What is a tender?

A tender is basically a request from a purchaser to a supplier for a proposal and/or price. However, the process may vary in formality from an inquiry to a full-blown tender, and can be used in a variety of ways. Inquiries can range from verbal price requests through to formal letters and data packs. Tenders, on the other hand, often use sealed bids (whereby the bid is submitted in a sealed envelope to prevent its contents from being revealed before the deadline for submission of all bids), with pre-defined protocols for their receipt, opening and acceptance.

The format used, the formality of the request and the information required will directly determine the success of the approach to the market, so it’s worth spending time getting it right. Factors influencing the type of tender include:

* the nature of the product or service (a generic product, such as a PC, as opposed to specialised, performance-based services, such as consultancy);

* the competitiveness of the supply market;

* the sector involved (public procurement versus highly bureaucratic environments such as the construction sector, renowned for wads of contract documentation, versus fast-moving consumer goods sectors such as fashion retailing); and, most important,

* the value of spend.

What if I work in the public sector, oil or gas?

The public sector, along with certain other industries such as oil and gas exploration, has the added complication of European Union directives. Any works contract worth more than £3.75 million, and any contract for goods or services worth more than £300,000, require compliance with EU competition legislation. Essentially, this means:

* the sealed bid method of tendering must be adopted;

* the invitation to tender must appear in the Official Journal of the European Communities;

* the selection criteria (lowest price, etc) must be defined;

* information on all aspects of the tendering process (for example, whether post-tender negotiation will take place) must be communicated to all bidders.

The rationale for these rules is that they support free-market competition within the EU. However, in many situations, the reality is that interpretation of the rules provides for a degree of flexibility, albeit within a bureaucratic and regulated environment in which there are significant fines for breaches.

When is tendering most effective?

Tenders and inquiries are key tools in competitive markets and should be used when the goods can be provided by a number of suppliers. This also applies in a supply market that is competitive even if it is not actively competing for your business.

You can also use tenders and inquiries when a supply market changes (for example, when there is a new entrant or you want to encourage one, or if supply chain capacity increases - that is, when conditions are, or can be made, favourable).

The timing of your approach to a market is also key. In times of shortage, market contraction and worsening supply chain conditions, you will invite a price increase.

What will I gain from tendering?

Many organisations limit their effectiveness in competitive markets by using tenders and inquiries purely to obtain prices when a contract is up for renewal. As many agreements tend to expire around the same time - at year end, for example - the tender and inquiry activity is seen as part of the contract renewal process, rather than as an opportunity to deploy a key competitive tool. Even then, purchasers’ aspirations are often limited. For example, the objective may be merely to gauge prices, rather than ensuring competitive pricing by creating competition.

Whether the catalyst for issuing a tender is EU competition law, pending contract renewal, an opportunistic tactic to benefit from a changing market, or a means of eliminating complacency, competition is at the heart of the tendering and inquiry process.

Add to this some non-price-related benefits, such as information on costs, markets and emerging technology, and you begin to see the power of this tool.

How can I create competition?

Managing the perceptions of the supply market is a key feature in creating competition, and there are two fundamental drivers involved: building desire and creating uncertainty. The key to creating enthusiasm on the part of suppliers is to ensure that they want to win the business and that they believe the company is prepared to award them the business. To do this, purchasers must first understand how important their business is to the suppliers. They need to assess whether desire for their business exists naturally, understand the nature of competition in the market, and gauge whether there is capacity to absorb that business.

Purchasers need to identify what constitutes real value to the supply base, establish whether and how they can deliver that, and sell the fact that they can deliver.

What could go wrong?

Make sure you understand and quantify the cost of changing suppliers, as this could affect the feasibility of moving the business and thus undermine the tenderer’s position. Maintaining credibility is vital. If com- petitive suppliers are not rewarded with business, the tenderer’s ability to create competition in that market in the future will be seriously affected. Potential suppliers need to be conditioned to the benefits of gaining your business and the fact that you are willing and able to move the business.

Equally, existing suppliers must be convinced of the need to remain competitive and perform well to retain the business. In leverage markets, in particular, purchasers should continuously question the competitiveness and performance of existing suppliers and be careful that these suppliers can’t call their bluff.

How can I make sure that tendering works?

To be really effective and incorporate all the factors of creating competition, tendering must be part of a wider process. For both existing and prospective suppliers, belief in the need to compete will be embedded at the pre-tender stage, when the tendering company would outline what they want to get from the tender (including how and when suppliers should respond) and assess the market’s capacity to supply. This is when the supply base is “conditioned” at every meeting, either verbally or non-verbally, and often at a subconscious level.

The supplier’s desire to win the business, and their perception of their chances of winning it, is influenced by the buyer’s behaviour and will determine their willingness to compete. Lack of enthusiasm and low expectations will breed lack of effort. First impressions count and the control of information from all staff is a critical issue. They must give the right messages and be consistent.

Many staff see tendering as a no more than a bureaucratic routine with little persuasive effect but, with the right approach, it can be a powerful tool for creating competition and using it to good effect.

Peter Hunt is associate director at international purchasing consultancy ADR.