The consumerisation of enterprise (e-sourcing) software, revisted

One data point does not prove an argument but look at Zycus’ recent announcement of their sourcing software, a commented on by Jason Busch:

Zycus iSource – Zycus iSource is an eSourcing module that provides comprehensive RFX processing, objective supplier bid evaluation and multiple negotiation techniques. Zycus has leveraged Web 2.0 technologies including Drag-and-Drop for RFX creation, Interactive graphical analysis, and collaborative workflow to provide end users the simplicity, speed and power that encourage adoption.

“In order to be more broadly adopted, sourcing tools need easier to use functionality for constructing requests, evaluating bids, and archiving the results of events in a searchable fashion,” said Deborah Wilson, Research Director at Gartner Inc.

Good to see people buying into the idea that consumerisation is the future of business technology. Though whether Zycus have simplified the tool sufficiently is an open question at this point 🙂

Lightweight technologies, e-sourcing and VRM

One of the blogs I read most religiously is Confused of Calcutta (*). For the past aeon or so, JP’s being going on about the uses of Facebook and Twitter in the enterprise. Today’s post brings together a whole bunch of strands that show vividly how small pieces of technology, that on their own are not that intersting, combine to make a whole that is far greater than the sum of its parts. He uses examples from the consumer side of things, but we all know how consumerisation is the future of business technology.

But I digress. To come back to JP’d post. Read it, the storyline is great. I’ll try not to rip off the whole thing, because you have to follow the story to get the point. But here are some extracts:

Something should be scraping what I am doing, capturing it in a way I can choose to share with others. Choose, we must remember that word. And what else? Oh yes, wouldn’t it be nice if I could enrich the information I was sending? Provide more information about the artist or group, maybe YouTube video links, maybe Wikipedia links, maybe Flickr links, maybe even the homepage of the band or group. How about a link to the song itself, so that someone else can sample it, try it out, decide for themselves if they like it? Maybe even a way to search for more information, and the tools to buy the CD or DVD in physical or digital format?

and

It’s worth bearing a few things in mind. First there was the web. Then there was SMS. Without SMS there is no Twitter. Without the web there is no Twitter. Now we’ve had tinyurl for a long time, but it starts coming into its own when we start using something like Twitter. As a result of all this, someone else could build something like FoxyTunes (which looks like Netvibes meeting last.fm), and then building TwittyTunes to connect up with the Twitter world. And then suddenly everything else waltzes in to enrich what we can see and do, ranging from text to audio to video, from search and syndication and conversation to fulfilment.

and

What strikes me is the power manifest here, the power of connecting simple things like SMS and tinyurl and Twitter. Small pieces loosely joined, as David Weinberger said.

There are important applications here in the e-sourcing space. Funnily enough, JP ends the post with some questions about VRM (short questions, long answers). Now, I think he’s talking about VRM from the perspective of how, say, one individual an manage his relationship with the arline he buys tickets from and another person can manage her relationship with the garage she bought her car from. But I’ll address it from the point of view of sourcing in the enterprise space. Here’s a start: The important innovations of tomorrow won’t come from inside Ariba or even Emptoris or Zycus. The innovations will come from small pieces that didn’t even come with a business plan attached, until people (yes, people, in the plural) figured out how you could plug them all together, and then all of a sudden it all seemed so obvious.

Ridiculous? I don’t think so. What about MFGx.com’s recent exhortations to use YouTube more? There’s something emergent here.

(*) – I’ve been a big fan of JP Rangaswami since I first heard his story about how you decomission a mainframe. To paraphrase: If you need to decommission a mainframe and you ask people in the organisation whether they still need it or not they will tell you that, yes, they do sometimes need it. They will tell you that, yes, they do refer to the 50 page printout that lands in their department once a week. So you can’t decommission it. So what you do, is you just turn the damn thing off. And then 6 weeks later tell people that you’ve decomissioned it.

Auctions and Sustainability

Reverse auctions are unsustainable. They force suppliers to lower their prices to such a degree that they risk being driven out of business (bad for economic sustainability) and incentivise suppliers to cut corners in order to deliver at such low prices (bad for social and environmental sustainability.

OK, so this is an extreme caricature, but I am sure that some of you will identify to some degree or other with the sentiment.

And yet, forward auctions are a central tenet of carbon emission trading (good for economic, social and environmental sustainability).

So where’s the disconnect?

Truth be told, reverse auctions are just a tool. They can be used in a sustainable way or an unsustainable way.

