e-sourcing place

You’ll be glad to know that this post is shorter than part 1. On this slide of the presentation I broke the 10/20/30 rule by using bullet points and font sizes of 14 - 16. Oh never mind.

Not all eAuction designs are created equal. Choosing the right eAuction type is an important step in maximising the benefits you can achieve from the event. Here are 3 examples I often use:

Hygiene Services

• Saving from RFI only: 17%
• Suppliers did not know there was going to be an auction involved
• Saving from RFI + Auction: 39%

In this case a potential client had already run their own sourcing exercise, achieving a 17% saving for Hygiene Services. TradingPartners was challenged to see if an eAuction would do better. To cut a long story short, the eAuction did much better, increasing the 17% saving to 39%. Now, in theory the buyer may have been able to negotiate some slight increase in savings beyond the 17%, but would not have been able to get to the 39% saving level without an eAuction.

We see this time and again with eAuctions: With open competition you get a better result than through doing your sourcing offline.

Consultancy Services

• Saving from a normal Reverse English Auction would have been about 12%
• Run as a Weighted Auction and so delivered saving of 18%

This auction was the first one run in the UK under the 2006 procurement regulations. These regulations state that, if an eAuction is used in the public sector, then the winner of the auction must win the contract (with certain caveats). These regulations have driven increased adoption of weighted auctions. Interestingly enough, weighted auctions often achieve greater savings than would be possible under simple English price-only auctions. This is because they do a very good job of levelling the playing field amongst higher price/quality and lower price/quality suppliers. And is another reason why weighted auctions should be used far more by buyers than what is currently the case.

Levelling the playing field amongst suppliers by using weightings improves the results for both buyers and suppliers

Dairy Products

• Saving from a normal Reverse English Auction would have been at most 5 - 6%
• Run as a Japanese Auction and so delivered saving of 12%

 I still remember fondly the first Japanese eAuction we ran in the back end of 2005. The market place for this category at the time was very tight. So an English eAuction wouldn’t have been a great choice. So we ran it as a Japanese eAuction and got a dramatically improved result. Again, you can speculate that with judicious messaging, for example, you might have been able to achieve more than the 5-6% savings we calculated would have been achieved under an English auction. But again, an English eAuction would never have been able to achieve this increased level of saving.

Use particular auction types (e.g. Japanese or Multi Directional) when the market conditions dictate 

In my last post I outlined the presentation I gave at eWorld in Feb, which went down very well, and so for the next few posts I will be posting up some of the main slides with some commentary.

Procurement eAuctions, as we know them today, really took off in the mid 90s. Back in those early days, behind the sales and marketing spin, reverse auctions were pretty basic tools most suited to simple commodity items for which price was the most important (if not the only relevant) factor. eAuctions have moved on dramatically over the past decade and are now capable of delivering significant benefits to buyers across an ever wider range of categories.

(click to enlarge)

The Reverse eAuction Family tree shows how eAuctions have evolved over the past decade.

Before I dive into the different types of eAuction shown, a word on terminology. The vast majority of academic study and thinking about auctions has been based around auctions used for selling goods or services. In these auctions a seller puts something up for auction and potential buyers place bids, with one buyer being awarded the goods or services at the conclusion of the auction. The same theories and practices could apply equally well in procurement auctions. But in these auctions a buyer puts something up for auction and potential suppliers place bids. In other words the roles of buyer and seller are reversed in a procurement auction. Hence the name reverse auction. As you’ll see, the term “reverse” does not apply to the price going down, because under some reverse  auctions the price can actually go up!

To return to the evolution of eAuctions. A decade ago almost all “reverse auctions” used the same broad format. This has now come to be known as the Reverse English eAuction. In a Reverse English eAuction the price starts at a particular agreed level and then potential suppliers place lower and lower bids to drive the price down. This is still the most popular type of auction format today, but it does rely on 4 or more suppliers who share a similar cost base in order to be successful. About 90% of TradingPartners’  eAuctions in the private sector are English eAuctions. The buyer is careful not to guarantee awarding the contract to the lowest priced supplier because the lowest priced supplier may not offer the best value for money overall.

