Procurement Mythbusters – “Never tell the supplier your budget”

In this occasional series we explore and explode popular myths about procurement. Today, one of those bits of good practice guidance that we are often given in negotiation training sessions, or receive from the procurement mountain tops like the wisdom of the ancients, or even in text books.

"Never tell the supplier your budget".

Now, clearly there are times when this is good advice, but we'd argue there are probably almost as many where it isn't. Let's start with the times it is sensible. If you’re buying a defined quantity of items where you have little idea what a fair cost might be, and where there isn’t much competition, then exposing the budget is likely to mean you’ve set a floor for the price. So a bespoke piece of equipment, or maybe some software development where you’re locked into a supplier might fall into this category.

How much will this enhancement cost? My budget is £50K”?

“That will be £49,500”.

It is also pointless or worse if you have a lot of clarity on the quantity and clarity of what it is you want, and a competitive market. So if you can clearly define "I want three hundred laptops to that specification “, or even (in a less tangible spend category), I want a report from the lawyers that covers x, y and z, then you can let competition drive a best value response.

BUT.. there are times when disclosing your budget makes a lot of sense. Going back to first principles, there are two ways of approaching a competition. You can define what it is you want, and let the suppliers compete on price (and maybe other value related factors of course). In effect, you have fixed the specification - quality and quantity - and the selection variable is value / price.

Or, you can fix the price (and other value factors if appropriate)and let the competition be based on the quality / quantity of what is offered against that.

So, whilst we gave the legal services example above, there are many professional services cases were fixing the price makes a lot of sense. If you want a report that assesses strengths and weaknesses in your procurement function and provides a procurement transformation plan, then your specification may get responses from suppliers suggesting anything from a £10,000 project to a £ 1 million assignment.

If you know your budget is at most £30K, then you've wasted suppliers’ time and ruled out what might have been strong potential providers. So when you invite proposals, why not say , "we expect your proposals to be in the £25-30K price range". Then judge the bids on factors such as the quality of the proposals, the insight they show, and the depth of the firm’s experience.

The same can work for tangible items. If the marketing department has a budget of £100,000 to buy promotional items to support a new product launch, then the simplest tender question is just “how many can you give me for £100K”?

Or you can construct the request in a manner that doesn’t eliminate price completely from the evaluation process.

"We want to re-furbish our office. We have 200 workstations, 3 meeting rooms... etc.  Please note that whilst our maximum budget is £1 million, our tender evaluation will consider price as one of the key factors”.

The big advantage of exposing the budget is that it saves the market,  and potentially you as the buyer,  wasting time and effort on unrealistically high (or indeed low) bids. It enables you to obtain competition based on the quality and quantity of what is proposed rather than the price.  And it is applicable in many situations

So, “never tell the supplier your budget" becomes "think carefully about whether telling your suppliers the budget might lead to a stronger competition and better ultimate value".

Voices (2)

  1. Feetontheground:

    Peter, couldn’t agree with you more in relation to professional services. Given tight budgets and external controls in Government, my last few consultancy procurements were competed almost exclusively around content (what can you deliver for this sum). This proved very successful and goes to prove that procurement is a profession where judgement is essential, there is no ‘one size fits all’ and all generalisations are dangerous…….

  2. Garry Mansell:

    I agree with you Peter, but there is also another way. That is using a reserve price or even a reserve “value”..where the way the “value” is reached is defined by the buyer and shared with the potential suppliers so they can react to feedback they receive. You can announce or keep secret the reserve price or value and if you keep it concealed you can choose to reveal it once somebody reaches it…thus stimulating competition. There are a myriad of variations on this that we have seen ( and assisted people) use on our web site. I know you were probably talking about face to face negotiations but most people do that as well as use tools like ours. You just need to make sure they can make the complex offers and counter offers that they and their suppliers want to rapidly and clearly. Good topic for discussion though. Our game theorists can speak for hours to me and our clients about it…and sometimes do!

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