Here’s one way you can use a reverse auction unsustainably:

• Include suppliers of all different kinds of quality, even ones you are not really going to be prepared to deal with
• Bid just on price
• Wait for high quality suppliers to drop their prices in an attempt to compete with the lower-quality suppliers
• Then just use the information you gained from the reverse auction to beat your incumbent into accepting a price decrease

Any time you buy something at a price that is lower than what the supplier can genuinely afford to sell at you are damaging not only your supplier relationships but you are damaging the economic sustainability of the supplier marketplace. And you may well be causing knock-on effects that damage environmental and social sustainability as your suppliers struggle to deliver at the agreed prices.

Here’s one way you can use reverse auctions sustainably:

• Weight the different suppliers so they are competing on a genuinely level playing field
• Be prepared to award the contract to a supplier who provides best overall value for money rather than simply best price

So long as suppliers are bidding on a level playing field, the prices they are prepared to offer should be sound. Or at least you can see where different quality suppliers really drop out of the bidding. Certainly from a theoretical point of view, an auction run on a level playing field is the best way of allocating goods and services to those who value them most. In the interests of practicing what you preach, this is the approach I took in my recent reverse auction for software development services.

This may mean paying more on a per unit basis, but if you’ve done your sums right in the weightings part of the project you’ll be better off overall. As will your supply market.

Happy smiles all round.

Two sides to the CSR/Sustainability argument

So I’m back visiting my colleagues in Shanghai. WordPress is (still) inaccessible through the Great Firewall Of China so I am having to take alternative measures to keep posting.

Anyway – The Doctor is kicking off a Carnival of Sustainability blog posts this week. I am trying to see if I can make some useful points about the intersection of e-auctions and sustainability that are beyond the obvious.

But first, a couple of points I noticed whilst catching up on some reading on the plane. From my two favourite publications: The Economist and Private Eye.

From The Economist’s Special Report on Corporate Social Responsibility, January 19th 2008, a quote about Tata – makers of the famed 1 lakh car:

“India has a long tradition of paternalistic philanthropy. Big family-owned firms such as Tata are particularly active in providing basic services, such as schools and healthcare, for local communities.”

And now, from Private Eye, issue 1201, 11 Jan – 24 Jan 2008, again about Tata, and again under a banner called Corporate Responsibility:

“[Tata’s commitment to Corporate Social Responsibility] might surprise the farmers of Singur … where the car is being built. The 997-acre site produced three crops a year and provided a decent living to more than 20,000 people. But when Tata picked it for its new plant in 2006 … the chief minister of West Bengal … announced that the land was to be forcibly acquired … Many of the farmers and sharecroppers dug in their heels when they realised the non-negotiable compensation would be half the market value.

“Others baffled by Tata’s claims to being socially concerned include tribals of Bastar in Chhatisgarh, fighting to prevent their ancestral lands being torn up for a Tata iron ore mine; and relatives of 13 tribal people shot dead by police at Kalinganagar in Orissa in January 2006, a village earmarked for a Tata steel plant.”

The point is not to try to make a point about Tata. Nor is the point to get into a debate about where CSR stops and Sustainability starts. Will the Tata site in Singur be better or worse for the farmers? For the people who will now be able to afford the new car? Will the factory be more sustainable than farming? Who wins from CSR and Sustainability? Who loses? The point is to remember that, yes, the whole sustainability issue is genuinely complex. And, yes, pity the poor overburdened word “sustainability” which seems to mean all kinds of things to all kinds of people.

And then, when you start to despair of the sheer complexity of the task at hand, have a read about Norway’s audacious, inspirational (yet fundamentally pretty simple) plans to become carbon neutral by 2030.

BidAnalyzer: Improving Reverse Auction results?

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.

Reverse Auctions: Supplier Strategies

Today I’d like to introduce a guest poster. Andy Moorhouse is Lead Research Consultant with Huthwaite International, a sales performance consultancy, and has produced some (in my view) ground-breaking research on how suppliers should deal with procurement.  He recently shared with me some insights from his research on Combating Reverse Auctions that highlights strategies suppliers have used before, during and after a reverse auction. An extract of his work is below and should make interesting reading for suppliers and buyers alike:

 To further fuel the current reverse auction debate, I thought I would share some recent research findings.
 
As part of our wider research project on the ‘Best practice for dealing with procurement’, during Q3 and Q4 2007, Huthwaite International conducted in-depth interviews with 39 global and national sales leaders to learn about their reverse auction experiences.
 
Our research goal was to identify the successful strategies being used to combat reverse auctions and to help suppliers break through the commoditising effects of this technology.
 
We gleaned many valuable insights from the study, especially around the supplier’s misconceptions of how to approach and participate in reverse auctions (i.e. believing that you need to be the cheapest to secure the contract). Allow me to share an extract from our recent research:

Must you follow the rules?

When analysing the case studies, it was apparent that incumbent suppliers greatly enhance their chances of success by not following the rules set by procurement.
Before presenting the data, I must highlight the research limitations and state that the results only reflect the outcome of auctions in the private sector and that 80% of the participating suppliers have revenues of > $1 billion.
 
