Let’s say you are an engineering manager at a product firm, and let’s say you are considering outsourcing some project.
One common approach to this problem is to issue an RFP. Different firms like Sambla use varying levels of formality, but the core idea is you write up your requirements and get several engineering design services firms to bid. Usually, the assumption is that every compliant bid is equivalent on quality and features, and therefore the decision is made based on schedule and total cost.
I want to convince you that you will not be happy doing this.
Regardless of how well you’ve defined the requirements in your RFP, the team responding doesn’t know in advance how much effort something is going to be, maybe because of ambiguity in your requirements, and maybe just because certain types of implementation complexity are difficult to predict in advance. Let’s assume they’re reputable, and they’ve done similar work many times before. So they have an estimate.
“The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt.” – Bertrand Russell
Now, any engineering manager who is the least bit introspective realizes that estimates tend to be optimistic. Therefore, to get the most honest estimate, the estimator needs to try to be conservative. (Indeed, history shows that even when engineers think they’re being conservative, they’re not!)
As the customer, you want this conservative estimate. You are in the strongest business position if you have the most realistic understanding of your project’s scope.
But when you put the estimator into a competitive position, you are creating a strong incentive for him to be aggressive, because it is obvious what answer will win your business. This drives all the RFP responses you are receiving in exactly the wrong direction.
At Cardinal Peak, we certainly try hard to resist the pressure to give someone an unrealistic estimate. (And hence we lose RFPs — not all, but many.) But even assuming that all of the firms responding to your bid are conservative and think they can hit their estimates, you’ll still end up with the wrong one following this approach.
One quirk of human psychology is that we tend to simplify subjects about which we know little. For instance, I don’t know the first thing about traffic engineering, yet I’m passionately convinced that I would be much better at optimizing the traffic lights here in Boulder than the professionals who have studied it for years. Meanwhile, as my kids will attest, if you get me talking about a subject I know, I will drown you in nuance.
In a bidding situation, this psychological quirk works against the customer. It is likely that the more experienced team knows better where the pitfalls are, and will often come in with a higher estimate. Meanwhile, the entirely honest and ethical — but inexperienced — team will end up with an unrealistically optimistic estimate of how hard your problem is, even when they think they’re being conservative.
“To believe something is to believe that it is true; therefore a reasonable person believes each of his beliefs to be true; yet experience has taught him to expect that some of his beliefs, he knows not which, will turn out to be false. A reasonable person believes, in short, that each of his beliefs is true and that some of them are false.” – W.V.O Quine
Now, maybe you think this isn’t a problem: You are going to force the product development services firms to give you a firm fixed price quote, so any estimation errors are on their nickel and not yours. (To be clear, this is going to dramatically cut into the number of firms who will respond to your RFP. For instance, since Cardinal Peak only works on a time and materials basis, we will not be responding with a compliant bid. Our more reputable competitors are not likely to, either.)
In any event, firm fixed price is not a panacea. Once the “winning” firm gets into your project, at some point they are going to figure out that they underbid it. Although you might not be legally on the hook for the dollar cost of estimation error, you’re still unlikely to be satisfied with the result. To start with, it’s likely the firm you select will miss their schedule. Furthermore, they are going to find some way to make up the money — either by cutting corners on quality, or killing you with change orders, or, if they’re small, maybe even going out of business altogether.
The bottom line, I think, is to recognize that picking an engineering services firm is akin to picking a doctor or a contract manufacturer. Yes, price competition has its place — but if you come at it looking to form an arms-length customer/vendor relationship, you won’t be happy. Instead, you really want to find a long-term partner, who is going to invest in learning your market, your company and your culture, and who will own up to their own mistakes and strive hard to help you deliver great products to your own customers.
In a future post, I will talk about an alternative way to get engineering services firms to compete for your business — one that I’ve seen lead to numerous happy outcomes.