Housing Technology asked a panel of finance and procurement experts from Aareon, Ark Consultancy, CJC Procurement and Itica for their views around the idea that ‘cheaper isn’t always best’ when it comes to IT procurement and the subtleties of balancing quality versus price.
The risks of low cost
Commenting on the key risk factors associated with opting for a low-cost product or supplier, CJC Procurement’s founder and director, Chris Cliffe, said, “The ‘real’ costs are often hidden because the ‘proposed’ price doesn’t fully take into account vital considerations such as full lifecycle costing, full transparency of implementation or support costs, or extra module costs.
“The lowest cost has its place, but not in the same sentence as ‘partnership approach’, which stems from a misalignment of objectives with the evaluation strategy. Furthermore, a common failing is to not do enough market research in order to establish an anticipated market price against which to assess if any low-cost options are within a sensible range.”
Ark Consultancy’s digital/ICT services director, Ian Lever, said, “In the housing sector, low cost has often been associated with high risk, with suppliers being seen as trying to ‘buy the business’. Historically, this approach has compromised the quality of the relationship (although not necessarily the solution itself) because the supplier can’t resource the project properly, resulting in delays, increased costs and excessive demands on the customer’s own resources.
“Equally, the poor quality of some housing providers’ specifications of requirements can result in IT suppliers offering the minimum solution to keep costs down, with the consequence that the customer doesn’t actually receive a fully operational system and has to find additional monies after the award of the contract to make the system work fully – integration, training, resourcing and data management are the most common omissions we’ve seen.”
Aareon’s head of business development, Ian Lockwood, added, “While it doesn’t always follow that higher cost means higher quality, there is some truth in the mantra that you get what you pay for. When the procurement of your new IT system is going to tie your organisation into a relationship with the supplier far beyond the initial purchase, you need to be assured that the supplier will continue to support and maintain the product, reinvest in its ongoing development and work with you in a spirit of true partnership.”
Mitigating procurement risks
How can housing providers mitigate their risks, before, during and after procurement? Aareon’s Lockwood continued, “Do your homework! While a good contract will mitigate against some risks, there can still be areas open to interpretation, and once underway, the contract is often filed and forgotten. However, we are lucky to work in a sector where people will readily share their experiences so use that openness to your advantage.
“Talk to your supplier and to other housing providers to find out if similar projects came in under budget, what were the real internal costs of the project, were the supplier estimates of the time you would need to allocate to the project realistic, what savings have other organisations made as a result of their similar projects, what extras needed to be bought from the supplier, and were there any areas of unexpected extra value?”
Ark’s Lever said, “The real issue is that housing providers will generally only undertake a sizeable system procurement once every few years and to minimise risks, it’s sensible to invest in support from organisations that undertake procurements regularly and know the marketplace and developments within it much more. This support will generally be less than five per cent of the overall costs but it ensures that the reason for a low price is quickly identified and this approach will avoid the ‘cost creep’ associated with a poor selection process.
“Before procurement, housing providers must understand the objectives that they want to achieve and how those objectives will be measured. Those objectives should be stated as tangible business improvements and as such, there should be significant input from the business rather than expecting the IT team to do it all. The appropriate elements of the business case (in particular the anticipated benefits) should be included in the tender documentation so the supplier knows what they are expected to deliver.”
Itica’s director, Martin Joy, said, “Pre-engage with suppliers and their customers – try to identify customers who are not on the normal case study/reference list to get a good balance. How easy is the solution to implement, what is the supplier like to ‘live with’, particularly when the going gets tough, and talk to recent new customers – what was their experience like once the honeymoon period was over?
“Having said that, consider if there is a way you can get the relationship with your existing supplier on a different footing – is the grass actually greener on the other side of the fence or would you in fact be better off investing with your current supplier or buying in complementary technologies that will help you leverage more from your existing solutions?
