Absent some unusual circumstances, customers will ordinarily want to have gone through a competitive procurement process of some sort in relation to any medium to large scale IT or outsourcing engagement. For simpler/smaller projects, this may involve little more than an analysis of responses to a Request for Proposal (RFP) document and high level terms sheet. At the other extreme (and in particular in the public sector), it may involve detailed negotiations right up to the point of having finalised contracts with multiple bidders.
The norm for the private sector, however, is commonly to have a point at which a single, ‘preferred’ bidder is identified, so that the customer organisation only proceeds to finalise the contract with one other party. However, the process of downselection and the issues which follow may not always be straightforward….
Why Downselect?
By ‘downselect’ in this context, I mean the process of identifying a single bidder out of many, with whom the customer will proceed to finalise contract and commercial terms, having previously had a fairly extensive level of engagement with at least two bidders so as to get to the point where all of the major facets of their respective offerings are known and understood.
Lawyers sitting on the customer side of the fence benefit from having multiple bidders remaining ‘in play’ all the way until final contract signature because of the additional leverage that it provides in terms of the contractual and commercial positions which the bidders are putting forward – ie in terms of being able to play one off against the other and draw direct parallels between their offerings. But there will usually be good reasons to go down to a single bidder at some point prior to the finalisation of the entire procurement process, including:
- maintaining the interest and ‘buy in’ of the selected bidder (as they may be reluctant to incur all of the costs etc associated with a complete due diligence process, eg, if they are uncertain about ‘winning’ the eventual contract
- saving time/effort on the customer side (in terms of avoiding having to continue with separate streams of meetings and negotiations with multiple bidders, and so being able to complete the process and get to contract signature faster)
- achieving a more cost-effective return from the negotiation process overall (ie if all of the ‘deal breaker’ issues and those which would have the most significant commercial impact have already been dealt with by the point where the downselection is made).
Common Issues
In practice and notwithstanding the potential advantages/plus points referred to above, downselection can be a fraught process.
Assessment of the Bids
In the ideal world, the ‘winning bid’ will be relatively clear cut, with one bidder having a demonstrable advantage over the others in terms of all the key variables – contract terms, solution, cultural fit and commercial offering. However, reality is rarely so kind! More often, there will be a mismatch between the merits of one or more of the bids so that, for example, one bidder appears to be offering a better solution, but with more onerous contract terms or a higher price.
The role of the lawyer in this regard is difficult, but key. There is a tendency to place by far the greatest influence on price and perceived ‘fit’ of the solution, but one must always remember that both of these can be heavily influenced by what is contained in the contract. To take a simple example, an apparently advantageous price offering can prove to be illusory in practice, if the relevant supplier has extensive caveats and/or assumptions set out in the contract which will enable it unilaterally to vary the charges after contract signature, and/or wide rights to raise charges for activities for which other competing bidders would not have charged.
The legal team must accordingly look beyond the obvious considerations regarding risk related provisions concerning liabilities, warranties and the like, and seek to assess and ‘score’ the wider provisions of the contract related responses which will have a potential impact in practice. In particular, lawyers must look at those provisions which relate to the ‘Holy Trinity’ of commercial schedules, relating to the Services, Service Levels, and Charges.
Impact of Ongoing Due Diligence
It will frequently be the case that the selection of a ‘preferred’ bidder will trigger a further, more intensive due diligence phase, notwithstanding any prior assessments which the bidders may have been able to do for the purposes of the initial formulation of their bids. The bidder will usually have stated that its offer will be in some way contingent upon what it finds during such due diligence. From one perspective this is understandable (as there may genuinely be unpleasant/solution impacting discoveries to be made!)….but it is equally true to say that it is very rare to find a bidder offering to reduce its proposed charges by reason of more positive results than expected arising from a due diligence process!
