So I’ve been a bit quiet recently – but will now be completely silent for the next week and a half or so. I am off to Rome on holiday. See you in a couple of weeks.
All the best
Alan
Month: April 2008
Reverse Auction workshop updates
I’ve been doing Reverse Auction workshops for CIPS (UK equivalent of ISM) for quite some time. These cover general issues in running a successful reverse auction and a fun game that is designed to show buyers the differences between English (aka descending bid), Japanese (aka descending clock) and Weighted (aka multi attribute) auctions.
Yesterday I did the first one of these events hosted by TradingPartners at our London office. It was a good session so we’ll be doing these workshops every month.
If you’re a bit sceptical about what a good reverse auction can do for you, or if you’ve only ever seen a reverse English price-only auction then there’s going to be something interesting in it for you. It’s also a good opportunity to network with buyers from other industries and to share reverse auction experiences with other buyers.
So far in the diary we’ve got 15th May and 19th June (both start at 9am in TradingPartners’ London office). Send a mail to me or check http://www.tradingpartners.com/europe/events.page and look for “free Understanding eAuctions workshop” for more details.
Reverse Auctions in a downturn (2)
Lisa Reisman over on Metals Miner has a rather more sophisticated analysis of reverse auctions in the current economic climate than most. Worth a read, but for the impatient (and click-averse), here’s the conclusion:
I would argue a reverse auction in a stagflationary environment can achieve benefits for the buying organization, more for further worked products containing metals than for semi-finished or raw materials. And though we still predict some prices to drop further this year, there is nothing like a reverse auction to show exactly where the market really is…
Web 2008 = Rock n Roll 1968 ?
The BBC may have written this in 2006 but I only just got it recently. Here are some quotes
If Web 2.0 is the new rock ‘n’ roll, who are the one-hit wonders and who will still be playing to packed stadiums in 40 years’ time?
The comparison isn’t quite as ridiculous as it may appear. Forty years ago, music was leading a social revolution, disrupting the establishment and empowering a new generation.
Today’s web technology and social media, known as Web 2.0, or the second wave of the internet, are leading a similar challenge and the long-term effects are likely to be greater.
Once again we are divided into those who get it and those who don’t. There is hyperventilating on the blog barricades about the end of the old order and the birth of the new counter-culture, information anarchy.
It was a recent posting on Confused Of Calcutta about Facebook that did it for me. JP is a long-time believer in the power of Facebook in the enterprise – but that’s not what I want to talk about here. Here are a couple of comments, one after the other, that really attracted my attention:
Ross Mayfield:
Part of what makes Facebook work across enterprises is it is new. That wont last. Part of it is fragmenting modalities, that will continue. Part of it is the trend towards the personal, but socially connected, and you know where that is going. Make things trend towards the transparent and you gain serendipitous discovery, and memory.
Ayesha Lakhani
But i guess..networking sites like facebook..if taken seriously can bring about a dramatic change in the appearance of the society.
I just came across one such group on facebook and i got to the positive effects of these applications..these are the highlights of the group:
Be the first generation to end poverty by 2015 with the United Nations’ Eight Goal Millennium Campaign.
1. End Hunger
2. Universal Education
3. Gender Equity
4. Child Health
5. Maternal Health
6. Combat HIV/AIDS
7. Environmental Sustainability
8. Global Partnership
Ross’s comment isn’t completely anti-Facebook. (The really anti-facebook people don’t spend time on the web reading and writing blogs). Yet there is a very clear difference in emphasis between Ross and Ayesha. On the one hand: Facebook is useful largely because of its novelty, which will wear off. On the other hand Ayesha’s wide-eyed enthusiasm does seem a touch, well, hippy-ish. Just as the BBC described.
And then here’s a comment on Sourcing Innovation about the power of social networkiness:
I am a recent Grad, who landed into the procurement industry extremely green (pun intend). I have found great uses for facebook, linkedin and recently www.iprocurement.org to help me network in this small but exciting industry. Due to the amount of Baby Boomers running around this profession, I believe this your reason for lack of new content and daily bloggers.
Now contrast this comment with the stated view of Sourcing Innovation’s owner in that post who is resolutely staying off Facebook (for example).
OK, I’m sold. But here’s the interesting point for me. If the Web in 2008 is equivalent to Rock’n’Roll in 1968 then .. well we’ve had our Monterey Pop Festival (1967) – but we’ve still got our equivalent of Woodstock to look forwards to.
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Bid rigging and e-sourcing
The Office Of Fair Trading claims to have uncovered more and more evidence of bid rigging in the UK construction industry. See here from Yahoo news today, here from The London Times Online on March 22nd.
The OFT press release here gives some more detail on the substance of the claims:
The investigation has uncovered evidence of bid rigging activities which include cover pricing, where companies obtain a price from a competitor in the tender process which is not designed to win the contract but is intended to give the appearance of competition. The Competition Appeal Tribunal has fully endorsed the OFT’s decision in its investigations and confirmed that cover pricing is anti-competitive and contravenes the Chapter I prohibition. In some instances the OFT has also found evidence in the current investigation of compensation payments or ‘bungs’ being passed between competitors in exchange for a cover price.
