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.

 

Wikis, User-Generated Content and Procurement Communities

I started experimenting with wikis at TradingPartners a little over a year ago. A wiki could help us, we figured, with sharing  up to date category information across a team that is spread all over the globe. (How to best make sure when Joe in the USA ran a sourcing project for castings that he would know that Jane had recently been working on something similar in China, and would be able to benefit from her experience?)

A wiki seemed like a good fit as:

  1. it would be editable by anyone in the business 
  2. it would be accessible to everyone in the business over the web
  3. it would be fun for people to use
  4. the necessary investment would be negligible

So we tried out various wikis and settled on mediawiki. Launched it to the business early 2007 in workshops at which staff excitedly brainstormed ideas of what kinds of information they’d like to see on there…

Then we left it to see how it evolved. Fast forward 9 months and this is what we had:

  • Lots of marketing material – case studies, brochures etc.
  • Some customised user pages with pictures of people, their backgrounds and interests.
  • Standard templates, training materials etc.
  • Some category information. But, interestingly, this had not been put on by auction managers themselves, but by self-appointed editors who were collecting the information and uploading it.

In reality, despite the initial enthusiasm for a site that “anyone could edit” was replaced with the more realistic understanding that in order for it to be of any value, “someone” would have to do the actual editing!

It brings home the fact that in wiki- or forum- style communities, the number of people who contribute information is a fraction of those who consume information. The templates and marketing information all went on because they only relied on a small number of interested editors to make the wiki site definitive. Some people – either those who find this sort of thing interesting, or those whose managers find this stuff interesting, were prepared to update their own user pages. But changing the process of running a sourcing event so that all the relevant information is entered into the wiki repository after the event for the benefit of others in the business? Now that’s a whole different proposition. And it begs a number of questions like: how do you make sure all the relevant information is loaded onto the wiki (and you don’t miss out a crucial piece of information which is blindingly obvious to you but which might not be obvious for other people)? How do you ensure that people who are consuming the information are looking at the right page (paper bought for resale might not be the same as paper bought as an indirect, for example)? Etc, etc.

Extrapolating from this experience has taught me something important about any attempts to build a procurement community online: The procurement world is sufficiently small that you can’t expect a critical mass of people simply to contribute useful information to any one central repository. Iasta’s e-sourcing wiki is an example: 7,500 odd hits so far but check the recent changes page and only a small number of names appear as contributors. Perhaps there’s a generational element, with newer buyers more open and older buyers more reticent. That would be the thrust of articles like this one at Tech Crunch, but I suspect the generational piece will turn out to be just a small element in the overall equation, especially when applied to business information. Seems to me that the best way to share useful information in the procurement space is by inferring it from what people are actually doing, rather than treating it as an activity in its own right. Of course, exactly how to infer auction best practice (for example) from successful auctions people have run rather than via a self-contained documentation exercise is another question in its own right which, I guess, nods towards the Semantic Web – if that ever gets off the ground. More questions than answers, in other words.

A coda: what did we do with our wiki in the end?

Well, we kept it for two things:

  1. Community building by people building their own pages and telling a bit about where they come from and what their experiences are. This is becoming part of the process for all new starters and is quite a neat way to quickly get a feel for who you should be talking to about what.
  2. An intranet-style piece holding standard templates and marketing materials.

Regarding category information: We could have gone down the traditional Enterprise Software Change Management route. This would have gone something like “come on, the eAuction managers aren’t updating their category information. We need to mandate it as part of the process and keep beating them over the head until they accept it”.  Or we could have gone down the Enterprise Software Budget Busting route. This would have been something like “the central repository won’t work without an editor. So let’s hire someone to maintain the wiki and have that person interview, or otherwise, extract information from the eAuction managers as they go about their daily jobs”.

We took a different approach, which I call the Going Back To The Objective approach. We asked “what are we trying to achieve here?”. The answer was: “help eAuction managers keep up to speed with what their colleagues are doing”. Next question: “Is there an easier way to do this that doesn’t make them do extra typing?”. Answer: “How about just letting everyone have query access over our history of sourcing events with some pre-defined reports so people can easily look up who has the most experience in category X and which eAuction managers have auctioned category Y most recently. That way they can just pick up the phone and easily get hold of all the relevant information, plus all that intangible, invaluable stuff you only get through talking to people”. The tool then becomes something to encourage, and facilitate, people to talk to each other. Not an end in itself. Boom. Sometimes the simplest solutions are the best.

e-Sourcing at Royal Mail

Silicon.com has some good detail on how Royal Mail is using e-sourcing.

The SAP application went live in June after a relatively short two-phase implementation of just over three months and is being used [as at 1 November] by more than 100 Royal Mail staff.

