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Breathing New Life into eAuctions

Many organizations are still using eAuctions, and these eAuctions are still delivering fantastic returns the first time (they are applied to a category). Michael Lamoureux, Lead Analyst and Futurist, explains.

Synertrade has been saying reverse auctions are not dead, and they are right -- they're not. Many organizations are still using eAuctions, and these eAuctions are still delivering fantastic returns the first time (they are applied to a category). And sometimes these eAuctions even deliver fantastic returns the second time. But, in an average organization, these eAuctions sometimes die after a few key categories have been sourced for the third time and prices go up. (Yes, prices can go up as a result of an auction -- especially if the auction was poorly designed or the category poorly chosen.)


So How Do You Make Sure Your Auctions Don't Die?


Five best practices will give eAuctions eternal life in your organization!


1) Analyze the market before choosing eAuctions as your strategic sourcing platform

Use publicly available market data from indices, government contracts, marketplaces, and your GPOs to build a reasonable should-cost model and compare it to your current costs. If market prices have gone up (considerably) since the last eAuction, chances are there's not going to be much success in the eAuction. If market prices have gone down, chances are there is a good opportunity for success. If market price is about the same, and if the volume is there, since good negotiations can get below market, then still consider an eAuction.


2) Break out the costs ... and invite carriers and configurators too

All-in bids allow providers to build in or hide greater-than-market costs and takes away your opportunity as a buyer to either lower those costs if the service (such as shipping or system pre-configuration) can be done cheaper by third parties or identify opportunities for supplier development to lower costs over time. So, break out product bids from delivery bids (and break out worker / service rates from travel and expense costs) and make sure the best provider can bid on each. 


3) Automate 3-bids-and-a-buy tail-spend

The biggest opportunity is in mid-size categories that are not being regularly sourced where you have no time to build should-cost models and no insight into market pricing. Create standard templates for these, along with standard (approved) supplier lists, and use your platform to automatically construct the auction workflow. And if you have a cognitive platform, use it to automate the entire auction (including the award if all suppliers have been pre-qualified and the amount is under a threshold). In an average organization, tail-spend is 20% to 30% and over spend is 15% to 30% -- and this negatively impacts the bottom line by 3% to 9%. Auctions can deliver easy savings here ... that go straight to the bottom line. 


4) Supplier qualification

Do multi-round tenders that use eAuctions for supplier qualification.

For example, if you are planning to split demand between three bidders for risk mitigation, indicate that the three winning bidders will advance to the next optimization-backed RFX round where all three bidders will be ranked against multiple objectives and receive a guaranteed business minimum (e.g. 20%). This can really drive down starting bids and allow you to focus your time on proper supply chain design with the vendors you should be using. 


5) Bundling for MRO, Value-Added Services, etc.

Sometimes it just makes sense to bundle a product buy, installation service, and training service from a single vendor -- especially when the volume or dollar value of each component on its own is not attractive in a 3-bids-and-a-buy tail spend auction or when a provider who specializes in offerings around the product can use the volume leverage you give it with their product suppliers. 


eAuctions Live!

In other words, eAuctions are far from dead and have a lot of value if properly applied. There's a reason auctions have been around for thousands of years. They work! But just like the gambler has to know when to hold 'em, know when to fold 'em, know when to walk away, and know when to run -- you have to know when to hold 'em, know when to fold 'em, know when to walk away ... and know when to run. And this is where a lot of organizations fail.


First up, they believe if the auctions work the first time, they'll work the next time. However, as we indicated above, whether or not the auctions will work the second time really depends on the market. If the first auction squeezed most of the fat out of the supplier margin, and prices in the category have went up significantly since the last auction (and especially if the prices have gone up close to, or in excess of 10%), they just aren't going to work. In this case you have to walk away.

Second, some organizations will persist even if preliminary pricing, from market data or initial RFB/Qs, is considerably higher than what the organization expects. Some organizations believe suppliers always start with an excessively high bid which they will lower aggressively during the real-time auction. Sometimes this is true, but if you are sending the RFI out to long-time suppliers who have been through the process before and know that they may not even get invited to the auction if their starting bid is too high or proposal just flat out unacceptable, they are not always going to come down double digits during the auction. In this case you have to fold your plans. 