The construction industry has a reputation for resisting e-sourcing in general and e-auctions in particular as suppliers. I wonder how much of this reticence is down to a fear that e-auctions (in particular) make it harder for cartels to operate? Certainly, if you read this article from the World Bank about an e-rfp system implemented in Andhra Pradesh, India (hat tip to Andrew Moorhouse for passing it on) – there is a view out there that e-sourcing systems may be a good way to combat cartels and collusion. According to the document there were some pretty blatant abuses in the manual system. One of which was:
Cartel formation to suppress competition: Through dubious means, the participating bidders would gather the list of prospective bidders for a procurement request. They would use this information to lobby for formation of syndicates or cartels and bid at higher quotations.
Reverse Auctions in a downturn (1)
Procurement Leaders opened its latest issue with the words “Good news, we’re in recession”. I’ve long agreed with this view, as you know, so it’s good to hear the likes of Jason Smith, Principal Advisor of KPMG’s procurement advisory service, reported in Procurement Leaders on the subject:
“Increasingly people are looking to procurement to deliver results,” says KPMG’s Smith. “They can’t actually increase the top line so it’s ‘how can we save money from within the business?'”
Smith points to e-sourcing, strategic sourcing and outsourcing as basic tools to help cut costs. KPMG estimates there is a typical saving of between 5% and 35% using e-auctions and 10% via strategic sourcing. But he believes there’s much more mileage in these techniques.
“The leaders are starting to adopt these tools but they’re not taking them beyond pilot categories such as office supplies. But how can they use those tools on the more strategic indirect purchases? There’s still a long way for even the leaders to go,” he says.
A good question to ask. From my (probably biased) perspective I would imagine a big part of the reason for failing to take these initiatives beyond the pilot stage is largely down to a lack of resource and focus within the buying organisation. Any other views?
e-Auctions in Supply Management
Gratifying to see that Andrew Moorhouse’s research has put e-auctions it into Supply Management’s news pages. Even if the news headline is the rather sensational “Suppliers disrupt e-auctions“.
Supply Management chose to focus on some stats, like the fact that some incumbents refuse to take part in e-Auctions. But there is some other information in the study which I’d like to emphasise here. I’ll declare an obvious bias given that I work in the e-auction industry, but nevertheless I hope these comments serve as some sort of counterpoint to the Supply Management version of events:
Incumbents who took part in e-auctions dropped to their bottom line price 86.1% of the time. 5.6% of the time they stopped above their walk away price (this was due to the incumbent having inside information from their contacts at the buying organisation as to what target price was expected). 8.3% even went below their walk-away price (this only happened when a senior director was present). If you don’t auction your incumbent you are leaving savings on the table.
Producing clear and unambiguous specs is a significant challenge when running an e-auction. Many e-auctions fail due to poor specifications. Only 37% of self-service e-auctions had clear and unambiguous specifications. But amongst third-party managed e-auctions, 78% of the e-auctions had clear and unambiguous specifications. A third party auction specialist will improve your auction result.
Here’s a quote from one of the respondents that Andrew used in his report: “3rd party self-serve auction tools have degraded and destroyed the reverse auction market place. Inexperienced procurement professionals didn’t maintain auction integrity and abused their position of power”. Again, you need a decent e-auction manager to run decent e-auctions
Citing data from CAPS eProcurement Benchmarking report 2007:
43% of manufacturers see an increase in e-auctions; 38% see a decrease; 19% see no change
50% of non-manufacturers see an increase in e-auctions; 28% a decrease; 22% no change. e-Auctions are on the rise. Sure, they still have a way to go but unless you are running an e-auction, how can you be sure you are getting best value in the marketplace? (I am not talking about lowest price only).
I’m sure you could find all kinds of ways of spinning the research – I can only suggest you read it for yourself and take on board its lessons for improving the design of your e-auctions.
Does Procurement eAuction Design Matter? (part 7)
This is the 7th and final posting from my eWorld presentation series.
My last eWorld tip is, again, arguably as much about strategic sourcing as it is about eAuctions. But again, the clarity and open-ness of the eAuction process brings the issue out into stark relief.
As usual, I have a story to illustrate the example.
There was a buyer who ran reverse auctions but who didn’t have the slightest intention of moving to a new supplier. The reverse auction was competitive and identified a significant saving. The buyer then used that information as leverage to get his incumbent to deliver some savings. From the buyer’s point of view this approach seemed too good to be true: running reverse auctions helps you achieve savings targets without ever having to go through the effort and risk of changing supplier.
The suppliers, meanwhile, were aware of what was going in the marketplace and soon got wise to the buyer’s approach. By year 3 of this approach, the buyer was finding it very very hard indeed to encourage suppliers to participate in eAuctions. And why should they? They know it would be a waste of time.
An approach that seemed the most expedient to the buyer in year one turned out to be a counter-productive strategy over the medium term for his employer.
So if, as a buyer, you are interested in medium and long-term sustainability of your supply markets, you’ll be interested in the 5th and final tip:
Trust plays a key role in negotiations in general, and auctions in particular. Protect your reputation and your credibility in the supply market and you will reap the rewards again and again and again.
