During the summer of 2001, Danny Hicks worked for a large engineering company, Anontus Engineering Group, and was involved in Anontus’s effort to win a contract with an estimated value of $40 million per year to manage and execute the small capital, supplemental maintenance, and turnaround work at four U.S. refineries owned by one of the major oil companies, which we will call Global Oil. Previously, such work had been done by a variety of different local contractors, but the president of Global’s downstream North America division believed that having a master agreement with one supplier had potential for superior results. It would enable Global to create shared savings and improve operating efficiency. So, in the spring of 2000, he commissioned a study led by the maintenance management of the four sites. The study concluded that by implementing some form of multisite, single supplier alliance for field services could result in significant cost and efficiency improvements. Based on this recommendation, in December 2000, he assembled a six-man team consisting of representatives from the business units and a program manager.¹
This selection team began by reviewing all contractors that Global Oil had worked with in the past and would consider working with in the future. Their criteria for including contractors in their initial set of potential partners were compatibility with Global Oil’s core values, ability to perform the work within the cost parameters, relevant corporate experience, and people with the right skills who were located near Global’s refineries. As shown in Figure 3-1, they initially identified twenty-two contractors who they felt could perform the contract satisfactorily. Then they began the winnowing process that would lead to the winner.
To narrow the field, Global’s selection team released an RFI (request for information) to all twenty-two contractors. Responses to this RFI enabled the team to eliminate thirteen contractors who either did not meet the initial criteria or whose responses were considered inadequate for a number of reasons, such as failure to provide the information requested. This is a particularly egregious error in the bidding process because it suggests that those bidders really don’t want the business. If that’s true, one wonders why they bothered to respond at all. How potential suppliers respond to an RFI is the first evidence customers have of how those suppliers will behave if they get the contract. So it’s important for suppliers to behave well (i.e., thorough, professional, responsive, compliant, committed, and enthusiastic) right from the beginning of a response to a new business opportunity. As in this case, suppliers who behave poorly at this point will probably not get a chance to redeem themselves. Other potential contractors were eliminated because of safety records that did not meet Global’s standards, their inability to service all of the sites, a misalignment between their core business and Global’s needs, or a mismatch between their company size and the size of the contract.
FIGURE 3-1. The winnowing process in supplier selection. Most B2B supplier selection processes are like this funnel. Most potential suppliers are eliminated early for technical and cost reasons. However, the suppliers who remain at the end are evaluated primarily on their behavior.
So, after the first round of RFI responses, the selection team had narrowed the field to nine contractors who would be suitable from a technical and general experience perspective and who were likely to have fees within the competitive range. Clearly, there were still too many potential providers at this point, so the team conducted a more in-depth evaluation, which required about another three months. As Figure 3-1 shows, the criteria now included the contractor’s financial strength, corporate small capital project and maintenance experience at refineries, their ability to work open shop (nonunion) as well as union shop, quality of the management team, ability to reach contract terms easily, and cost structure. The last criterion was especially important because Global Oil sought to avoid “hidden margins” by finding contractors who would be open about their people costs (salaries, benefits, training, vacations, etc.) as well as overhead. Suppliers who are not open about their cost structure sometimes try to hide margin in other costs. Global Oil wanted complete transparency but was willing to pay for performance based on that open book.
In the refining business, companies subscribe to a benchmarking process from Solomon and Associates, which rates refinery performance from 1 (best in class) to 4 (worst). Global Oil’s goal was to drive its refineries to 1s and 2s, and it wanted a supplier partner who was willing to put some fee at risk if that goal was not achieved. The quid pro quo was that Global would agree to process improvement changes the contractor recommended, and vice versa. Furthermore, Global sought a partner whose values would be aligned with its own. In many buyer-supplier service relationships, there is an inherent conflict of interests. Global’s goal, like that of all buyers, was to reduce the number of man-hours required to perform the work while maximizing performance. Most suppliers, on the other hand, strive to maximize the number of man-hours (and hence their fee). Global wanted a partner who would share its goals, accept the Solomon benchmarking challenge, and be transparent about its cost structure so the risk-reward equation on both sides was clear. In short, what Global wanted was the kind of supply chain management relationship we described in Chapter 2.
This round of evaluations eliminated four more contenders. Some were dropped because an in-depth examination revealed discrepancies between what they claimed and what Global Oil thought it could actually deliver. To assess the remaining five contractors, Global’s selection team released another RFI. This time, it probed each contractor’s willingness to accept differing pay models and contract terms and conditions, their record of successful site transitions, and their procedures and processes for ensuring early success once on site. As the selection team finished this round of evaluations, it became clear that there were two serious contenders, Anontus Engineering Group and one other key competitor—one of the largest engineering and construction firms in the world, a formidable rival.
During this final round, Danny Hicks became centrally involved in the contract pursuit. Previously, someone else had been managing Anontus’s pursuit team, but it was becoming more apparent that this person did not have the degree of chemistry with Global’s key people that would be required to win the contract. So Danny Hicks was assigned to lead the team down the homestretch, assuming he could build the requisite degree of chemistry. Significantly, his title was “alliance manager” and that’s how he was introduced to the customer.