There is another offshoot of Reverse English eAuctions called Multi Directional eAuctions. Multi Directional auctions allow some elements to be bid downwards and others upwards at the same time. These are particularly useful where suppliers can bid a unit price downwards and a rebate upwards. Many TradingPartners’ auctions for office supplies use the multi directional format because rebates are a common feature in this category.

Where competition amongst suppliers is likely to be limited, or where cost bases differ dramatically across suppliers, or where the buyer does not want to share market pricing information amongst suppliers, Japanese eAuctions are a good alternative. In a Japanese eAuction buyers set a price level and suppliers have to accept to supply at that price level or to withdraw from the auction. As long as one supplier has accepted a certain price level the buyer then decreases the price level, inviting suppliers again to accept or withdraw. Suppliers do not know how many other companies they are competing against. At TradingPartners about 10% of auctions use the Japanese format.

Reverse Dutch eAuctions follow the opposite method compared to Japanese eAuctions. In a Dutch eAuction the buyer sets an initial price that is very low, too low for any supplier to supply at. The buyer then gradually increases the price until one supplier agrees to supply at the stated price. The auction then ends. Forwards Dutch Auctions work well for selling (in particular, some successful IPOs have used a variant of a dutch auction). But Reverse Dutch eAuctions don’t work well in procurement. One main reason is that the buyer only ever sees the price from the lowest priced supplier, so if there are any issues with that supplier’s quality (for example), the buyer does not have an alternative source of supply to hand. In fact, I recall talking to a major retailer who had updated their Reverse Dutch eAuction software so that it acted the same way as a Sealed Bid: accepting price proposals from suppliers and then revealing them all to the buyer. In practice this is the way to go: don’t do Reverse Dutch eAuctions on the internet. You will be better off doing either a Sealed Bid or a Japanese auction, depending on the circumstances.

In the EU public sector, regulations came into force in January 2006 that stated that: if a buyer was to run a reverse eAuction, the buyer would need to award the contract to the supplier who came first. This left public sector buyers with two choices:
(a) Qualify out all but a tiny minority of identical suppliers amongst whom price is really the only differentiator, and then award the contract to the one of these who comes in with the lowest price during the eAuction, or
(b) Calculate weightings and incorporate those into the eAuction so the supplier who comes first is not necessarily the one with the lowest price, but is the one with the best value for money.

Enter Weighted and Multi Attribute eAuctions. These auction types incorporate non-price factors into the auction so that the buyer can award a contract, say 60% on price and 40% on quality and see the real positions of the different suppliers, on a total value for money basis, in real time during the auction. About 60% of the UK public sector eAuctions facilitated by TradingPartners have used these kinds of weighting. The rest tend to be English auctions.

Unfortunately, traction for weighted auctions outside of the EU public sector is very low, perhaps because it forces buyers to think through their award process up front rather than waiting until after the auction.

This is already a long post for a blog, but I hope it has given you an overview of the richness of the contemporary eAuction landscape. In my next post I will discuss how judicious use of these different auction types has helped buyers achieve better results in their sourcing projects.

I was visiting a client recently who was asking the usual questions about reverse auctions: I can understand that they work for a very commoditised category which I have a high spend for, but how can they help with this more strategic strategy?

I hear this question so here are some brief thoughts.

Reverse auctions are helpful if you want to achieve a better price than what you can achieve otherwise. If you don’t care about getting a better price, don’t consider a reverse auction.

Of course auctions these days are far more sophisticated than the old price-based systems. Weighted and Multi Attribute auctions are capable of incorporating all kinds of non-price attributes into the competitive dynamic. With this in mind I’ll revise what I just said:

e-auctions are helpful if you want to achieve better value for money than what you can achieve otherwise. If you don’t care about value for money, don’t consider an e-auction.

