In most RFP’s, the most time-consuming task for the buyer is the price comparison. When analysing the price proposals, buyer organizations should have three objectives:
- Obtain the best price from each vendor, for each quoted service. The best price may not always be the lowest price. In total, though, the overall quoted contract cost will be the best sustainable amount that each bidder can offer. Once all viable bids are restated on this basis, the customer can make a selection decision.
- Identify the Vendors who have understood or misunderstood the required service. As a customer, you want to be paying for the service features you need, such as (for example) higher automation and connectivity to your systems, better Assignee experience, a more seamless global service. If you’ve opted for more self-service, less handholding and strict scoping, that should be reflected in the pricing too.
- Identify and isolate “special effects”. Who is under-bidding to “buy” the business? Who has a few exceptionally expensive territories? Who needs to build in extra revenue sources to justify the role of the central team? Some of these factors may be fully justified. But organizations need to understand what they receive in return.
In this Article, we interview Aurelio Bürker, probably Europe’s leading pricing specialist in the Global Mobility sector. Aurelio described how customer organizations can understand the vendor pricing landscape. This interview focuses on GM compliance RFP’s, especially tenders for a global expatriate tax program.
Question: Clients are frequently surprised by outliers among the bids that they receive. For example, one reputable bidder might be significantly less expensive than other bidders. When one bidder proposes prices which are very different from other proposals (much lower or much higher), what could be the explanation(s)?
Answer: There can be legitimate reasons for a low bid. Very often, a bidder needs to make up revenues after losing business from other clients. If that loss was related to an audit appointment, the loss was outside the bidder’s control and the bidder may even have excellent references from their former client. Alternatively, a bidder may intentionally bid low in order to enter a market or to strengthen their presence. “Big 4” Accounting firms do have weak territories and they may team up with a large territory to strengthen their offering.
Conversely, a high-price bid should give customers food for thought. Legitimate reasons include high-performing vendor technology, unique expertise within the vendor, a vendor’s concern that the customer’s KPI’s are unrealistic or a concern – based on the bidder’s own experience – that the customer’s service scope will be too narrow for some of the customer’s Assignee profiles.
To assess if the outlier bid is legitimate, a little analysis is also required. Looking carefully at all the bids, is it possible that some RFP questions were ambiguous? Could the bidder have misunderstood the overall contract value? Or were technical factors in play, such as a discount scale that’s triggered by different volume thresholds than other bidders? Finally, has one bidder truly found a more cost-effective delivery approach, such as profound and rigorous offshoring strategy to lower costs?
Question: If a more expensive bidder reduces prices significantly during the RFP process (between the start and end of the RFP process), is that just evidence of their eagerness to win or evidence that they have started from a high cost base in their organization?
Answer: Incumbent bidders frequently worry about RFP’s for precisely this reason. Incumbents argue that their prices are higher, because only they know what it truly takes to service the Customer. As the RFP proceeds, incumbents feel pressure to maintain their prices, lest their argument loses credibility.
This is one reason to disclose as much information as possible about the customer organization and Assignee programs in the tender document. A thorough tender process and well-prepared RFP document does ensure that all bidders understand the effort required to service the customer. Paradoxically, this is a good reason to seek the incumbent’s input to the “Requirements” section of the tender document, in order to capture all processes and services. If the incumbent bid still looks expensive compared to other bids, this may have more to do with a lack of previous challenge to the incumbent vendor from the customer and the market.
As bidders reduce prices over the RFP process, here are the key factors for customers to look out for:
- Does the bidder give sound reasons for reducing the initial quoted prices? Good reasons could include strategic financial support from their head office in order to win or retain key customers, minimum volume conditions or easing of certain KPI’s which, on balance, are less important for the Customer than the cost reduction. Red flags include no reason given at all, significant reductions focused on a few territories or services that are key to the customer (risking service deterioration) or, conversely, extremely unrealistic new prices tilted towards a rarely-used service category. In the incumbent’s case, it should be clear that the incumbent bidder took a fresh look at all prices at the outset, instead of progressively offering ever higher percentage reductions against the old prices.
- Did the customer set realistic expectations about future additional opportunities? A properly constructed RFP should include information about potential additional connected projects (such as a possible technology implementation) that the vendor could win later, to help the bidders to develop sustainable pricing. It is unwise for the Customer to suggest that the winning bidder will be able to compensate low prices with additional business, if the customer has no intention of awarding that work. The result will certainly be worse service than expected.
- Did the vendor explain how they will fund the price reductions, without downgrading service? Funding options could include a proposed alternative delivery model (such as further offshoring). The bidder may wish to outsource some services to a lower cost partner. They may also wish to amend the invoicing process in order to take more control over the distribution of funds to their network. All such proposals need to be “audited” for viability by the customer and turned into binding and detailed commitments before the RFP decision.
Question: Bundled fees / Itemized fees: which is better?
Answer: We are really talking about three concepts:
- Itemised fees, meaning that each service in each territory has a separate price. Any coordination fees also are priced separately.
