Friday, 28 October 2011

Would we participate in a reverse auction?

Reverse auctions and even e-sourcing software has become a commodity product.  There are numerous players in this market offering broadly the same functionality.  Sure, some have a few more bells and whistles and others can integrate nicely with other e-procurement solutions, but on the whole there is little to distinguish between them aside from cost and aesthetics.

So, if I had responsibility as a buyer for a large company to implement an e-sourcing solution, why would I not consider conducting a reverse auction to settle the negotiation and how would I go about such a thing?

Well, if you look at the key ingredients for a successful e-auction, purely and simply it comes down to being able to accurately and robustly define what you need and to ensure you have enough capable and interested participants who can meet those needs.  

In terms of e-sourcing software, I would draft up the core features and functionality that I would look for in any capable vendor.  Now, I could do this the complex way and draft up a weighted RFI followed by a weighted auction to allow bidders who have “special” features to score more highly, but then why make this difficult.  Simply knock up the list of “must-haves” and make each participant verify that they can satisfy the requirements.  I would request a 2 hour web-demo with each participant to help me decide whether or not to include them in the bidding process.  Since the whole process will be run on “Buyer’s Choice”, I will decide post-negotiation which participant to award the business to, taking into account the price of their solution as well as the other features and service levels that they can be distinguished by.

Having done this, I have my list of capable and interested participants. To complete my requirements, I would also compile my commercial and contractual terms, such as length of contract, number of users, approximate number of sourcing events, suggested payment terms, my training requirements and so on.  This would allow my participants to submit accurate and sustainable quotations.

The next step is to conduct the negotiation and for this we could choose the reverse auction.  The interesting step here is to pick a platform on which to conduct the auction, as it would most likely be inappropriate to use the software of one of the competing vendors, even though I could probably source a free event from them!  Perhaps one of my earlier unsuccessful candidates would supply this, which would at least be something of a consolation for them.

With the auction and hence price negotiation complete I would be in the position to award the business, using my buyer’s choice to take into account all the other differentials.

So, would we as a company participate in such a process?  

The short answer is most certainly yes!  Whilst some organisations refuse to take part reverse auctions on the basis that they are too price-focused and that they drive you to prices that are unsustainable, we would actually be very keen to take part in any such opportunity as we know this is not true.

Firstly, the sales process is much shorter.  A buyer would be approaching us with a genuine interest to buy and has been given the green-light from above.  We would not have to spend much time at all writing proposals, reviewing proposals, re-writing proposals and so on!  Instead, the buyer has taken the time to lay all of this out for us in advance.  All we have to do is examine whether it is within our core capability and interest to supply it and at what price.  Since we know from experience that the entire reverse auction process and award decision takes approximately 8 weeks, this method is far quicker than the 6 months it can take in a traditional process.

Secondly we have huge belief in our business model and offering to the extent that we think we would perform very well under competitive pressures.  Should we not be successful, at least we have live and dynamic market feedback on how we compare to our genuine competitors.  If we continued to be unsuccessful against the competition then it would provoke us to carefully review our business, thereby mitigating the risk of longer term failure that would inevitably have occurred should we not have pitted ourselves against the competition.

As for the potential objections, sure the auction itself is focused on price however the award process is not.  During the process, as a participant I would be in regular dialogue with the buyer, building up the relationship, advising where the specifications are not quite right, being supportive, proactive and punctual.  Let’s not forget that the negotiation is still part of the sales process and so by demonstrating a high degree of professionalism and that you are a company that can be trusted, you are greatly influencing the buyer’s decision once the auction is over.   This can make the difference between success and failure, despite your ranking in the auction.

The only ground for objection here is that the auction is simply too effective as a negotiation tool.  With my buyer’s hat on, sometimes I do wish that suppliers I am negotiating with stopped offering me all these extra services and features that I don’t want and simply reduced their price for those that I am actually asking for!  This is where the auction is so powerful.

As for auctions leading to unsustainable contract pricing, this is where you need to do your groundwork and stick to it during the auction itself.  Sure, it can be tempting during an auction to submit that “one last offer” only to later realise you cannot commit to it, but it is in no one’s interest for this to happen.  The buyer is looking for a capable partner at the most competitive price level and we as a participant are looking for a new customer at a price level that allows us to grow.  There is certainly middle ground here where both parties can win.  Again, if you keep losing out whilst bidding on auctions, it is time to take a look at where you are leaking costs or to re-think which markets you should be competing in.  Perhaps all those additional service levels and quality accreditations are simply not important to your customers, or on the other hand, perhaps your run-of-the-mill offering is not specialised or distinct enough to convince your customers to partner with you.  An auction plus award decision offers genuine market feedback combined with specific personal feedback.  You can really use this to your advantage to improve your sales performance in future activities.  In fact, should you be successful in an e-auction, why not shout it from the roof-tops.   You have just positioned your company as one of the best in the market.  What a fantastic statement to make when you are next in a sales dialogue.

One final note is that we as an e-sourcing and e-auction software vendor, who encourages organisations across the globe to tender their business via this approach, really should be able to put our money where our mouth is and wholly support any buyer who would like to auction us.  

 Well, it would be our pleasure!

About: Market Dojo provides business-to-business e-auction and e-sourcing software. Find out more at www.marketdojo.com 

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