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The Case Against Most Favored Customer Clauses

The IT Alliance for Public Sector (ITAPS) recently sent a letter to the Arizona Department of Administration opposing its decision to include Most Favored Customer (MFC) language in future open bid opportunities. This restrictive contract clause is of major concern to the information technology (IT) industry because it substantially decreases competition, significantly increases procurement cycles, and ultimately leads to higher costs for taxpayers.

MFC clauses contractually require a vendor to supply the government with a product or service at the lowest price it has ever offered to any other customer. Focusing solely on lowest price without regard to value, quantity, or special terms is a dangerous and ineffective way for a government to procure products and services for its citizens. While price should be a major consideration in negotiating a contract, it should not be the only consideration, and including such MFC clauses makes price a primary evaluation factor in those competitions.

A broadly applied MFC clause does not make sufficient distinctions between factors that can affect price such as differences in public and private sector contracts, specific terms contained in maintenance agreements, or large volume discounts. This creates an environment where vendors are extremely reluctant to agree to such a clause for fear they will unintentionally breach the clause because of its arduous terms. At best, the inclusion of MFC clauses will lengthen the already drawn out procurement process, or even worse, it will reduce competition by forcing vendors not to bid on contracts that contain this provision.

These clauses are also burdensome to the state. To start, enforcement and compliance of MFC clauses is next to impossible. While some industries’ commodity prices may be easily discernable among products, this clause poses a serious challenge for complex IT procurements due to the sheer number and variety of products and services offered.

Tracking vendor compliance would be so burdensome for the state that pricing data would likely have to be provided by the vendor, which then adds to costly overhead burdens. That’s because vendors who do business across the country and around the world will find it extremely difficult to ensure one specific client receives the unconditional lowest price for a product or service that is also provided to thousands of other clients across vastly different markets with differing terms and conditions.

Additionally, the cumulative effect of MFC agreements appearing in states other than Arizona could lead to an alignment of prices, threaten price rigidity across both the public and private sector markets, and subsequently raise prices. The concern remains that vendors will be less likely to bid on open opportunities, which could limit competition and remove the state’s ability to procure high quality IT products and services at best prices.

As noted in our letter, ITAPS continues to work with Arizona policymakers to address these concerns and will continue promoting terms and conditions that enable the state to receive competitive and fair bids in the future.

Public Policy Tags: Public Sector