And here’s the slide for completeness.
Postscript
Well, that’s it. I’ve tried to compress down TradingPartners’ last 8 years of eAuction experiences into less than 10 slides. And font sizes less than 30. I think I achieved about 70% success rate on the 10/20/30 rules, but most importantly I hope you’ve enjoyed reading these posts and have taken away something that will help you run better eAuctions (whether or not you choose to do them with us). As a re-cap this is what I covered:
Reverse Auctions Background
- The Reverse Auction Family Tree. Reverse Auctions have moved on significantly over the past decade and there are a number of different types of auction suited to different supply markets.
- From Consultancy Services to Dairy Cream there is a reverse auction type most suited to your category and supply market conditions.
Reverse Auction Tips
- Specifications (Remember the waterproof matches)
- Plan and Execute an appopriate Messaging strategy
- Strategic Sourcing (and Reverse Auctions) are not one-hit wonders that apply only once for a category. Markets change and can offer new opportunities for buyers
- Auction structure impacts success (Remember the UK vs Swiss 3G auctions)
- Protect your reputation in the marketplace
Does Procurement eAuction Design Matter? (part 6)
Nearly there now: I’ve summarised the recent history of auction types and given examples of how differnet auction types achieve better results in different supply markets. And so far I’ve provided 3 tips that I’ve seen help TradingPartners (and hopefully you) run better reverse auctions.
This tip is all about structuring your reverse auction to encourage maximum competition. My presentation used some pretty basic clip art and animations to get the point across – that won’t really work as an image attached to a blog post. But I can give you the story equally well.
I’m not going to talk about reverse auctions for this tip. I’m going to talk about sales (forward) auctions, specifically the sales of 3G license spectrum in Europe in 2000 – 2001. Auctions are now a commonplace method of auctioning the rights to part of the radio spectrum but back in 2000, in Europe, they were quite a new idea. I’m going to compare 2 of the European auctions: Great Britain (a resouding success) and Switzerland (an umitigated failure).
Great Britain
There were 4 main existing mobile phone providers in the market place. The government had 4 licenses they could sell for this new type of spectrum. Each of the existing phone providers wanted a piece of the action. and the market knew this. Potential new entrants into the market were put off attempting to take part. How could a new company compete with one of the established behemoths? Any new company could expect to spend a fortune preparing their bid, only to be comprehensively outbid by the big guns.
There were various solutions touted around. But in the end the government was able to change the specifications and offer a 5th license. 5 licenses, 4 key players: At least one new entrant would win a license. All of a sudden the marketplace was abuzz with enthusiasm and 9 new entrants were attracted into the auction. 5 bands, 13 bidders: the competition was intense and the result was a tremendous success.
Switzerland
On the other hand, Switzerland’s auction was a mess. They started the process with 4 licenses amongst 9 potential bidders. But there was a quirk in their auction rules: joint bidding arrangements amongst companies were allowed. Sure enough, with only a few days to go before the auction the 9 bidders had formed joint bidding arrangements such that only 4 distinct bidding entities were left. The Swiss government tried to cancel the auction. They were sued. They lost. They had to award the licenses at the reserve price (which, to add insult to injury, had been set very low). Ouch.
The tip here applies as much to reverse auctions as it does to forward auctions: Make your auction as interesting as possible for as many bidders as possible to enter. But be careful of your rules as bidders will try and take advantage of the rules if they can.
Does Procurement eAuction Design Matter? (part 5)
I am sometimes nervous of showing this information because it is a warts-and-all summary of the case where we have managed a reverse auction for the same client, for the same category, two years running.
But it does address one important assumption that many people have about reverse auctions in particular and strategic sourcing in general. This assumption is that, once you have reverse auctioned (or strategically sourced) a category, there are no further benefits to be achieved by reverse auctioning it (or strategically sourcing it) again.
So here’s the slide. It shows the savings from 6 different categories which were auctioned two years running. The blue bar represents savings in year 1; the orange bar the further savings in year 2.
In some cases you make larger savings in year 1 than in year 2. In other cases you make smaller savings. In some cases the price goes up. (This is life, right?). The simple point is that there is no simple rule that says you cannot run save money by running a reverse auction on the same category twice. (*)
It’s not even (just) as simple as tracking the general price trends in the market. A colleague once told me the following story about some paper products.
We had a client who had recently auctioned some paper products. They had achieved a good price and since their auction the paper price indices had risen. So they were understandably nervous about what would happen if they went back to market. What they didn’t know was this in the meantime one of the large banks had just completed a significant consolidation exercise in the same category. In other words, while some suppliers to that bank had seen their orders increase, there were many suppliers who had suddenly lost a customer. Ironically this meant that despite a rising market there was a lot of surplus capacity in certain sections. To cut a short story shorter our client did go back to market and did secure a further (modest) saving.
So tip number 3 – which again is as much a strategic sourcing issue as it is a reverse auction issue is: Know your market, and get as far behind the headlines as you can.
Back to a strictly auction tip in my next post.
(*) If you are facing price increases, then running a reverse auction is a great way of minimising those price increases.
Be good, work hard, get lucky 