Sole Source Justification Tutorial
The sole source justification is a very powerful yet controversial way of specifying products. Vendors love them because it eliminates competition and all but guarantees higher profits. Users often want them to simplify complex contracting procedures. However, often these justifications are abused and manipulated. In this note, we dig into sole source justifications sharing a recent practical example betwee BRS Labs and a US city.
What It Is
Typically, governments and large scale companies use competitive bidding processes to select vendors. This process is quite formalized and generally requires picking the best fit at the lowest cost, of any qualified respondent. This is done to ensure that contracts are not manipulate to benefit friends, families, bribers, etc.
Sole Source Justifications allow organizations to eliminate competitive bidding for approved products / projects. To do so, these organizations must justify why only a sole source, rather than a variety of sources, can meet the organization's needs. Sole source justification requirements are documented by many organizations globally.
Typically, 3 main rationales are used to justify a sole source:
- Unique offering - a product or service that no other organization can possibly deliver (e.g., patented core features)
- Backwards compatability - only one product can be used that works with what the organization already has (e.g., a VMS already installed)
- Timing - the product or service is needed very quickly and cannot wait for normal contracting time frames (e.g., wartime, natural disasters, etc.)
The organization will submit the justification, typically with the help of the vendor being justified. As long as the buying organization is willing to support the justification, it generally is approved. Rarely are sole source justifications critically examined or rejected. Indeed, as we will explained later, doing so is difficult.
Why Vendors Love Them
A competitive contracting process is painful for vendors, even if they are preferred by buyers:
- Timely: A formal bid process can take 3 - 6 months or longer, significantly lengthening the sales process and making it more expensive for the vendors.
- Profit Pressure: With the threat of alternative suppliers, vendors have more pressure to reduce their pricing, and therefore their profits.
- Loss of Business: An open process increases the risk that a rival vendor will sweep in and offer a less expensive or alternative offering.
By contrast, if a vendor can get the buyer to sole source their offering, the vendor is essentially guaranteed the business, can charge a higher price and get awarded the business faster.
While competitive bidding is designed to benefit buyers, weaknesses in the process make the sole source justification sometime attractive to buyers as well:
- Get What They Want: Buyers might have a preferred vendor and fear that a competitive process may force them to go with an unknown quantity that might not do a satisfactory job (note: this is controversial and other ways exist to handle this).
- Reduce Work: Running a competitive bid can be expensive and time consuming for the buyer. If the buyer 'knows' what they want, sole sourcing can eliminate this time and expense.
Vendors typically seek to justify based on uniqueness or backwards compatitability:
- Uniqueness: Frequently, vendors of emerging technologies will advocate buyers to sole source justify the specification of their products. Here's an example of BRS Labs being sole sourced for a $180,000 USD project. The buyer will typically cite a unique feature or patent of the product as the basis of the justification.
- Backwards Compatibility: Vendors of VMS, access control software and PSIM will typcially fight hard to get specified in to new deployments, often by offering deep discounts or incentives. This is done because they know that expansions will almost certainly result in the sole source justification of their products in the future.
Misuse and Abuse?
The big risk is misusing sole source justifications, especially when it comes to 'unique' offerings. A good salesmen is well aware of the power of pitching their 'unique' offering. For technology sales, it is easy to find features that only one manufacturer has. Plus, with the patent system as porous as it is, anyone can get dozens of patents of questionable value. If a vendor can get an end user excited about their offerings big marketing claims, justifying most anything as 'unique' is not hard.
It is very difficult for contracting departments who oversee these justifications to truly determine if the offering is 'unique'. Typically, the offering needs to uniquely meet the needs of the buying organization. However, this is simultaneously subjective and demands deep technological expertise than contracting people would not have in various niche domains. For example, in the BRS Labs case, is BRS Labs truly the only solution that can meet the needs of the El Paso Water Utility? Would Ipsotek be close enough? Could VideoIQ or AgentVI though using different implementations meet the needs equally as well? Even for us as domain experts it is hard for us to conclusively determine.
Sole source justifications are powerful tools that need to be carefully understood and, when necessary, objected to when overused.