fine at the border if the OPP were checking.

So you can see we’ve got legislative change here that caused us to do things differently. Think of all the pain and suffering and the time and money and the cost to our economy that didn’t happen because of that legislative change. Now we have over 90% compliance on seatbelt use. Still, some people, they don’t use them but…

Here’s another big change. We used to use cartoon characters to sell cigarettes. If you don’t believe me, just Google Fred Flintstone cigarette commercial and you’ll see some really interesting stuff. I was able to buy these the other day. These are Popeye candy sticks but in my day they were Popeye candy cigarettes. But social pressures caused us to rethink this and then the advertisers said, “Hmmm…maybe it’d be better if we got Freddy Flintstone flogging vitamins instead of smokes.”

See, things can change, even big things. But one thing that hasn’t changed that we still do in Canada is we hire experts based on low price. What we should be doing is hiring experts based on the most qualified person or firm available.

What do I mean by experts? Let me start explaining myself here. Architects, engineers, lawyers, accountants, management consultants, ad agencies, market research firms, et cetera. You don’t want to hire the cheapest if you are a not for profit, private sector firm or government. What you want to do is hire the person that’s going to bring the best solution to you. We don’t need architects on staff typically, what we need is once in a lifetime or three times in a lifetime, we have a big project, we need an architect or we need an ad campaign or we have some market research we need to do. We go and access that expertise that we don’t have in house.

How’s it done today? Typically, what happens is a big firm or a government agency, which could be local municipality or the federal government or a not for profit, will issue what’s called a request for proposal.

A request for proposal could be a 10, 20, 50, 100 page document that says, “Here are the variables that we think we need to buy. Tell us why you can deliver those variables and give us your best price while you’re at it.” What this means is, everybody responding to this document, writing the proposal in response to a request for proposal, is going to be focused on the only critical defining factor that will determine the award of that contract, which is low price. Innovation goes away and value goes away because you have to interpret the project as the least viable, smallest, cheapest product or project.

Instead, what we should be doing is using a methodology called Qualifications Based Selection. In Qualifications-Based Selection, you don’t consider price, which sounds counter intuitive, doesn’t it? If we want to get good value, shouldn’t we be looking at price? I’m telling you no, we shouldn’t be. Not when it comes to professional services and experts. When you pay a fair price through a QBS or qualifications based selection methodology, what you do is you encourage the respondents to provide you innovative solutions and to drive value because they don’t have to worry about being the lowest cost. You’ve probably told them what your budget is, and now they come back and say, “Here’s how I can drive value into that budget.”

You still with me? Good. Okay. Am I saying an RFP or request for proposal is always bad. No, it’s got its place in society. If you want to buy commodities, where you can define all the variables like pens or pencils, go to town. Pens, for example, you might say, “I want this brand. This color ink, this many in a box, this many boxes in a case, this many cases delivered to this location at this time, on this date, free on board, delivered.” The only remaining variable to differentiate suppliers is price. If you can deliver exactly this, whoever can deliver that at the best price wins. I’m perfectly fine with that.

The challenge is that when you’re hiring experts, the solution is complex, it’s high-dollar value and it’s customized. For example, one of the reasons you might hire a consultant is because you’ve got high staff turnover. You know the problem but you don’t know the cause of that problem. You can’t even determine what the solution’s going to look like because your high staff turnover might be an IT problem, it might be a compensation problem, it might be a leadership problem, it might be an ergonomics problem, it could be a supervisory skills problem. It could be a lot of things. What you need to do instead of saying, “I want someone to do this,” you need to say, “I want someone who’s seen this problem in my industry before and can come in and fix it for me. Show me why you’ve done this before and why you’re the most qualified to take care of this.”

It’s a slightly different approach but Joe Average is sitting there thinking, “Wow Cal, why should I care? I’m not a procurement person, I’m not a government minister, maybe I don’t volunteer in a board.” But some of you will. Some of you will work for government, some of you will work with a not for profit, maybe as a volunteer or paid person, or some of you will work in a company that does use an RFP.

What can you do and why should you care? Let’s talk about why you should care first. You should care because of your safety. What you see here is the Auditor General of Ontario Special Report in Winter Highway and Maintenance from April of 2015. The Auditor General was asked in Ontario to provide this report because things weren’t going really well with winter driving in Ontario.

