Monday, 14 April 2014

Should suppliers still fear eAuctions?


Following a recent LinkedIn question ("Someone explain to me how a Reverse Auction is fair and equitable to the supplier ...") we had to pause for thought.  Admittedly in the past auctions had obtained a less then sparkling reputation.  This seems to be in a large part down to the pre-conception that it was a race to the bottom for price and quality.

When eAuctions initially came onto the market (~20 years ago) as a way to negotiate quickly and effectively, they were firmly in the hands of experienced consultants such as FreeMarkets (sold to Ariba 2004).  eAuctions were primarily viewed as a way to save money.  However it does hide the fact that the consultants would put in a great deal of work.  Even five years ago when we were working for a consultancy, auctions would take us between 200 and 300 man-hours.

The next stage in their progression was as a module of the larger ERP (Enterprise Resource Planning)  applications and consultancy software offerings.  This seems to where the damage to their reputation was done. This was the initial transition of software to the hands of organisations themselves. The fact of the matter is that setting up an auction is more work up front than a traditional RFQ (Request For Quotation).  You need to have the Service Level Agreements and specifications tied down as well as have sufficient market liquidity.  By this we don't just mean having suppliers who can bid, but suppliers who will bid and to whom you are willing to award the business. In this initial transition it seems that the benefits from negotiating the price down were understood but the level of work required for a truly successful auction was not.  And a truly successful auction needs to be judged on realised savings, quality and delivery, not just identified savings. This is where suppliers were put off by badly run eAuctions.

As the procurement professional has grown up in the last 10 years, becoming far more reputable, so has the eAuction process.  Companies understand that for success the eAuctions need to be run in a professional manner and should be viewed as any negotiation where you are looking for a win-win outcome.  For example you can weight non-price criteria or mention in the documentation that you will bring in the top three suppliers for discussions post-auction, or even include supplier presentations in the process.  The truth is that eAuctions are just another tool in the procurement tool-set for negotiation and they need to be used with care.

The new breed of eSourcing platforms on the market also help make the process easier.  For example we strive to embed professional processes in every stage with check points at appropriate milestones.  We make it easy for the suppliers, as well as the buyers, to adopt, and we have had many different kinds of suppliers bidding from taxi drivers to one man bands.  Here is our guide for helping to onboard suppliers.

Unfortunately that initial bad reputation is still around today.  However we less frequently see a powerful incumbent try to kibosh the process.   With the increasing professionalism and eConnectivity in supplier markets and the ability for buyers to more readily search globally for suppliers, this is becoming a risky approach for an incumbent.

Not only that but suppliers are actually finding that eAuctions are a good way to negotiate and they have been proven to strengthen relationships.  With increased thought up front on documentation, open communication and more transparency, eAuctions are fast becoming a very efficient and fair way to do business. Suppliers are also better prepared in understanding their margins before the event and having a sufficient BATNA (Best Alternative to Negotiated Agreement) in place.  This is will help negate the view that suppliers can get caught up in the furore of bidding.  Also many consumer applications from eBay to moneysupermarket.com help make the process less daunting. We have many guides and videos to help suppliers through the auction process here.

In conclusion we would say that suppliers don't fear the eAuction itself anymore. With a greater understanding they see the advantages.  All they do fear is a badly run eAuction, so make sure your's is not one of them!

2 comments:

  1. The fact that 'badly run' is a blog tag pretty much sums it up!

    I’ve admitted in the past that I don’t think auctions are quite as evil as they are painted. And yet, I can see why suppliers would push back, preferring to negotiate traditionally or not at all to keep the business they have enjoyed in the past. As Market Dojo points out in their recent post, the professionals executing auctions have as much to do with their reputation as the actual dynamic of bidding online in a dynamic fashion.

    Like it or not, auctions are still a resource that we can chose to use as appropriate. That being said, there are a couple of facts to which we need to reconcile ourselves:

    At the end of the day it is still about savings.