- A partial bundled fee. This lump sum includes services which must always be provided, each year to every Assignee. For example, the tax return package fee can include the tax return preparation and filing, tax notice reviews, provisional tax bills and filing extension application. Other services continue to be itemized, i.e.: priced and invoiced separately.
- A fully bundled fee. For example, a single lump-sum fee per Assignee per year could include home and host tax returns, arrival/departure tax orientation meetings and a tax equalization calculation as well as related services which do not occur for all Assignees each year like a tax residence certificate. Any non-recurring services are added to the bundle after they are multiplied by a probability percentage that is agreed with the Customer and then fixed. Recurring services are considered with a probability of 100 percent. There are almost no core services outside the scope of the bundle. As a further variation, the bundled fee amount can vary according to home and host country combination.
Obviously, bundled fees make price comparisons between bidders easier. Bundles are also simpler to contract, to budget, to create purchase orders, to communicate and to process. Yet in practice, bundles present some critical weaknesses:
- Without careful contracting, the Customer may pay for services that are not rendered. The bundle will be invoiced automatically, even when all services are not provided. For example, an RMC may in fact not meet Assignees at the airport, because in certain countries this has ceased to be their practice. Or a tax provider may not perform all tax orientation meetings, because a significant number of Assignees do not respond to two standard invitations to attend a meeting. Not only is the customer then overpaying, but also a service that the customer sees as important to the assignment experience is not forcefully communicated to Assignees or delivered, because the vendor has little financial incentive to do so.
- The customer mainly relies on the provider to assess the probabilities of each service within the bundle. To minimize overpayment risk, the customer needs to organize an annual analysis of service frequency for each service and then negotiate a change in the percentage probability. This analysis is itself time-consuming. It is also necessarily future-looking: it will not lead to refunds for past periods.
For these and other reasons, the partial bundled fee is often a reasonable compromise between itemized fees and bundled fees. The partial bundled fee preserves some of the transparency of itemized fees with the streamlined structure of bundled fees. A fully bundled fee can be convenient for very large programs. The invoice and service review process is much simpler and compensates for the additional monitoring of the fully bundled fee.
Question: Is „cost-plus“ pricing a good alternative?
Answer: Cost-plus pricing means agreeing with bidders on their cost of production and on a reasonable margin above that cost. That margin is set as a fixed amount in the contract, rather than a percentage. This strategy has been used by very high-volume Global Mobility customers ready to sign up to a long-term Vendor relationship. The model differs from traditional outsourcing cost-plus pricing, because in Global Mobility cases, Vendors agree on their costs in advance.
Cost-plus pricing does create truly transparent pricing as well as a deep sense of partnership between customer and vendor. However, it is extremely time-consuming to negotiate. It also requires vendors to disclose sensitive commercial data which inevitably will leak out to the market at some future date.
A useful variation on the cost-plus model is the incentive payment scheme. In this model, a provider is paid approximately at cost for a specific task, for example, preparation of tax returns. If the provider meets certain KPI’s when completing the task (for example, meets an agreed deadline to complete most tax return or achieves a given Assignee satisfaction level), the Customer pays a fixed additional premium at the year end. This premium is approximately equal to the vendor’s net margin.
Question: Do coordination fees ensure good quality or is the client only paying so that the vendor keeps the vendor’s inefficient network under control?
Answer: Vendor coordination fees have always been contentious. Global Mobility vendors present themselves as seamless global businesses yet require a specialist central coordination team in order to manage their networks. In the past, there have undoubtedly been cases of high coordination fees not delivering substantial value to customers. Currently, though, most reputable vendors have developed automated and low-cost ways of administering a customer contract throughout the globe. A coordination fee that is priced on this basis is probably fair.
Any extra coordination charge above this basic level assumes that the Vendor offers the following coordination services:
- Excellent Account Managers who offer proximity, demonstrate seasoned expertise and provide value-add. These characteristics are described in a previous article in this series.
- A commitment to manage the Vendor’s network to over-achieve certain strategic KPI’s that are important to that Customer’s Global Mobility objectives.
- A rolling strategic plan for that customer that continually improves and re-shapes the Vendor service, backed with a technology development program.
To keep a Vendor network under control requires time. There may be inefficiencies due to weak processes between client and provider or customer complexity. A simplified mobility program, such as “Host-plus” should result in lower coordination fees. Coordination should be scoped at a similar level of detail to any other Vendor service.
Question: Are incumbent providers at an advantage or a disadvantage when they set their prices?
Answer: Incumbent providers should have the advantage, since they can better tailor their offering to the customer’s needs and organization. To be fair to all bidders, it is therefore essential that the RFP fully describes the customer’s requirements. It goes without saying that other bidders can only demonstrate their understanding of requirements regarding service model, process, resources and transition if customers have prepared to describe their expectations in these areas during the RFP process. This includes disclosing the location of hubs, the required role of the Vendor’s Assignee-facing consultants, the linkages to other Vendors and RACI charts describing customer contacts and decision-making responsibilities. Omitting these aspects distorts the result of the RFP, by giving an unfair advantage to incumbent vendors. Conversely, omitting key information can disadvantage the incumbent Vendor in price-setting if the Customer has not informed other bidders about what it takes to service their organization. It is therefore in the customer’s interest that the incumbent contributes content to the “Requirements” section of the RFP document. Naturally, the overall RFP document should not be shared in advance with the incumbent.
