Supplier Perspectives on eAuctions

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

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4 thoughts on “Supplier Perspectives on eAuctions

  1. As a past corporate Purchasing Manager and now President of K2 Sourcing, I always find the discussion of ethics in use of reverse auctions quite interesting. I will be looking forward to reviewing the findings of Mr. Moorhouse’s study.

    What I find most interesting is the concept of the argument of the tool fostering improper or unfair negotiating practices. From points 1&4 above, one should be careful about blaming the tool.

    Take a moment to think about the traditional strategic sourcing process; the meetings with suppliers, the request’s for proposals and quotes. Did supplier’s all receive the same information? Were specifications always perfect? When negotiating and asking suppliers for total cost reductions, was feedback given about competitiveness of other offers? Was the feedback always honest and perfect?

    If an organization has unclear specifications whether a traditional negotiation or a reverse auction there is room for error. Furthermore the traditional negotiation leaves plenty of room for unqualified suppliers and ambiguous award feedback. How many sales people have received the call from a procurement manager asking only for price?

    Here is the point: the ethics of a reverse auction is reflective of the ethics and the skill of the organization running the reverse auction. The reverse auction is a tool to augment the strategic sourcing process. It can be used ethically or unethically by the company utilizing the tool – just like one on one personal negotiation.

  2. The link to Huthwaite’s whitepaper is below:

    DISCLAIMER: The reverse auction research findings are based upon in-depth interviews with rather disgruntled global and national sales leaders and the paper thus presents an inherently biased viewpoint of the process.

    However, there is real value for procurement professionals, as the paper identifies how supplier response strategies have evolved and the mistakes still made by procurement when hosting reverse auctions.

    Huthwaite is re-writing the paper for the benefit of procurement professionals – but for now the sales focused paper can be downloaded here:

    http://www.huthwaite.co.uk/pdf/whitepapers/playing_the_game_effective_strategies_for_combating_reverse_auctions.pdf

    Cheers,

    Andy.

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