While it’s great to have a good rapport with your vendors, it’s important to ensure the relationship remains cost-effective. Vendors who know there is a threat that they could lose your contract are more likely to focus on providing the best service and offering competitive prices.
And when the vendor is, for example, a retirement plan third-party administrator or record keeper, you’ve got fiduciary liability to consider. The courts are littered with class action cases against employers whose retirement plans were deemed to be paying excessive fees for asset management and plan administration. That’s because, in the retirement plan arena, employees — not the company — are typically paying the price through reduced retirement asset accumulation. As the plan sponsor, your fiduciary duty is to those employees, of course.
That doesn’t mean you should always use the least expensive vendor. But if you can get the same level of service for less, or if you’re overpaying for unnecessary service, employees might start questioning your wisdom. A lawsuit could soon follow.
Why Seek New Bids?
The point of periodically rebidding service agreements isn’t only about making sure you aren’t overpaying. Other reasons can include:
- Performance commitments. You might discover that other vendors will set higher performance standards for themselves than your current vendor. For example, how long does it take your vendor to return calls, process claims and deliver reports? If you can get better service for a similar price, you might be asked why you didn’t pursue those options.
- Performance track record. In some areas, such as retirement plan asset management, service providers can’t make promises about the investment returns they’ll deliver. But if your current investment managers are consistently missing their benchmarks, it’s time to consider alternatives.
- New capabilities. Your service provider might not be up-to-date with the latest technological advances in its field. Meanwhile, some of its competitors could be much more cutting edge and can provide useful service features affordably. There might even be new service options out there that you don’t know about! These often turn up in a vendor’s response to a request for proposal (RFP).
- Capacity issues. Perhaps you signed on with your current vendor ages ago when you had half the number of employees you have today. You might have outgrown that vendor if their resources are stretched thin and the service quality is deteriorating.
By the way, unless you’re thoroughly dissatisfied with your current vendor, it might not hurt to ask for a rebid.
Depending on the specifics of the service contract you rebid, it might be prudent to enlist the help of a consultant. Those who specialize in the service category know the players and their capabilities. They know how to put together an RFP that’s detailed enough to give you the data you need without being overly complicated.
Consultants also have access to benchmark data that can help you assess where the bids you receive fall on the spectrum. And they have the benefit of experience. A seasoned consultant should know how satisfied other clients have been with the various vendors that respond to your RFP.
Sometimes it’s appropriate to get employee input into the process as well. Their views on the quality of service they’re receiving from your current vendor might surprise you, either on the positive or negative side. Also, you can gauge their interest in optional services that might cost more. While you’re seeking employee opinions, you might ask whether they’d value having a financial planner visit the worksite a few times a year to answer questions. If so, add that to your RFP.
Because you’ll want to receive several bids in response to your RFP, you could need to take a couple of steps to make your company more attractive to prospective bidders. As noted, if your business is relatively small, a vendor might not see the value in taking the time to respond to your RFP. Not only does the size of your company matter, but also the size of the prospective vendors. Smaller companies that have the resources to handle large clients might provide the best service, so consider including them when you’re deciding where to send your RFPs.
You can also enhance your company’s appeal, regardless of size, by asking for multi-year contract bids. Doing so assures prospective bidders that you’re expecting the relationship to last a while. And it doesn’t mean you can’t build safeguards into the contract you eventually sign with the successful bidder to allow yourself an early out if the service provider’s performance is way off the mark.
When the dust settles, you might conclude that you’re better off sticking with your current vendor. That doesn’t mean the process was a waste of time, however. You’ll have gained confidence that you’re working with the right vendor, and your vendor will know you’re prepared to switch if service quality falters or their prices skyrocket unreasonably.