Please see the graph below and allow me to illustrate with some examples:

The strategies for not following the process include:

• Submitting a proposal but refusing to participate online
• Telling procurement you will only enter one bid online, which will be your ‘best and final’ offer
• Rejecting participation entirely.

The European VP of Strategic Accounts for a global logistics company explained their corporate policy of never participating in reverse auctions.  He explained, “We drew a line in the sand and told procurement; we won’t agree to the terms, we won’t access the system.”  

As the incumbent supplier, they have retained two multimillion $ accounts by insisting on meeting with procurement and delivering a proposal in person. One caveat: they have won no new business with this strategy.

We came across many examples of suppliers refusing to play by procurement’s rules during our research. Incredibly, the UK Sales Manager from a global chemical manufacturer explained that when they rejected participation, procurement entered their offline bid into the auction to maintain the perception of a healthy online event!
 
Finally, as suppliers learn the rules of engagement, they now understand that if there are only three real players, refusing to participate may be an effective strategy.

The Sales Director of a global steel tubing manufacturer explained, “When asked to participate we always refuse.” He went on to say, “Auctions in our industry normally fail as the major pipeline contractors cannot get 3 or 4 people together that will compete”

In summary, our research indicates that suppliers are playing the game but learning to bend the rules to their advantage. Remember 4 out of 5 incumbents who bent the rules, secured the contract. Our advice to incumbent suppliers is:

• Ensure you communicate your intentions and set expectations upfront
• Follow the process, but don’t follow it slavishly
• If there are only 3 real players, refusing to participate may be an effective strategy

The full research findings will be published on 2 March 2008, but if readers of ‘Where Next’ are keen to learn more, please let me know and I’ll post some additional insights.

Accidental Innovation

Can organisations make innovation happen? Or is real game-changing innovation a result of random accidents?

I tend towards the second view which is why I really enjoyed this article in The Economist about the founder of Blogger and Twitter:

Evan Williams accidentally stumbled upon three insights. First, that genuinely new ideas are, well, accidentally stumbled upon rather than sought out; second, that new ideas are by definition hard to explain to others, because words can express only what is already known; and third, that good ideas seem obvious in retrospect.

And contrasting Williams approach with Google’s (where Williams briefly worked after Google bought Blogger):

Google trumpets its innovative nature, but its genius is for attacking known problems (web search, e-mail, calendars, etc) with brute force–weapons of mass computing and mathematical algorithms. Mr Williams’s passion is solving new problems. In theory he could have done this at Google with his “20% time” on the side, but in practice he found it tedious to pitch ideas to the Google bureaucracy.

Blogger, itself, was developed by accident. Read The PayPal Wars and you see that Paypal’s meteoric growth – thanks to becoming the de facto standard on eBay – largely came about by accident.
This is why I believe that large companies are dramatically less likely to come up with genuinely great innovations compared to smaller companies. And why I feel that, whatever the calibre of individual Ariba is now promoting to its leadership ranks, we are far more likely to see something genuinely market-changing from MFG.com or Coupa than from Ariba in ’08.

Another take on innovation, this time from inside The Economist is described by Max Bleyleben in his blog. They set up a group dedicated to spending 6 months coming up with something “innovative”. The project struggled to produce innovations – but what is most interesting is that The Economist documented the struggle.
 

Netsuite’s Dutch Auction

Vinnie Mirchandi at Deal Architect commenting on Netsuite’s recent IPO. They IPO’d at $26 a share. From an auction perspective it’s instructive that they made their offering based on a Forwards Dutch Auction. And, guess what, it raised much more money than if the IPO had been priced at the $13 – $16/$16 – $19 level they were looking at previously.

Some feared an auction would give rise to the winner’s curse (*). If so the stock would have dropped in price dramatically after its listing.

Yet the stock price rose on its first day of trading and, even after its recent downward slide, it is still trading over $30 at the time of writing.(**)

Goes to show that an auction does get better results (when used properly) than not doing an auction.

(*) The winner’s curse theory goes as follows: People know how much they are prepared to pay for something (let’s say a car). This is based on what they believe it is worth. On average, some people will underestimate the value of the car, others will overestimate it. During the auction the price rises gradually as higher and higher bids come in. As the price rises people will stop bidding when the price gets above what they think the car’s worth. The person who wins the auction is the person who bids highest. The  person who bids highest is the one who thinks the car is worth the most. The person who thinks the car is worth the most is one who has overestimated its value. So the winner overpays.
(**) Which still seems ludicrously bubbly for a loss-making company.

My First Reverse Auction

Yesterday I ran my first reverse auction for spend that I control and for a contract I will be responsible for implementing: Offshore Development Services. This was also TradingPartners’ first reverse auction for our own spend (rather than on behalf of a client). This was not a toy auction. This was a real auction for some spend that is very very core indeed to the company.