Once you consider an e-auction there are some factors that could rule it out:
(a) Monopoly. If what you are buying can genuinely only be got from one source then, sorry, you can’t do much about it. But I wonder whether, with a little imagination, you can change the specs to some degree to allow competition? Just a thought.
(b) Unable to specify what you want. The EU directive on public procurement puts it well: You can’t auction the result of intellectual endeavour. In English, this means that you couldn’t auction the design of a building. But guess what, you can auction architect day rates. So, again, with a bit of imagination you might be able to specify what you want in such a way that it does become auctionable.
(c) You know and love your favourite supplier too much. Fair enough. But bear in mind that despite all the talk about “win win” that is in vogue these days, the supplier might just be taking a teensy bit of advantage

A personal perspective: I have been negotiating two contracts recently – one for software development and one for hosting. I used a weighted e-auction for the software development but elected to source my hosting offline. The offline negotiation has been much more of a pain in the arse for me than the online e-auction. I dare say that the suppliers feel likewise. Next time I will use an e-auction, if I can.

I first came across BidAnalyzer in a post over on e-sourcing forum.

Two academics, Sandy Jap and Prasad Naik have created a model that, they claim, will tell buyers whether suppliers in a reverse auction have actually bid down to their lowest price or not. It’s an intriguing claim; it even made the pages of CFO.com. And if you are really mathematically-inclined you can read the actual paper that describes the model.
Obviously this sounds fascinating to me so I had a call earlier this week with BidAnalyzer’s authors, Sandy Jap and Prasad Naik to find out more….

Suppliers in reverse auctions have a rough idea of who they are competing against. So a higher-quality supplier will know that they don’t need to have the lowest price to have the most attractive overall offer. So they will keep their bids higher than the lowest price.

Let’s run an imaginary reverse auction with the following four suppliers:

Known supplier inc. We’ve worked with these guys before (though they aren’t the incumbent) and know they are pretty good. They had some quality issues a few years back, which is why we moved away from them, but we have it on good authority that those quality issues are all in the past.

Great reputations inc. Never worked with these guys but everything we have been able to find out about them tells us that their products are of good quality, with prices to match.

Crap but cheap inc. Oh my goodness. We once gave these jokers a contract in a past life and boy did we regret it. Still, they can be relied on to bid aggressively in the reverse auction.

Here Today Gone Tomorrow inc. Never heard of these guys and nor has anybody else.

The bidding starts. It so happens that the market is pretty small so the suppliers have a good idea of who else is bidding. For the sake of this example I’ll assume we are using a very simple reverse auction (*).

Great Reputations sees the price drop further than they are prepared to go. So they hang back, confident that their good reputation means they don’t need to compete aggressively. Same goes for Known Supplier. This leaves Crap But Cheap and Here Today Gone Tomorrow fighting for first place and driving down the price, while Known Supplier and Great Reputations set themselves strategically somewhere above the lowest price, depending on their assessment of their own value-add. So suppose when the reverse auction ends the prices are something like:

Crap But Cheap: $705,000
Here Today Gone Tomorrow: $710,000
Known Supplier: $790,000
Great Reputations: $800,000

As the buyer can you be sure that Known Supplier and Great Reputations have given you their best prices? Or do they just believe that their offerings are worth $100,000 or so more than the cheapest competitors?

BidAnalyzer claims to be able to tell you the answers, based on analysing each supplier’s bidding pattern. Ideally you’d also feed in some cost models of the different suppliers, but Jap and Naik claim the model works even with just the bid information.

One thing worth mentioning at this stage: In our call Naik and Jap said that the problem with traditional reverse auctions which I’ve described above, and which BidAnalyzer seeks to address, only applies in price-only reverse auctions. Multi-attribute  and weighted reverse auction formats don’t suffer from this issue, because all suppliers are already bidding on a level playing field.