The auditor’s report said that keeping the snow off, and de-icing them is critical to safe highways in Ontario in winter. If they’re not well taken care of, they can be very dangerous.

The problem was, they were having service failures. They linked it all the way back to the way that the contractors were hired. In fact, the report says that they actually did not adequately assess the ability of the vendors to actually do the work. The work went simply to the lowest price vendors. What happens when you hire the person to clean highways in the winter with the lowest price? They probably have the least amount of equipment, the wrong equipment, the poorest trained staff, et cetera. You don’t get low price for nothing.
Even further on, several pages in the report, they went on to say that the tendering process caused them to choose unqualified vendors which created service failures, which created road deaths. I’ve never seen a report link procurement to service failure and ultimately to death more clearer than this one. I encourage you to go find the report and read it.

If your own skin is not important to you, maybe your money is important to you. We think that when we hire people based on low price that that’s how we’re going to keep our costs down, keep our taxes down because a lot of this procurement is done by government at all levels and you are the buyer. You’re handing your taxpayer’s dollars or your money to the governments to say, “Go buy this on my behalf.”

Let’s look at a typical and scary process for hiring an architecture firm. This goes back about a year and a half. Real story told to me by a real architecture firm in Western Canada. It was a government agency that went through a request for proposal process to hire an architecture firm to do an expansion on a building.

Because we have fee guides for architecture in Canada, you can pretty easily tell what a contract should be worth for architecture in Canada. In this case, it was a $50,000 project. Anyone in the industry who was asked “What are the fees going to be?” They would’ve said, “That’s going to be around 50 grand, 48, 52, something like that.”

The challenge was that the RFP required pricing. Pricing is customized, it’s complex. When you hand over a proposal saying, “I will do this work for this amount of money,” you’ve just handed over a legal document. The courts have told us that clearly. You’re binding yourself and committing yourself to do work for a certain dollar value but you’re guessing at what the project’s really going to be like. You actually have to start almost figuring out the problems for free just so you can give them an estimate. That takes a lot of time. In this case, it cost $20,000 for this one firm to write their proposal in response to an RFP, which they hoped to win and get $50,000 worth of work. That $20,000 is the retail value. If they had sold that proposal to somebody, they would’ve charged them $20,000. Thirty-eight firms responded with proposals. Who’s good at math? 38 firms times $20,000 because that’s the level of effort you would’ve had to put in to be compliant. It means $760,000 was spent by the architecture community so that one of them could get 50,000 bucks.

It gets worse because there are procurement costs as well. Someone’s going to write the RFP in order to issue it, they’ve got to manage 38 proposals coming in which becomes very expensive. You’ve got to come up with a selection committee, you got to evaluate them, interview, defend them, et cetera. What happened? In order to make a decision about a $50,000 contract, $800,000 of expenditure was jammed into our economy. Now, did anybody get an invoice for 800 grand? Not a single person. Does it mean the expenditure was not real? It’s real. It’s called overhead in an architecture, engineering, management consulting, ad agency.

Every year when they’re doing the budget, these firms sit down and say, “How many proposals are we going to have to write in order to stay in business?” “Well, they each cost us 20 grand, we’re going to have to write 10 of them to stay in business because we’ll win one in four. We’re going to spend $200,000 this year writing proposals. We build that into the hourly rate.” Every time you pay an architect, engineer, management consultant, ad agency, your money goes towards paying for proposals they wrote and lost for some other procurement group. That’s not a lot of fun, right?

You got to remember, you are paying for this inefficiency because sometimes I hear the procurement community say, “Hey Cal, that’s just the cost of doing business as an architect or an engineer. You guys got to eat that cost.” I’m saying, “They’re absolutely eating the cost and then sending it right back to you.” As soon as you realize that your inefficient buying process is costing you money, then maybe there’s an incentive for change. When I’m saying we should change the RFP process, I’m saying that the buyer benefits the most if we change this because it’s just a flow through cost for the consultants.
The third reason you should care about this is because you want to live in a better country. How many of you want to live in a worse country? None of you. I don’t even need an answer. None of you want to live in a worse country. There’s plenty available if you do. But we want to make our country better all the time.