Auction setup

• Reverse English Auction
• Weightings incorporated into the auction on about 60% price, 40% non-price
• Non-price was based on an assessment of things like: Size + Stability of company, Experience of similar projects, Quality of their ideas for enhancing the software, ability to scale the team, relevant certifications etc
• Suppliers were able to see their price, how this converted to a score, and what the best score was. So suppliers could see how much they needed to drop their price to become best value for money overall. In other words they were genuinely bidding on a level playing field.

Auction results

 

• I could see where a suppliers dropped out and so can have confidence that the price levels reached were
• Savings were pretty impressive
• A supplier I had thought was keen on the business did not bid as actively as I had expected.
• Similarly a supplier I had thought of as an outsider came in with a very compelling offer.

No, I’m not going to tell you the baseline but feel free to drop me a line if you want to discuss the reverse auction more.

Some thoughts

 

• Could I have done better off-line? No. In all my negotiations with software development companies, this was by far the best, fastest, and easiest.
• Was it right to weight the auction? Absolutely yes. It was a little more work up front, and I nearly did give up trying to do it. I can see why so many buyers shy away from doing this. But I’m glad I saw the process through because it has given me a clear picture of where the market genuinely is and my work from here on is much much easier than it would have been otherwise
• Would I do it again? Definitely. Some reasons why in a future post
• I wonder whether buyers are unconsciously biased towards certain suppliers. For example, a supplier I had thought was very keen for the business did not really bid very seriously during the auction. Looking back at my previous conversations with that supplier I recall that they had evidently taken the time to read my blog and discuss the issues it raises with me, and I wonder whether that pre-disposed me favourably towards that supplier. Whereas, when you look at the market objectively through a reverse auction you see that there are probably other suppliers out there who are going to be better at delivering what you really need
• Are the prices and offerings I have genuine? Have suppliers been gaming the system? Will I find them taking advantage of me later on? I hope not because the reverse auction was weighted to include our assessment of their non-price value-add. But time will tell.

I’ll let you know how I get on with implementing the contract.

Collusion in e-auctions

Alkiviadis Trigas made a comment on a recent post  asking about how to address (suspected, apparent) collusion in reverse auctions.

This is a topic in itself and worth a post (or several) in its own right. Although the question is posed with regard to e-auctions in fact it has as much to do with buying in general as it does with e-auctions in particular. So I’ll take a provisional stab at both sides of the question.

Collusion amongst suppliers in general

It’s worth remembering that this is not a new issue. Adam Smith, in The Wealth Of Nations (published 1776) writes that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Now I am no legal expert but from what I can tell, such price fixing is illegal. Except when it’s not.

In practice, I have yet to find a buyer who was able (or willing to expend the effort) to actually prove collusion. Most seem to accept that just as buyers want to get as much as possible for as few $$$ as possible, sales people want to deliver as little as possible for as many $$$ as possible. Indeed, most anti-collusion cases come about when one member of the cartel breaks ranks for whatever reason.

In practical terms the best defences buyers have is knowledge of the supply market, and to use that knowledge to broaden the supply market as much as possible. For example – even if there appear to be many distributors, are they only being supplied by a handful of manufacturers? Are there any alternative sources of supply overseas?

Buyers need to have this information – which is only really achievable through deep relationships in the supply market – early on in their sourcing processes. It’s no good waiting until you ask for pricing (whether you are doing an Excel RFQ or a reverse auction) to find out that the supply market is narrower than you thought it was.
Collusive behaviour in e-auctions

Collusive behaviour has been studied in both forward and reverse auctions. I give some examples in my white paper on e-auction design. One of my ‘favourite’ examples is the sale of 3G telecommunications licenses in Switzerland. There were 9 bidders bidding for 4 licenses. Each bidder could win at most 1 license. So the bidders formed joint bidding arrangements such that by the day of the auction there were only 4 entities bidding for 4 licenses. In the end each of these 4 bidders was awarded at the very low reserve price. (A great book to read on auction design that describes the 3G license auctions in detail is Paul Klemperer’s Auctions: Theory and Practice most of which is available online for free at http://www.paulklemperer.org/index.htm)

So what does this mean for reverse auctions?

As with any buying project, start by understanding the supply market and by widening it as much as possible.

From a strictly auction point of view, if you are stuck with what you suspect is a potentially collusive environment then you can still run an auction

1. Keep the number of bidders confidential
2. Run a reverse Japanese auction. In a Japanese auction the buyer sets the price level and suppliers accept that price level or withdraw. The buyer then progressively lowers the price level until the last supplier withdraws. I have seen this auction tool achieve quite impressive results, even in tight markets.