The legal team for the customer may be asked what protections can be built in to try to mitigate some of this risk. Examples we have seen include liquidated damages regimes applicable to the bidder in the event that changes to its pricing arising from due diligence mean that the bid is no longer acceptable to the customer and contracts fail to get concluded; and caps placed upon the degree of variance which is permissible from the original price quoted by the bidder. However, such protections are imperfect. For example, in the case of the examples given above, the first may be difficult to negotiate with the relevant bidder and may lead to it loading additional contingency into its bid price to begin with; the second would in any event be relatively meaningless if the bidder simply refuses to sign up to the proposed contract unless the customer waives the original cap on the degree of permitted variance. The only practical protection which ‘works’ is for the customer to have done as much of its own pre-due diligence checks as possible, so as to have anticipated the likely requirements of the bidders and either expressly to ask the bidder to cost for perceived gaps/issues where known, or to include within the customer’s own business case an appropriate contingency to cater for the points which the bidders are thought to be likely to raise.
Back-sliding
If a bidder has been selected on the basis of a particular position (or set of positions) at the point of putting in its bid, the customer will – quite understandably – expect that these positions are maintained and that only genuinely new points/issues or those which were known to have been left un-finalised as at the point of downselection will need to be dealt with in the period as between downselection and contract signature.
However, the reality is that bidders are all too well aware of the fact that the balance of bargaining power/leverage swings very much in their favour once they have been designated as a ‘preferred supplier’. Although the customer does of course retain the ability to change its mind and go back to one of the previous, unsuccessful bidders, or indeed to the market overall, this will be far from an attractive option, given the combination of (a) delay, (b) additional cost, and (c) potential personal/professional embarrassment that this would entail. The risk, therefore, is that the successful bidder’s contractual positions may not simply harden following downselection, but may even start to slip backwards.
To give a real (albeit anonymised!) example of where we have seen this happen, we advised a large European corporate on a major, multi jurisdictional outsourcing project, where the successful bidder had been fully cooperative in the run up to its downselection, and had put forward a very compelling offer. Post downselection, however, its attitude and approach noticeably changed to one which was far more aggressive; external counsel were engaged by the bidder for the first time, and they showed little reluctance in revisiting/reopening points which we had thought to have been conceded prior to downselection, raising new points, and arguing that ‘changed commercials’ meant that other, risk-related provisions (eg amounts placed at risk to service credits, liability caps etc) needed to be revised accordingly. The customer was understandably incensed by this change in tack, but felt that it was too far down the road to go back to the drawing board with a re-tender, and so tried to make the best of things with the positions being put forward. Although the contract as eventually signed remained relatively robust, there was considerable damage to the commercial and personal relationships as between customer and bidder – far from the best starting-point for a long-term outsourcing project!
This is not a risk that can be completely removed; we have again seen ‘bid bonds’ and the like (ie financial penalties/payments which the bidder has to bear in the event that the contract negotiations break down), and also negotiations taken down to a more granular/advanced level prior to any downselection taking place. Both approaches have costs implications, however. A more successful/cost effective approach may be to retain at least the impression that another option remains open to the customer, eg if one of the unsuccessful bidders is still being ‘kept warm’. In one project in which we were engaged a reserve bidder was actually paid a modest retainer to convince them that the customer was indeed serious about the possibility of reverting to them if the initially selected bidder was not able to conclude a contract with the customer. As things eventually turned out, they did in fact have a contract awarded to them (albeit for a part of the original scope rather than the entirety of it).
Conclusion
In the private sector at least, it will be a rare project which justifies the time and expense of running multiple bidders all the way to full contract finalisation. A careful analysis must however be made as to the point at which it can genuinely be said to be ‘safe’ to downselect, with due consideration of (and allowance for) the risks which will still remain, remembering (as a certain well known US politician once said) that it is the ‘unknown unknowns’ which will be the most problematic to deal with!
Kit Burden is a Partner and Head of Technology, Sourcing and Commercial Group at DLA Piper
