How to run a bad electronic reverse auction

So  much seems to be written about how best to run an electronic reverse auction (including by yours truly) that I thought it would be entertaining to share some tips on what not to do.

The benefits electronic reverse auctions bring (clarity, rapid price discovery, low-cost sales channels for suppliers, etc) can be neutralised by managing them badly. Perhaps the simplest example is post-auction negotiations. It may sound counter-intuitive to recommend that buyers do not negotiate further on price after the auction finishes. After all, if there are a few $$ left on the table then why should the buyer leave them there? From a short-term perspective this is probably right. But from a long-term, economically sustainable perspective, this doesn’t work. As soon as suppliers wise up to this tactic they either refuse to take part in future auctions or they hold back in the expectation of post-auction negotiation. Bang, auction benefits neutralised for many years to come for that buyer.

Even eBay offers some basic advice to sellers on how to produce a listing and how to behave during and after an auction, so how much more important must it be for participants in $000,000 electronic reverse auctions to think carefully about their strategies in order to get the best result?

With that in mind, here are some top tips on how not to run an electronic reverse auction:

For the buyer (i.e. auction manager)

  1. Make sure the Invitation To Auction (or whatever you call it) is as vague as possible. Fit it onto 1 sheet of paper, max.
  2. If any bidders ask for clarifications then don’t answer them. After all, it will be more fun if all the bidders think they are bidding for something different.
  3. Don’t waste your time qualifying suppliers before the auction. You want to leave as much work for yourself after the auction as possible. And, hell, chances are you want to stay with your incumbent anyway so there’s even less point finding out if the other bidders are serious.
  4. Don’t communicate with the suppliers during the auction. You wouldn’t want any good old fashioned negotiation to get in the way of the technology, would you?
  5. Obviously you have no intention of changing suppliers, you are just running the auction with the intention of beating down your current incumbent’s price. So why not call the incumbent up after the auction asking them to match the leading supplier’s bid?
  6. Or, if you have fallen out with your incumbent, then treat the final bid from the auction as a starting point for negotiations with your preferred supplier.
  7. Don’t tell the bidder who came first in the auction that she hasn’t been awarded the business until at least 3 months have passed. Until then don’t answer any calls from the bidder asking for updates on the contract award process.

For the supplier (i.e. the bidder)

Remember that the buyer is only running the auction as an information-gathering exercise and has no serious intention to award the contract based on the auction results.

  1. Turn up on time to show some willing and place a few bids if prompted, but otherwise just sit tight and watch the other guys. If you’re lucky you might not have to bid at all and you’ll end up finding out your competitors’ pricing.
  2. Make sure you wait until the auction is running before you ask any questions about the specifications or auction rules. Whatever you do, make sure that your interpretation of what you are bidding for is different to what the other bidders are bidding on.
  3. Whatever you do, make sure you don’t come first. After all, what’s the point?
  4. Wait until after the auction then call up the buyer offering to negotiate offline, perhaps even matching the leading price. This way other bidders won’t be able to respond to your offer – isn’t that great?
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2 thoughts on “How to run a bad electronic reverse auction

  1. Jeff Henning

    Hello Alan:

    Great article about how not to manage an e-auction. However, do you have any simple “to-the-point” articles, commentaries, or recommendations for how to manage an effective e-auction.

    Best regards,

    Jeff Henning

  2. Hi Jeff

    Thanks for the comment. Where to start with answering? You could browse through the archives here – I’ve been banging on about good and bad reverse auctions for a few years.

    But there is a simpler answer which I’ve found works most of the time: To manage an effective e-auction, do everything the same way you would in any other sourcing exercise. What works well in all sourcing exercises (clear requirements, regular communication etc etc etc) works well in reverse auctions. And what messes up offline sourcing processes will screw up your auction.

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