Take that $800,000 I just illustrated for you, multiply it by a gazillion RFPs every year in this country, and you get about, by my estimate, $5 billion worth of waste in our economy, what I call it, is sand in the engine of our economy.

What would happen if we pulled even 50% of that waste out? Say, we pulled $2.5 billion worth of waste out of our system, what would happen? Would architecture and engineering and ad agency fees plummet? I don’t think so. I think their fees would just remain the same. But what would happen, is it’d be a little bit more profitable. They’d have a little bit more room to do things like their own research, hire another staff person, maybe do some marketing into another country to sell their services elsewhere and bring foreign dollars in.

Good things will happen if we can pull that waste out of our economy. Doesn’t mean it’s going to get cheaper, that’s not the point. It’s not to make it cheaper, it’s to make it more efficient. What can you do? Again, maybe you’re not directly involved in this but you probably have opportunities through your lifetime to influence this process. We’re going to hire somebody like an architect, engineer, management consultant, so how should you do it?

First thing is you will probably say, “Let’s do an RFP. A low bid gets it. But it’s a ton of work, and it’s a bad process.” What do you do instead? Pretend that you’re not hiring consultants, pretend that you’re hiring staff.

Let’s do a little comparison. What would you do if you’re hiring staff? First, you would do the BFOQs – Bonafide Occupational Qualifications. You would define the requirements of the job and the qualifications required by the best candidate. If you’re hiring staff, that’s what you do. If you’re hiring a consultant, just do the same thing. The person who would be best for this project, what qualifications should they have? It probably relates to the fact they’ve done very similar other projects for other people in a similar sector. It’s easy to understand.

You would share budget info. Whether you share it or not, you’ve clearly defined the salary range for a new staff person. Quite often ads, in career sections will say, “Between 90 and $100,000, these benefits, this amount of time off, blah blah, blah, blah.” We’ll do the same thing with the consultants. Say, “It makes sense for us to spend 100 grand on this project.” Share that information with them. Usually procurement people cringe in fear when I say share your budget but that’s something we have to get over.

The next is short list the top 3. You looked at all the resumes, you looked at all the proposals because a proposal and a resume are almost the same thing and you pick the top 3. The three that you think could do the job, now you got to decide who’s the best to do it. So what you do, is you interview them and one of them bubbles to the top. At that point, you negotiate with them. The person who you’re hiring you say, “Well, we’re going to give you 92 grand a year. Here’s your holidays and your benefits, et cetera. Does that work for you?” They say, “I want 94,” and you settle at 93 and you’re done.

Same thing over here, you say, “Look our budget is 100 grand but if we had 110 grand, could we get an extra 30% of value if bump up the budget by 10 grand? What if we really only want to spend 80 grand? Could we have a conversation about that?” The vendor who’s successful will say, “Yeah, absolutely.” That’s why you get really good value and innovation because you could have that conversation. It’s not someone blindly submitting a written proposal, trying to guess at the lowest price.

Have you ever heard of a building project that was confirmed to be $90 million at the time the vendors were selected but when it’s done it’s $190 million? It’s a low bid project that’s why. If it wasn’t a low bid project they would have gotten more accurate pricing up front with fewer surprises down the road and that’s a good thing.

What I just described to you is called Qualifications Based Selection or QBS. Here’s the dirty little secret, since 1972 QBS has been required by law in the United States when hiring architects or engineers for federal government projects. We’re 43 years behind our largest trading partner in terms of how we hire professionals and experts. I think we can probably improve that.

There’s this thing called the Brooks Act. It’s a piece of US legislation, it says, “You shall not consider price when hiring architects or engineers for federal government projects.” I think what Canada needs to do is first, we need to change our philosophy around how we hire these very important people and get them doing important things. Instead of writing proposals that go in a recycling bin, change the procurement culture when it comes to price and how to hire people without considering price. We probably also need to consider legislation like the Brooks Act. We probably need a Brooks Act in Canada.

But the thing we want to do, the one thing we absolutely want to do is make the price based RFP something we used to do in Canada, no matter how we do it.
Thank you very much.

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The Consultant with Pink Hair

"This should be required reading for consultants AND their clients - especially the part about RFPs." - Blair Enns, Win Without Pitching

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