Getting Hit With the Reverse Auction Hammer: The Supplier View
Over on the Alan Buxton's excellent blog, Where Next, a recent guest commentator offered up some thoughts on how suppliers view reverse auctions. These observations came from questions and interactions with UK sales executives at a Strategic Account Management conference. My takeaway from looking at these observations is that suppliers are getting more savvy about when to walk the walk when it comes to reverse auctions versus simply when to walk away. According to the post, "only after participating in 4 or 5 reverse auctions do sellers realise that procurement indeed reserve the right to award the contract to any participant and that price is not the sole criteria. One key research finding came from analysing the incumbent's final bidding position: 93% of successful incumbents won the contract without being the cheapest and the median final rank was third!"
Another insightful observation is that the "reverse auction is rarely the end of the decision process ... In research involving 39 Fortune 500 selling organisations, unless procurement explicitly stated, 'lowest bidder wins', post auction negotiation always took place with incumbent. Indeed, the average time from auction to contract award is 7 ½ weeks. Critically, when further negotiation did occur; only one in ten incumbent suppliers were informed, pre-auction, that post-auction negotiation was going to happen!" I observed firsthand in five years of experience at FreeMarkets in the early days of e-sourcing that transparency was the major driver of the significant savings we often identified. As companies have transitioned to self-service models, I fear that declining transparency -- and a lack of enforcement of market rules -- have damaged the credibility of auctions in the eyes of many suppliers beyond the point of repair. Perhaps this explains why, I'd argue, actual reverse auction usage is down inside many companies despite the widespread availability of tools to all sourcing professionals (this is my observation, not an empirically based fact, mind you).
- Jason Busch
Another insightful observation is that the "reverse auction is rarely the end of the decision process ... In research involving 39 Fortune 500 selling organisations, unless procurement explicitly stated, 'lowest bidder wins', post auction negotiation always took place with incumbent. Indeed, the average time from auction to contract award is 7 ½ weeks. Critically, when further negotiation did occur; only one in ten incumbent suppliers were informed, pre-auction, that post-auction negotiation was going to happen!" I observed firsthand in five years of experience at FreeMarkets in the early days of e-sourcing that transparency was the major driver of the significant savings we often identified. As companies have transitioned to self-service models, I fear that declining transparency -- and a lack of enforcement of market rules -- have damaged the credibility of auctions in the eyes of many suppliers beyond the point of repair. Perhaps this explains why, I'd argue, actual reverse auction usage is down inside many companies despite the widespread availability of tools to all sourcing professionals (this is my observation, not an empirically based fact, mind you).
- Jason Busch
"reverse auction usage is down inside many companies". Yes I think your feeling will turn out to be true on this, certainly insofar as self-service reverse auctions are concerned. Running a good e-auction is quite a bit of work, as I'm sure you'll recall from Freemarkets.
@Senthil
By a "Ghost" participant do you mean the buyer pretending to be a fake supplier and putting in dummy bids to drive the price down? If so then this is an activity known as "shill bidding" and is fraud. So not even a question of ethics really.
"3rd party self-serve auction tools have degraded and destroyed the reverse auction market place. Inexperienced procurement professionals didn't maintain auction integrity and abused their position of power."
However, the global executive then went onto explain: "This lack of integrity in the auction market place not only prevents our suppliers from participating, but also our internal customers from wanting to run reverse auctions."
Thus, there is a huge credibility gap to close with both suppliers and internal stakeholders to get them on board with a reverse auction strategy.
"Ethics" in auctions i.e. straightforward awarding rules are and will remain the only way for a buyer to obtain an optimal price. This has nothing to do with Ethics, it is merely about efficiency. Of course, this problem of equilibrium also requires a number of other factors to be optimal, such as avoiding collusion, properly taking into account all decision making drivers other than price, the number of participants etc.
Counting the buyers who feel they outperformed Auctioning by "renegotiating" after the bell, and getting them to understand/admit that their auction was flawed in the first place sounds a lot like cleaning Augustus' Stables. For the last 8 years and several thousand auctions examples, I'm still to come across one example of auction "failure" that was not doomed in the first place based on less than a dozen common sense design rules.
Now what about Ethics of suppliers communicating on such topics? When asked such nonsensical questions, would it be in your interest to claim that auctions succeeded in getting you to bid your best offer, that you had no choice other than this one, that the bidding got you beyond the lowest price you anticipated proposing?
What's most fascinating in the end is the controversy auctions continue to sparkle.
There are going to be instances where buyers do not follow best practice ie. ghost suppliers, post auction negotiation, however lets not try and make out that this is a significant reason for a decline in usage. Let's also remember that suppliers sales execs are always looking for reasons not to participate in reverse auctions as it erodes their margins/commission!
The recent CAPS & ISM eProcurement Benchmarking Report suggests that nearly 40% of manufacturing firms are reporting a decrease in the use of reverse auctions.
However 28% of non-manufacturing organisations also report a decline in usage.
(Source: Section 15, page nine: http://www.capsresearch.org/publications/pdfs-prot...)
Is it really a 'hot supply market' that is driving non-manufacturing firms to reduce their auction program or could there be something else going on?
One key factor is that suppliers will no longer play the game:
Check out the press release by Cypress Semi-conductor: http://uk.reuters.com/article/governmentFilingsNew...
If 'The practitioner' is right, and the supply market is driving this change, then it won't be long before forward (seller) auctions are commonplace and procurement organisations are coerced, by suppliers, into bidding for a space on the production line…