Recently Andrew Moorhouse of Huthwaite International made a guest posting about some research Huthwaite has done on how suppliers can deal with eAuctions.
Here are some updates from Andrew following his presentation of those findings to sales people at a SAMA conference. The comments are pretty candid and will make for interesting/concerning reading amongst buyers. Despite efforts by providers to develop codes of practice or auction ethics it seems that suppliers experience the reality of eAuctions quite differently. Over to Andrew:
One key theme evident during both presentations is that suppliers do not trust procurement to behave ethically when running a reverse auction.
Far from being an ‘open and transparent’ event, many delegates shared stories how procurement would not commit to a contract award date or be explicit on how the auction would be awarded. Indeed, it seems that procurement professionals attempt to trick suppliers into believing they have to be the cheapest to win. When we presented TradingPartners’ advice about ‘guaranteeing to meet the first place bidder immediately after the auction’ this further fuelled the debate on how procurement is behaving deceptively.
When they hear procurement state, “It is our intention to award the contract to the lowest placed bidder” or, “We will meet the first placed bidder after the event” naive sellers are influenced by these conditioning statements and it does affect their bidding strategies.
Only after participating in 4 or 5 reverse auctions do sellers realise that procurement indeed reserve the right to award the contract to any participant and that price is not the sole criteria. One key research finding came from analysing the incumbent’s final bidding position: 93% of successful incumbents won the contract without being the cheapest and the median final rank was third!
Moreover, forget about shill bidding: certain global account managers have such a distorted impression that they believe there are ‘backdoors’ to the e-procurement systems where the buyer can manipulate the supplier’s bidding rank! Of course we know this is not true, but it helps to illustrate how critical it is for a completely open and transparent process.
From the research we conducted, the biggest areas of concern around procurement’s behaviour are:
1. Lack of transparency on award criteria
80% of the time, the contract is not guaranteed to first place bidder, but procurement condition suppliers into believing they have to be the cheapest to win.
2. Invited suppliers are not equally qualified
Sellers are starting to realise that procurement allow both low cost and high quality bidders in the same event and reduce bidding transparency (and the chance of being caught) by using a ‘Rank Only’ bidding format.
3. Auction specifications are ambiguous
Over half of auctions analysed have ambiguous specifications that allow room for interpretation by competing suppliers, with huge implications for both the buying and selling organisation.
4. The reverse auction is rarely the end of the decision process.
In our research involving 39 Fortune 500 selling organisations, unless procurement explicitly stated, ‘lowest bidder wins’, post auction negotiation always took place with incumbent. Indeed, the average time from auction to contract award is 7 ½ weeks. Critically, when further negotiation did occur; only one in ten incumbent suppliers were informed, pre-auction, that post-auction negotiation was going to happen!
5. Cost of participation
Suppliers spend hundreds of man-hours planning and preparing for auctions and then are faced with further negotiations and discussions. No delegate discussed how this reduces their cost of sale.
Finally, I remember the article you linked to by Tim Minahan http://supplyexcellence.com/blog/2007/12/10/reverse-auction-throwdown/ who stated, “When managed properly, reverse auctions require buyers to clearly define their specifications, rules for engagement, and award criteria at the outset of the process.”
However, as we see from our research and conference insights, this clearly is not happening today.
The full whitepaper will be published on 28 February and I can give you a link for downloads at this time