Question: Do some compliance providers rely too much on technology (questionnaires) to reduce costs, meaning that Assignees „do all the work?”
Answer: It is inevitable that Vendors respond to competitive price pressures by increasing automation. This includes data gathering technology such as tax data organizers. Assignees should understand the need for automation, particularly if the customer communicates to Assignees that they run a lean, low-cost Global Mobility program based on self-service. This technology is also required for compliance reasons, by safely storing data, transmitting information securely across borders and documenting the fact that each Assignee has been asked all tax-relevant questions.
In preparing for an RFP, customers should set the service level that they desire and be prepared to describe that desired service in detail in the tender document. This specification should include requirements for the vendor’s Assignee portal, for the Vendor’s personal interactions with each Assignee household and, not least, how the Vendor will significantly reduce each Assignee’s workload, stress and uncertainty. This best-practice picture of desired Assignee experience can be built up prior to the RFP, using external research, peer networks and internal soundings. This helps to ensure that the vendor does not purely rely on basic automation, when the customer expects something different.
Question: What can a client do in order to significantly reduce tax return prices?
Answer: Expatriate tax returns are one part of a chain consisting of tasks that need to be completed by the customer as well as tasks that vendors must complete. Each link in the chain depends on the quality and timeliness of the previous steps. Costs will certainly be increased if vendors have to wait for late pay data, or receive data from multiple sources, or stop and start the tax return processes while payroll errors are corrected. Customers can hold down tax return prices by the following measures:
- Commit to KPI’s in the same way as the vendor commits to KPI’s. Customer KPI’s that hold costs down include a commitment that Assignees will supply their own personal data on time and that questions from the vendor to the customer will be answered within agreed deadlines.
- Ensure that employee compensation data is complete, correct, timely and combines home and host country information. There are many ways to achieve this, outside the scope of this article.
- Respect volume commitments in the RFP. Volumes should be quoted conservatively in the tender document. If volumes are significantly lower, vendors will be under pressure from their local offices to agree higher prices with their network. This may require the Customer to be firm with affiliates or divisions who are reluctant to fully use the new global vendor.
Question: When checking prices in an RFP, is it better to take a detailed approach (analysing individual prices in each territory) or big picture (total contract cost)?
Answer: Ideally both exercises should be completed. Analysing individual prices of specific countries and comparing them amongst the providers helps to detect price anomalies and ask for explanations. This is also the right way to achieve better negotiation results. The customer knows the lowest possible fee per service and per country, which will not always come from the same provider. This allows the customer to align all individual prices between all providers. Once this alignment has been achieved, the total contract cost serves two purposes. Firstly, a thorough calculation of the total contract cost of each bid helps to compare all key features of the various bids in order to make a final selection. Secondly, the new total contract cost must be compared to the previous total contract cost to ensure that costs have truly been reduced by the RFP.
Question: When preparing an RFP, it’s important to provide detailed volumes in order to obtain competitive prices. Is it OK for providers to make their prices conditional on those volumes?
Answer: Vendors will always take volumes into account when setting their prices. However, it’s important for customers to understand which volumes actually impact vendor efficiencies. For example, in expatriate taxes, vendors can be more efficient when volumes are high in individual countries where tax work is performed. A big global volume which is distributed among many countries with small volumes does not necessarily create the most efficiencies for tax vendors.
Having said that, it is quite usual for RFP’s to quote volumes and for Vendors to make their fees conditional on a range around those volume numbers. However, the volume scale should not be complex, as volumes do not usually change radically during a contract life of three years, especially as the next pricing round may already start within year three.
Question: Is a VIP or „red carpet service” worth the extra cost?
Answer: A VIP tax service needs to have a good business case to justify the significant extra expense. Such a service can help to attract good Assignee candidates. For those candidates with a complex tax situation, this wider-scope tax service may help them to agree to the assignment. In addition, a wider-scope tax service can improve compliance, particularly if the organization has complex employee share plans, frequent back-to-back assignments or many potentially complex situations such as external hires who immediately go on assignment. Obviously, a VIP service has to be carefully communicated so that Assignees truly appreciate the benefit. In addition, proper scoping must ensure that costs remain reasonable.
Question: Is it fair to charge a transition fee?
Answer: This is always a controversial topic for customers. For the departing vendor, certain transition tasks take time and should be paid. The most time-consuming tasks that the former vendor may complete include explaining employee share plan reporting and payroll positions to the new vendors. Those discussions can add value to the new relationship, triggering new ideas and highlighting opportunities for improvement. Other tasks are mainly administrative. These routine tasks include collating copies of the prior year tax returns and placing them in an e-room so that the new vendor can download them. In the transition negotiations, customers should identify the transition tasks that help the new vendor to upgrade the service and be ready to pay accordingly.
New vendors may charge for consulting advice if the vendor change is part of a wider transformation project for Global Mobility services. These fees are part of the negotiations with short-listed bidders. Any consulting project needs to be linked to KPI’s and should be properly and separately resourced by both the new vendor and the customer.