More Reverse Auction momentum

Some more recent reverse auction stories that popped into my Google Reader:

Using Reverse Auctions to buy advertising spots on Radio. A quote:

Bid4Spots allows the media buyers (that’s us) to set a maximum bid and allow stations to bid ever-lower media prices. After all, the stations are selling next week’s leftover airtime.

The real power of Bid4Spots is the steadily lessening of price rather than the gradual increase. In a Bear economy, when most businesses are cutting their media spend, there exists a real opportunity for small and medium-sized businesses to get a lot of airtime for their money.

City of Waco uses a reverse auction to buy electricity. There seems to be a lot of interest in running reverse auctions for electricity these days. A quote:

“We’ve been wanting to try a reverse auction for some time, as we believed the process could significantly benefit the City and, ultimately, our taxpayers,” said Danny Jackson, Administrative Engineer, City of Waco. “I can’t say enough about how great World Energy’s people were throughout the process. The market directors were extremely knowledgeable about the industry and helped us make key decisions regarding structuring the auctions to ensure we had significant supplier participation. We were particularly pleased that World Energy was able to drum up supplier interest for the auction, even though we used our own paper for awarding the contract.”

 

2 points on this:

1. The Bid4Spots story is spot on in linking an upswing in reverse auction interest to the current downwards trajectory in the economy. This is what happened last time round in 2002.
2. The Waco story is spot on in highlighting the importance of market making support in running a successful auction. It’s no good these days for software companies to sell only software and/or software integration/implementation services. These days successful technology delivery revolves around what What Max Bleyleben (Disclosure: he works for Kennet, an investor in TradingPartners) calls software/services/content convergence. 

Unite Members to Protest Against Council Tendering

See here.

Unite, Scotland’s largest trade union, will hold a demonstration [Wednesday, 4th June] outside South Lanarkshire Council offices in protest at the blind bidding process for the care and support services for adults with learning disabilities.

South Lanarkshire Council set up an e-auction for firms to tender for providing care at home by submitting charges by the hour.

Thus begins the press release. Looks like an e-auction is the root cause of the antipathy.

Well – look again, further down.

Bidders were given no information in the tender document on the current terms and conditions of the employees who would be transferred.

In other words: the union’s issue seems to be with the quality (or lack) of information that was given out to bidders rather than with the bidding process itself. Once again – to run a good sourcing process (whether it involves an e-auction or not) you still need to be clear with suppliers. And make sure they have full access to the information they need to place sensible bids.

How many suppliers should I have in a reverse auction?

A few years back we did some work with Oxford University. They were interested in how procurement auctions fitted into the bigger auction picture. We were interested in finding out how in line with auction theory we were. I was looking through my old material from that study and I want to share a neat graph from that work that models how expected savings rise the more suppliers you include in an auction.

 

If you assume that all suppliers in a marketplace have a price evenly distributed between a low price and a high price then, on average, the savings you would get increase as shown in the graphic above. This helps emphasise that 4 bidders is a good number for a reverse English auction, as I have often said. But one thing to clarify: this is a model – you can do better than the model by ensuring that when you select potential suppliers that you are selecting suppliers who have a lower price rather than selecting suppliers at random from the marketplace.

How much steam is there left in reverse auctions?

Two contrasting views:

1. Been there, done that. The vast majority of companies have now done aucions and taken all the margin out. The age of the reverse auction as a revolutionary procurement tool is over. Time now for buyers to focus on other things raher than continuing to beat suppliers on price.
2. My god, we’ve barely scratched the surface. The vast majority of companies have either done no auctions, or just one auction and really haven’t exploited the benefits of auctions to lower price and increase quality.

As you might think, my views tend towards the latter 🙂 

Aberdeen reckons the average auction saving is around the 12% mark. TradingPartners’ average auction savings are nearer the 20% mark. I’m not sure how meaningful one rolled-up average number is, but suffice to say that this number covers categories that have been auctioned twice, three times or more as well as rising markets, falling markets etc. Reasons as to why this should be the case are for another blog but, even taking Aberdeen’s number there is clearly still some margin left in 2007 for buyers to take out.

Admittedly if I didn’t believe this then I would not be working for an auction provider – so feel free to provide me some evidence to the contrary if you think I’m wrong.