    We talk about the fact that auctions emphasize cost (although they are not limited to price-only award decisions) like it is a bad thing. As much progress as procurement has made as a strategic value creator for the organization, we are still measured first and foremost on our ability to negotiate and deliver savings. Ardent Partners’ CPO Rising 2014 report found that although metrics such as innovation and compliance are gaining ground, savings is still the number one metric for our performance. The good news is that it is possible to simultaneously create value and generate savings, especially when we work with our suppliers to reduce their process and material costs or when they help us better manage demand or specs.

    Sloppy is as sloppy does.

    Auctions require a lot of up front work – far more than creating the RFx’s that lead into them. As Market Dojo points out, “You need to have the Service Level Agreements and specifications tied down as well as have sufficient market liquidity. By this we don't just mean having suppliers who can bid, but suppliers who will bid and to whom you are willing to award the business.” Procurement professionals that have difficulty running effective auctions were also probably going to execute less than ideal traditional negotiations. But in the case of auctions, the results and weaknesses have nowhere to hide. To the contrary, they are high visibility internal events, often drawing an audience of executives from throughout the organization. The end result is that negotiating via auctions ends up looking like a bad strategy, when talent and or effort are to blame.

    The goal here is not to point fingers, but we do need to better understand the negative associations with auctions to separate out what is the technology or approach and what is poor planning or execution. Auctions are not right for every project, just as there are different negotiating strategies and approaches. What we do need to accept, is that as technically simple as they may be to build and administer, the bulk of the work still needs to be done by skilled people. If the goal really is, as the question put it, to be “fair” to suppliers, we need to make sure we are being fair to auctions too. Making sure that they bear no more and no less of the blame or credit than they deserve.

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  2. It should be clear esourcing and eauction tools are very strong helpers once used for the purpose they are designed. They are by many understood to be strategic tools.

    Well, would you agree to use strategic tool without having a strategy? Would you use you brand new chain saw to cut all trees at your garden just because you want to use is to maximal level? Would you let your 16 years old son to drive your brand new Infinity just because he got driving license week ago?

    We do not use Excel for writing a letter just because we were not told Excel is not the right pick for that purpose. Sure, We live in a fast moving World. Still we should act wisely.

    For example: Providers of esourcing tools bring new functionalities to help users on setting strategies of categories they source. The reason is not they want to charge money. The reason is there is a space to offer it. People who would appreciate they get guidance provided by the category strategy setting tool.

    There has been a lot of work done to make the tools accessible to variety of different industries. I do not think there is a way back. The sourcing tools proofed the right of existence under the Sun. For many users, they can only be substituted by something better now.

    What does happen if we create something so strong and make it so easily accessible? Do we have to have a sort of drivers license for event organizers who source through esourcing platforms in the future?

    My experience with high level CPOs of global companies is they are very pragmatic persons. Once not having appropriate information they say: "You tell me!"
    Does that happen always with the other users of these platforms? Surely, they do not want to get advised by consultants with unimportant (they think) questions.
    Then maybe the software itself should take over a bit of control. (Do you want to invite this supplier again? You are trying to source annual spend for the 3rd time this month. Are you sure? Are you sure you do not overuse?)

    Lot of this is already understood by providers who provide accessible tools.

    Users (who become event organizers) get more independence by newly obtained platform.
    They should also accept responsibility which always goes hand in hand with it.
    They are not requested to get the drivers license for esourcing platforms. (Or their managers should.) They should search for guides, information, helpers. At least until the moment they start to understand it is not possible to tear the tool out of the context and say: We do not get the results. We feel the reason to be (thinking we do not know why)...

    When I drive from Prague to Spain next summer. Guess, do I do some planning for it? Or should I just go without taking care of time needed, traffic jams, highways closed as under construction, tolls...?

    My final advice? Do not play chess at high level if you only know how to move pieces.

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