Just the FAQs, Ma’am: RFP Questions Everyone Should Ask

The recent demise of companies that had extolled themselves as “the leading providers of recruiting solutions to the Fortune 1000” ? as well as quiet announcements of several layoffs at others ? has sent shivers down the spines of CFOs across the land, whose companies were gearing up to spend some serious bucks on web-based recruiting tools. I myself could detect a collective “Whoa!” from the financial gatekeepers, as questions like “What guarantee do we have that you’ll be in business in two years?” starting appearing on the Requests for Information and Requests for Proposals that we answer on a daily basis. In my experience, there are few real guarantees; however, there are precautions that any prudent businessperson should take when investing in products and/or services provided by another company. Most are common sense, but many are often overlooked. This two part series of articles will provide some pointers in preparing Requests For Proposals for Applicant Tracking Systems (on any scale) that cover those areas that people funding these projects really want to know. Part One will focus on the financials. Part Two will provide questions of structure, technology and strategy that drive the financial well-being of companies in this market. Researching The Company First, do some investigating on your own. If the companies that you’re considering are public, there is plenty of financial information to be had through any number of sources like Hoovers Online. Some basic financial information for private companies can also be found at Dun & Bradstreet. The D&B D-U-N-S Number is an internationally recognized common company identifier in EDI and global electronic commerce transactions. Companies are allocated this number as a way of identifying a particular company as well as linking many companies worldwide. Match this information against information that the company provides from audited financial statements that you request. Prospects should do careful research on companies without a DNB number. Questions To Ask Next, lets get down to brass tacks. Every RFP should contain these or similar questions:

  1. Describe your organization’s history, product(s) and services offered. Include all partner companies and subsidiary relationship(s). What you’re looking for here are dependencies on third parties. For example: Does the company do its own implementations? If not, you’ll need to do the same research on the implementer. Or does some major function rely on third-party software? Then the same research needs to be done on that provider. The last thing any project manager wants is to get 99% complete and have the rug pulled out due to some external factors over which she has no control.
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  3. Is your company currently expanding or decreasing its workforce? Here’s a real teller. If the company you’re considering isn’t growing, then how are they going to meet your needs as your company expands?
  4. Has your company been involved in any re-organization, acquisition or merger within the past three years? What were the circumstances? Has it made the company stronger or weaker from a capitalization perspective? Be wary of companies that seem to be gobbling up others unless it impacts the bottom line positively. Re-orgs happen for a reason. Find out the details.
  5. Is your company currently for sale or involved in any transactions to expand or become acquired? You’ll be surprised how many won’t disclose this information unless they’re required to. Use language that will legally and financially penalize companies that knowingly withhold information about potential buy-outs by others. Stay away from companies with “For Sale” signs on them. Who knows what the buyer will do?
  6. Address the financial stability of your organization. Include Profit and Loss statements for the last two (2) years. Ask for audited statements by established accounting firms. Make sure it’s not the CFO’s brother-in-law.
  7. Are you a profitable business entity? If not, when do you expected to be profitable? Here’s where the rubber meets the road. The longer it takes for a vendor to reach profitability, the harder it becomes to sell enough products or retain enough customers. Eventually, the vendor will increase costs associated with products and services to the customers, which leads to higher attrition rates, or the company becomes unable to find financing and is unable to climb out of the ongoing debt. This all leads to going out of business.
  8. What is your monthly burn rate? The burn rate is how quickly liquid assets are being spent. Unless a company generates extra cash flow, either from adding new clients or bring in outside investors, the company will have a difficult time staying in business. Companies looking at vendors with a negative burn rate must be aware the risks associated with working with a financially strapped company.
  9. What is your current operating capital on hand? The final variable of the equation. By doing the math, you can figure out when they will go profitable (knowing the burn rate) and then figure this back into cash on hand. If the company has a burn rate of $12 million annual and only $10M cash on hand ? and they will not be profitable for 10 months ? kaboom! You will be surprised how many high profile companies ($50-$100M funding) are going to be added to the “dot-compost” pile.
  10. Are you a public or privately held organization? If private, what is the source of your funding? Who are your current investors? Are they Tier One? All of these questions relate to the depth of the pockets of the investors. iSearch is a perfect example of why you, as a prospective client, want to know the financial strength and temperament of a potential vendor’s backers. Talk to the investors and gain added insight into the market.
  11. What are your intentions on raising additional capital? Why do they need it? How much do they need and how long will it last? Remember, business financing isn’t much different from personal financing in the respect that those that need it least often get it easiest. Stay away from companies that need additional funding to survive. Today’s capital markets will not fund unprofitable businesses. If a company is taking a round of funding, understand why. Is it enough funding to get the company to the promised profit land? If not, stay clear ? for the VC’s are implementing a financial Chinese water torture.
  12. What is the valuation increase since your last round of financing? Has it increased? If not, the additional funding may have diluted the outstanding stock to a position where a future downturn in the market could make current investors turn and run.
  13. What percentage of your revenue is derived from the application you are proposing? How much from services vs. the application? Are they diversified or a “one trick pony”? Service revenue doesn’t scale. This is a big red flag to investigate what you are really buying.
  14. How many of your customers pay in advance? Is this the trend? Can we pay in advance? A “yes” to any of these questions should alert you to the fact that the vendor you are talking to is in need of immediate cash. Providers needing cash are at greater risk to adverse market conditions, slow sales, high account receivables and large amounts of debt. You should be extremely leery of any vendor asking to be paid up front.
  15. How much deferred revenues do you have? What percentage of your revenue is re-occurring (not labor)? New accounting laws indicate that this revenue (years two and on) must be accounted for as deferred revenue. If a company has deferred revenue, understand why. If they won’t share this with you, disengage discussions.

Conclusion The gist of it is this: Ask the hard questions up front, before you spend time and resources. A financial statement doesn’t tell the whole story. And RFPs are only as good as the questions that are asked. Consider it a puzzle that requires all the pieces to see the entire picture. If any piece is missing, the risks become greater. <*SPONSORMESSAGE*>

John Logan (john.logan@peopleclick.com) is the Director of Business Operations for Peopleclick, a leading provider of Internet-based recruiting solutions and EEO Analytical applications for major corporations. Logan manages the sales operations, RFP and RFI responses and product knowledge communication for Peopleclick's global sales force. His career has focused on integrating technology into the customer response cycle and establishing effective client relationship strategies. Previously, Logan was Director of New Product Development for SBC's Ameritech Publishing business unit and has also been a successful entrepreneur in several start-up ventures. John also provides RFP consultation free-of-charge to companies considering web-based recruiting solutions.