Third, some organizations will try to work with a stakeholder who will not accept any sourcing process that does not involve a reverse auction, believing that they will be just as successful as their peers (claim to be). If a stakeholder is not willing to let the market guide you to the best approach, then you need to run ... and move on to the project that involves a stakeholder that is more flexible. Especially if you are only able to strategically source about one third of "spend under management" each year. 

Fourth, and finally, if the market analysis indicates that prices have gone down, there is excess supply, and there is opportunity, especially if you open up the auction to new suppliers, even if there is initial bias against the auction or the initial bids come in high, you have to know to stick to your guns and hold fast. 


So What Can You Auction?

The answer here is simple: anything you can legally buy or sell! It's not just for (indirect) products. 

You can auction services

As long as you can clearly specify the service needed, the education and experience required of the service worker, and any insurance or certifications that are required, you can auction by resource type. All you need to do is determine if you want to auction by time-based rate (hourly, daily, weekly, etc.) or by statement of work, and whether you want expenses included or broken out. You can auction consumables and MRO.

You don't have to restrict auctions to (direct) goods and materials that you are reselling or using to manufacture the goods you are selling. You can auction your office and janitorial suppliers, your maintenance parts, etc. 

You can auction utilities.

You can auction your land-based and mobile communications. If the buy is big enough, the big carriers will play ball. With so much competition, some of them are more desperate for business than they will let on. If your local energy market is de-regulated, you can auction your energy buy. These carriers will definitely compete as well. The savings might not be as great here, but if you design the auction smartly and bid peak vs. off-hour rates, tie bids to market indices, etc., you can still find savings. Some niche sourcing services providers just focus on energy marketplace, so you know there has to be opportunity there. 

You can auction your facilities management and even your facilities leasing.

There's more than one company out there that specializes in facilities management who will manage your maintenance and upkeep, repair, janitorial services, etc. And most of these will get competitive for a sizeable contract. 

Plus, if you need to lease new space, and the market is in your favor (i.e. more spaces to rent than interested parties to rent them), you can auction your lease -- especially if it's a long-term lease. 

In other words, you really can auction anything if the market is right. It just takes a bit of research, planning, and preparation. But with a modern platform, which comes bundled with templates, category intelligence, and cognitive capabilities, a lot of this work can be simplified and even automated for you.


But the Category Has to Be Big to Auction, Right?

Not really. Many categories that have never been strategically sourced hide savings opportunities in the 10% to 30% range. As long as 10% of the category costs exceed the manpower costs to run the auction, the auction is a candidate. And if the expected ROI is more than 3X, it's a perfect candidate. Let's say the cost of a fully burdened resource is 500 a day. If the category is 10K, and the expected savings is 15%, that's a ROI of at least 3X if the total manpower to run the auction is less than one day. In other words, any category over 10K can be a candidate for a manually run auction. An average organization has lots of these. You just start at the biggest opportunity (defined as the largest spend times the expected return based on market costs and typical saving percentages) and work your way down.

And if you have a cognitive platform that can automate auctions, especially for tail spend products and services against pre-defined templates and workflows, you can run all of these categories through an auction. And you don't even have to stop when you get down to 10K. Why not auction a short-term 5K services contract for installation of standard replacement equipment to the local mom-and-pop vendors? If the system automates a $500 savings, take it. Especially since the system could automate 50 of these auctions across all your office locations when someone needs to go in and replace all the firewall devices to adhere to your new internet security standards. Fifty times five hundred is twenty-five thousand -- and that savings could easily exceed the savings you'd get from a national vendor who only has employees in ten of the fifty locations and who would be charging you travel and expense for the other forty. 

Auctions may be ancient (literally), but they are still one of the best strategic sourcing and tactical procurement tools in your toolkit when used wisely. So, use them.

Watch the Webinar eAuctions: Optimize Your Negotiations


About the author

Michael Lamoureux

Michael Lamoureux - Lead Analyst and Futurist The doctor of Sourcing Innovation (.com), who holds a PhD in Computer Science, is an experienced professional in enterprise technology and Supply Management who has been a Chief Architect, Chief Research Scientist, and Chief Technology Officer before taking up the mantles of blogger and analysts. He works with businesses and their internal knowledge transfer, positioning, and planning problems, specializing in working with clients who want to update their sourcing process, technologies, and strategies to lead the way in innovation.

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