“Enlist the help of housing-specific consultants to run the process for you or just act as an advisor or critical friend, plus they will be able to point you in the direction of a wider range of solutions and suppliers beyond the ‘usual suspects’. And at the end of the day, prepare for the worst and try to understand how ‘tied in’ you might be to the technology and what effort would be needed to extract yourself.”
Capex vs. opex
All procurement projects must strike a balance between the risks and benefits of high up-front costs with lower ongoing costs, and vice versa, but how should housing providers find their procurement ‘sweet spot’?
Aareon’s Lockwood said, “The questions that organisations must ask and reassure themselves on are: will a cheap supplier try to extract more revenue throughout the implementation process, with each request being queried as a potential chargeable extra; will post-tender prices for additional functionality be higher to recoup revenues; and what is the content of annual upgrades – are these all included or are some elements chargeable?”
CJC Procurement’s Cliffe’s said, “You need to be engaged with your finance team to gain a good understanding of the value of cash to your business, and equally to the supplier – only then can you assess the relative weighting of upfront costs versus ongoing costs. For example, enterprise-wide solutions (such as a new HMS) are very likely to be long-term decisions so a longer-term attitude to pricing can be adopted. Furthermore, gaining clarity on contractual break points, extension options and exit scenarios are vitally important and should be part of your risk-based decisions regarding long-term solutions.”
Itica’s Joy added, “You need to carry out a five-year TCO calculation to flush out the ‘low-ball’ submissions, including the one-off cost of business transition and the ongoing involvement of IT and the business in the usual maintenance and upgrade cycles. Those calculations should also factor in the cost of change at the end; how much will it cost to exit and re-establish operations with another vendor? In addition, the contract should stipulate the processes and costing mechanisms for contractual variations.”
Untangling the intangibles
How do you factor in the likely tangible and intangible benefits, such as financial savings, innovation, support, trust and cultural fit, when comparing products and services with significantly differing prices?
Ark’s Lever said, “Housing providers should look for two key elements – growth in efficiency and improvement in customer service. If you can achieve those two benefits and save money, then you’ve done very well. The procurement process will give you the opportunity to speak to the supplier’s other customers. Use this opportunity wisely – let the supplier suggest which customers to visit but select some of your own too, choosing those who are still in the implementation stage and learn from their insights.”
CJC Procurement’s Cliffe commented, “Investment decisions are very rarely, if ever, made on price alone and the more strategic the product, the more the tangible and intangible benefits need to be balanced. Consideration of a wide range of issues should be part of your overall procurement strategy and should be addressed in most procurements, with the relative weightings ‘flexing’ against the outcomes established in your business case. Related to this, technology roadmaps are increasingly important for ‘big ticket’ IT investments, and a clear long-term commitment by the supplier to the product should give some comfort regarding the longevity of the solution.”
Itica’s Joy said, “Price is never the only issue. Our view is that the old ‘spec and select’ method that has often been used to buy housing solutions for the last 20 years has had its day. That methodology has too much focus on functionality and sometimes misses the other important factors. These include: the value and outcomes that the solution needs to deliver across the contract duration and how these will be measured; the ease and flexibility with which future business-model changes can be supported; and a governance framework around the kind of relationship you want to have with the supplier – a business partnership or merely a supplier-customer relationship?”
Price vs. quality
Do housing providers’ tender processes provide suitable weightings to price versus quality, and what can be done to mitigate this potential discrepancy?
Aareon’s Lockwood said, “Tenders are often weighted at around 40 per cent on price versus quality, with scores being awarded proportionally to cost. This means a bid that is twice the price of another will receive half the available price marks. This might be a suitable criterion when one bid is £1 million and another is £500,000, but should we really apply the same score differential when there is only a difference of £100,000 (e.g. Bid A is £200,000 and Bid B is £100,000)? This relatively small differential (often spread over 6-7 years) may well be easily outweighed by the potential benefits of the more expensive system.
“The bulk of scored tender requirements for housing management systems still focus on the essential but very common ‘traditional functionality’ that most solutions can now easily provide. Therefore, there is a relatively small percentage of the quality score allocated to the innovative value-added functionalities, such as workforce mobility, digital engagement and channel shift, that can really add value and generate significant savings.