I haven’t seen BidAnalyzer in action (yet) so I can’t vouch for how much it tells you beyond what you would have been able to work out for yourself with a little market research. Though if and when I do, I’ll post some views.

(*) We will show suppliers the current best bid but we have no way of messaging them during the reverse auction.

I’ve seen a lot of auctions that take into account price and non price factors in the uk public sector. This is because since January 2006 public sector buyers who use auctions must award the contract to the person who comes first in the auction.

Whether it’s Consultancy workers on a 35% price / 65% non-price basis, or electricity on a 90% price / 10% non-price or temporary workers on a 60% price / 40% non-price, these kinds of auction have become pretty much business as usual in the UK public sector.

The private sector has been very slow to adopt this kind of methodology. Private sector buyers prefer to run auctions just on price and then to work out the details of how to make the award afterwards.

There are strong arguments on both sides of considering non price attributes during an e-auction. The significant benefit is that it levels the playing field amongst suppliers, letting them compete at what they are best at and producing a result that (in theory at least) is more easily implementable. Yet it is more work up front. And there does seem to be a perceived “lack of control” amongst some buyers of letting suppliers know this much information.

So it’s noteworthy when a private sector buyer chooses to build in non price factors. We had one such example a few weeks ago, for rental cars.

The potential suppliers were adamant that they would not take part in a reverse auction because they felt competing purely on price was not appropriate.

So the buyer built a dynamic rfp that weighted the participants 80% on price and 20% on non price.

In contrast to a price only auction that typically lasts about 1.5 to 2 hours, this was left open over a 24 hour period.

The potential suppliers could log in at any time to see their overall ranking, taking overall value for money into account. Value for money included other elements of the suppliers’ offers, for example: the percentage of hybrid vehicles in the fleet, the number of on-airport locations, reporting capability, percentage of cars with GPS, number of VIP memberships available, etc.

The result: the openness generated sufficient competition to achieve greater savings than the buyer had thought possible.  Don’t be surprised with this result. Many of this kind of auction I’ve seen have helped the buyer achieve increased savings.

Readers of this blog will have seen a few posts about the impact of new public procurement rules on the use of auctions.

Over the past year I have seen some pretty interesting results and I want to share a couple of illustrative examples. On the one hand these auctions can deliver increased savings (sounds counter-intuitive, I know, but it’s true). On the other hand these auctions can let higher quality suppliers win, even if they can’t compete purely on price.

Generalising, suppliers are either high quality/high price or low quality/low price. In your common or garden online reverse auction the high quality/high price supplier can’t compete on price with the low quality/low price supplier. This means that the low quality/low price supplier doesn’t have to work so hard to get into first place.

In a multi attribute or weighted auction, the quality is fed into the auction mechanism to produce a comparator score - this compares the total value of each offer. The winner of the auction is the one with the best comparator score, not necessarily the one with the lowest price.

The high quality/high price supplier ends up with good overall value for money, even if their price is relatively high. So a lower quality/lower price supplier has to bid far more aggressively on price than they would have done in a price only auction.

Two real-world anecdotes I’ve seen recently highlight what can happen when you start running these auctions:

1. An auction where the winner of the auction was the supplier with the highest price: Best value for money overall but highest price. The winner of the auction had a price about 10% above the lowest price in the auction, but because of their higher quality and better delivery they were able to win on a total value for money basis.

2. An auction where the winner of the auction was the supplier with the lowest price, but they had to compete very aggressively to match the overall value for money of the higher priced suppliers. The savings generated through the auction were 18% but if non-price factors had not been included into the auction then the saving would only have been about 12%.

Caveat: If this all sounds too good to be true, then that is because this kind of auction is hard work to set up. Additionally it is not appropriate in all situations. For example, if I want a 2 day lead time and I really don’t care if you offer me a 1 day lead time instead, or if I want trainers with 2 years experience at least and I really don’t care if you offer me trainers with 5 years experience then building in weightings for these attributes would be a waste of time.