It is common in the IT world to receive and evaluate vendor bids. At first blush, choosing the right vendor may seem like a no-brainer: The lowest Bid Wins. Unfortunately, this rule of thumb is shortsighted and contains several fatal flaws which can lead to spending more money over the life of the contract than any up-front savings. Other key factors to consider include a prior track record of success, proposed timeline, perceived quality, and any additional benefits/scope included.
Why is the bid lower?
Suppose your firm receives 3 well-crafted bids for an IT project. The first bid is $150,000, the second would cost $140,000 and the third suggests they can do all the work for $90,000. The variation between the first two bids is 6.6%, but the variation between the first and third bid is 40%. A large variance on the lowest bid is a red flag. You should dig deeper to understand why that consulting company believes they can deliver the same quality service for a drastically lower cost. There are a few common reasons for a significantly lower bid to look out for:
The bid does not cover the same scope – The higher bid offers greater functionality and better support (both pre- and post-implementation baked in). The lower bid may offer a basic package with improved functionality and support only available for an additional charge.
The bid uses less experienced resources – It is a common misconception that all resources are equal believing that you can pull one person out of a role and replace them with anyone else with no impact on quality or productivity. Ask yourself: if you needed heart surgery, would you want an experienced surgeon who had successfully performed the same surgery hundreds of times over a 20-year career? Or would you feel just as comfortable with a surgeon who just completed their residency, and this would be their first time as a lead surgeon? Experience matters, particularly relating to reduced mistakes, greater efficiency, and faster execution. Paying a bit more for expert resources is well worth the greater value they bring to the project, otherwise, you’re relying on limited experience to navigate anything that may arise.
The bid includes offshore resources – In a specialized and regulated industry such as Retirement Recordkeeping, there is a variation on the Less Experience Resources problem. On top of the previously stated concerns, there are often language barriers and cultural or time zone differences that impact communication and response times. Anything that slows down the project contributes to added cost.
What are the hidden costs?
Longer project times – Time is money. The longer a project takes to complete, you increase the odds of running over budget due to extended hours of labor cost for those resources. Additionally, longer project deadlines mean you are unable to complete other projects in the same timeframe, so your overall productivity suffers.
Mistakes – If a resource makes a mistake, it costs time and money to fix. If the mistake is caught during the project, it leads to longer execution times, but the overall fallout is limited. If the error makes it into Production, there may be downtime for the system, financial loss, data leakage, and damage to the company’s reputation. Less experienced or knowledgeable resources are more prone to mistakes, which increases the risk to the project.
Remember that you get what you pay for. We recommend that a thorough evaluation of the IT vendor bids you receive should always include:
• Verification that the bids are for identical service(s)
• Balancing potential risk to the project against experience and the cost of the project resources
We have extensive experience evaluating vendor bids for clients and we can help your firm make the right assessment by weighing vendor reputation, expertise, quality, and cost of bids received to reach the best-fit decision for your organization’s project. Beware of the hidden costs of lowest bids and don’t assume cheaper is necessarily best – experience matters! From Platform & Provider Search to Program & Project Management, and Staff Augmentation our team provides expertise and practical guidance every step of the way.
Email firstname.lastname@example.org to get started.