“Furthermore, tender evaluations typically focus on the upfront cost and a quality evaluation. There is rarely any allowance for factoring in the potential cashable savings that could be made or have been achieved by other organisations, despite this often having been a key objective in the decision to review the existing system.”
Itica’s Joy added, “Some housing providers have been increasing the ratio of price versus quality towards 50 per cent and beyond, believing that they will get the best possible deal as a result. This is fine for commodity procurements but not when the outcome is so critical to core business operations and where mistakes are so hard to rectify. Reaching for the contract and its penalty clauses isn’t a good position to be in if the supplier fails to support your business strategy or technology ambitions.
“Normal scoring mechanisms, where the lowest-priced tender gets 100 per cent of the marks and the rest are scored based on an offset from the lowest, mean that a supplier low-balling its price can pretty much overcome any weaknesses it has in its functionality and completely impair other organisations from winning the business. It’s also important to note that any supplier who low-balls its price in this way will obviously need to find a way of getting a return on investment from that customer later over the course of the contract.”
Value for money
Commenting on the role of value for money in procurement decisions, CJC Procurement’s Cliffe said, “VFM is essential to measure, yet it is far too often mistaken with price and a nebulous cost saving. First and foremost, VFM has to be assessed against whether the aims of the original business case have been delivered, which can’t be assessed until the resultant contract is being performed or the product being used. Measures of VFM should also be considered in the business case ahead of a procurement process and monitored throughout the commercial lifecycle.”
Aareon’s Lockwood said, “VFM is perfectly acceptable as a criterion, but how we measure it needs work. Too often, VFM focuses on upfront costs and obvious ongoing costs such as annual support and maintenance, but without regard to additional future expenditure as things change or to the real-world benefits and cost savings that are expected to be achieved.”
Ark’s Lever added, “VFM is very hard to calculate when buying a solution that may take over a year to be implemented and is expected to be used for the next 5-7 years. Over that time, the business will change and transform, extra services will be introduced, new partnerships may be formed and technology will foster unexpected opportunities.
“An enterprise solution procurement of this nature should therefore be seen as a necessary ‘enabler’ that supports, and in some cases, drives change within the business – procuring a solution that has a defined and predicable cost model should be the focus. Service improvements and the ability to deliver new services as a result of the procurement are the measures of success because this is where costs will be saved and new revenues generated, not within the IT solution itself.”
Ark’s Lever said, “In today’s world, cheap doesn’t always equate to poor quality. With the growing availability of cost-effective cloud services and pricing models focused on consumption rather than traditional licencing, cheap may well become cost-effective.
“We need to adopt an approach where integration is the key to success, avoiding the need to buy an expensive enterprise solution that seeks to do everything but has its limits. A matrix of cheaper solutions which have been built to provide a specific service and do it well, that integrate and coexist in their own ecosystem, is the way to deliver quality and manage costs.”
CJC Procurement’s Cliffe said, “Value is usually lost in the rush to complete a procurement process. Spending some time and effort truly thinking things through and doing research before going to market will pay long-term dividends. The most critical part of a procurement is before the supplier invitations are even issued, with the cost versus quality considerations tied to the market research and overall strategy at this early point.”
Itica’s Joy said, “Most suppliers are working hard to protect and retain their existing customers, and in some cases, have manufactured a position where the cost of change is enough to put anyone off. However, winning new-named customers is still one of the biggest and most important health indicators for any IT business and some of the bigger suppliers can afford to ‘buy’ a couple of bits of business to give the perception that their products are still a plausible option.
“When suppliers low-ball their tender submissions, they are genuinely risking their own future viability and that of their solutions. They are businesses and need to make money to thrive; squeeze them too tightly and nobody wins.”
Housing Technology would like to thank Aareon UK (Ian Lockwood), Ark Consultancy (Ian Lever), CJC Procurement (Chris Cliffe) and Itica (Martin Joy) for their editorial contributions to this article.