Anontus views major clients with multiple business units as alliances and assigns alliance managers to build and maintain these relationships. The goal is to stimulate mutual continuous growth through continuous improvement with Anontus and its clients sharing the responsibility and benefits of making it happen. If an alliance manager does not have good chemistry with a key client, then that person is replaced. It’s not necessarily a stigma to be replaced—everyone understands that chemistry is something of a mysterious connection between people, and you can’t always predict who will have good client chemistry and who won’t. We will have more to say about this in Chapter 7. For now, what is important is that Danny Hicks was the right solution for the people at Global Oil. They felt entirely comfortable with him, and vice versa.
So at this point in Anontus’s pursuit of this contract, the field had been narrowed to two key contenders. As shown on Figure 3-1, Global’s selection team now asked the two remaining suppliers to submit an execution plan for site mobilization. It wanted the suppliers’ ideas on the order all four sites would be transitioned, how many current employees could be expected to be retained, how union issues would be resolved, what the cost structure would be for the overhead required to transition all four sites in nine months, and their capability to enact an OCIP (owner-controlled insurance program). This last point was a significant cost issue for Global. Contractors with stellar safety records would enable Global to lower its risk and insurance rates; contractors with mediocre safety records would increase risk and rates. Sometimes, even small differences in safety records can make a meaningful difference in the rates owners pay for insurance.
Although the technical content was critical at this stage, more important was Global’s comfort with the supplier it chose to partner with because both of the remaining contenders were equally well qualified. In the end, the degree to which Anontus was able to successfully implement its alliance manager concept was one of the primary reasons Anontus won the contract. According to one of the Global decision-makers, the decision was based on a qualitative assessment of current active contracts, both alliance and nonalliance models of each competitor, an assessment of real results from actual safety improvement processes that seek to continuously improve site safety performance, Anontus’s experience with compensation that is incentivized for performance, the quality of key position candidates, and the perceived risk and reward mentality of each potential supplier. Quantitatively, projections of cost over a theoretical year were projected and compared. Global was very uncomfortable with Anontus’s initial alliance manager candidate but was delighted with Danny Hicks and the team he and Anontus assembled. In the end, the award to Anontus was based on significant study and a broad evaluation of both quantitative and qualitative criteria that were weighted and measured. We can learn a number of important lessons from this example:
In B2B buying and selling, most large contracts come about through a process like the one described. It is common for buyers to begin by identifying a large number of potential suppliers and, through a process of RFIs, RFPs (request for proposal), or RFQs (request for qualifications), narrowing the range of suppliers to the serious contenders, which are normally no more than two or three.
As Figure 3-1 illustrates, the criteria at the top of the funnel tend to be broad. Think of them as a coarse filter. The first pass through a large set of potential suppliers is not intended to find the best contractor; it’s intended to eliminate the most unsuitable from further consideration. At each stage in this winnowing process, the filters become finer and finer.
Cost is an important consideration throughout, but notice how the nature of the cost issue changes. Initially, cost is used as the basis for eliminating suppliers whose costs are clearly out of line with the budget or who have not shown good cost control discipline in previous contracts. In semifinal and final evaluations, the issues shift to the degree of supplier openness about cost structure and the supplier’s willingness to accept contract terms that are acceptable and beneficial to the buyer (and, ideally, the supplier, but this is not always the case).
Technical evaluation criteria are usually important only at the coarse level of evaluation. Once customers eliminate those suppliers who are clearly not technically qualified, they assume that the remaining contenders can do the job.
The most important criteria in the final stages of selection are behavioral. If you take away nothing else from this book, you should remember this vital lesson. In the endgame of supplier selection, every supplier still in contention is acceptable from both a technical and cost standpoint. The final decision is therefore based on which supplier the customer prefers, and preference is based on confidence, trust, and chemistry, which themselves are products of the supplier’s behavior.
Throughout the pursuit, we did everything we said we would do. We never broke a promise. It was tough to put quality people in 25 positions, but we did everything possible to achieve that goal. And something like this doesn’t happen overnight. It was a 2–3 year process, including identifying mistakes and correcting them. All four of the original site managers never made it past the first year, but we brought in the best available people to bring the project to completion, which they did. Global Oil had to change, too, and they did.—Danny Hicks
In this case, Anontus’s superior behavior was worth an annual $40 million contract and an alliance relationship with a major oil company that could extend to other contracts and other parts of its business over time. The value of the relationship itself is hard to quantify, but if Anontus performs well on this contract, it will establish a preferred-supplier position in future opportunities with Global Oil. Finally, and this is the critical point—there must be alignment between what the sales or business development people in a company represent to customers and what the company actually delivers. Otherwise, as Global Oil’s program manager told us, buyers will continue their process of churning through contractor after contractor. Needless to say, walking your talk is a crucial behavior, and many companies don’t do it. Those that do give themselves a considerable behavioral advantage.