Why a 50/50 split is sometimes the right call.

Posted on January 20th, 2015 by

Photograph of a split arrow

Having worked with hundreds of clients, managed well over a billion dollars in spend and executed a few thousand events over the years; when I joined SpringTide I was pretty sure that I knew a lot – more than most within the sourcing industry even.

I know when it’s best to take a collaborative approach (when you are working with only one supplier), and when it’s best to take a more competitive approach.  I understand when it’s best not to divulge pricing, and when it’s best to have an open type of auction, whether it’s a Reverse English, or a rank based type of bid structure. I have always known that sometimes you don’t want to put all of your eggs in one basket, and instead break the bid apart – but I also thought that you never want to break a bid into a 50/50 split.

This is because with a 50/50 split, the supplier who finishes with the lowest price is actually the loser: the person who finished with the second best price is being paid more for the exact same amount of work. I’ve always thought that if we offer a slightly higher percentage, we would discover the difference within the savings.

Split Sourcing Scenario

In a bid that I participated in recently though, my client initially insisted that they did not want to award the full package to one supplier, but instead to two.

They believed it was too risky to award all of package to one supplier based on the extremely tight timeline. Given my experience, we recommended that we should not offer a 50/50 split – and after discussion with the client, we agreed that we would analyse the bids and look at the possibility of breaking the bid into an 80/20, or 60/40 split.

Photograph of Alarm clock

One of my colleagues at SpringTide immediately challenged me on the approach. This truly shocked me, because after all, I’ve been doing this for a number of years so have a very good understanding of award strategies.

He asked me, “Why wouldn’t you consider awarding a 50/50 split? Isn’t it sometimes better to award 50% of the package to a supplier with a slightly higher price, but who has excellent quality, excellent service, and might be able to help you in the future?”

He also pointed out that very possibly, because the timeline was very tight, the supplier would need to keep their price the same for a higher quantity. This sounds counter-intuitive as we typically think that higher quantity equals lower pricing, but this happens more frequently than people realise.

The other point he brought to my attention is that, maybe a smaller supplier would not be able to handle more than 50%, but their pricing for 50% would be very favorable.

There’s always someone who knows more

There was very little I could say. After all, he was right.  Sometimes we get caught up with creating an incentive to receive better pricing, but actually, without realising, we might be hurting ourselves by trying to out-think the market. In hindsight, I probably should have thought about offering a 50/50 split. There were suppliers who couldn’t handle more, but those suppliers could definitely handle 50% and what’s more, could have given very favorable pricing.

It just goes to show that no matter how much you know, there’s always someone who knows more.

We ask – “Have you ever been caught out by trying to overthink a situation?”