Those timescales are pretty good in SAP terms – 3 months to get the system up and running and then getting to 100 users in 4 months. Read on …

The application being used is from SAP’s 2006 acquisition of Frictionless Commerce.

So it’s using the SAP badge but is really a standalone piece of software?

“We are looking to make it more connected with what already exists here in the SAP landscape.”

So the 3 month installation process was to get a basic, hosted e-RFX/e-auction system up and running?

Read the full story at http://www.silicon.com/publicsector/0,3800010403,39168959,00.htm

Sun’s e-Auctions

Great article over at Purchasing.com http://www.purchasing.com/article/CA6474837.html?industryid=23508. It’s an interview with Kurt Doelling, Sun’s Vice President of Supplier Management in which he talks about Sun’s ongoing use of reverse auctions (or Dynamic Bidding Events, DBE’s, in Sun’s Parlance).

Apparently, of Sun’s $4bn annual spend with suppliers, $2bn or so is awarded via DBE, expected to rise to $2.7bn this year. That is a very impressive statistic and means they must be doing a lot right as far as e-auctions are concerned:

Some commentary on Kurt’s specific points:

  1. Reverse Auctions are based on Total Cost of Ownership rather than just unit price, with suppliers being score-carded on attributes such as availability, technical support and quality. This is great.
  2. Don’t invite rogue suppliers just to drive the price down. This is absolutely paramount. Inviting low-priced suppliers that you have no intention of doing business with purely to drive the price down is tantamount to shill bidding (which is fraudulent). Certainly it damages the credibility of your sourcing process.
  3. Sun only invites known suppliers to their reverse auctions. Whilst this facilitates the previous two points, it is interesting to learn that they would not include new potential suppliers in a reverse auction. This suggests that Sun already knows, and does business with, the vast majority of their potential supply base.
  4. Reverse Auctions are a way of transferring margin from suppliers to buyers. Blunt and honest. Presumably this is an important driver for all buyers.
  5. Award shares of business. It’s common sense, but good to hear a practitioner advocating sourcing from multiple suppliers rather then just one.
  6. Invite 3 suppliers to an auction. Although this seems to deliver good enough results for Sun this seems a bit on the low side to me.
  7. Only show suppliers their rank rather than best bid. When I was auctioned, being shown rank only was a demotivator to bid. Typically, auctions I have seen work better with best price being shown, assuming you can generate enough competition in the reverse auction.

Quarter of public cannot spot phishing emails

According to a report in Computing.

How is this relevant to designers and implementors of e-sourcing software?

In contrast to a primarily internal-focussed system like accounts payable processing, successful e-sourcing is all about putting buyers in touch with new suppliers. Suppliers represent the whole spectrum of technical savvy. If 25% of the population has trouble identifying phishing emails then it follows that a significant proportion of the potential supply base, globally, will find e-sourcing systems too complex and unintuitive.

The moral is clear: make your software simpler and clearer. Always keep making your software simpler and clearer. 

It is very easy for software designers (who live and breathe software) to massively misunderstand the comparative lack of technical savvy of the target audience for their software. And also equally easy for buyers of software systems (who are themselves usually pretty tech-friendly) to massively misunderstand the appetite within their organisation for learning a new IT system.

 As a slight tangent: This is one reason why I believe that anthropology has a lot to offer software development: after all, anthropology studies how people really behave in real life. [Disclosure: My degree is in anthropology rather than any IT-related (or purchasing-related, or business-related) subject]

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.

Savings from Reverse Auctions

Aberdeen recently published (27 July 2007) a Sector Insight on the state of savings being generated across EMEA through the use of eSourcing technologies: EMEA: Advanced Sourcing Leads to Tangible Results.

This report quotes an average saving of 11.5% in North America vs 12.4% for EMEA. To me these figures look a bit on the low side, but hidden away on page 3 is an innocuous sentence that helps explain:

EMEA organizations are interested in e-sourcing event managed services (27%), supplier performance management programs (22%) and collaborative sourcing (21%); these technologies should further improve the realized cost savings.

In other words, the single greatest factor for increasing savings is to invest in event managed services. Obviously that comes at a price – so organisations need to weigh up the value of managed services against the costs – but it is gratifying to see Aberdeen recognising that not all electronic reverse auctions are created equal, and that managed services increase the benefits of electronic reverse auctions.

Small plug: Coincidentally, this report from Aberdeen is out in the same week as my new White Paper: “Does Procurement eAuction Design Matter?” which gives a number of examples for improving the results from eAuctions.

How to run a bad electronic reverse auction

So  much seems to be written about how best to run an electronic reverse auction (including by yours truly) that I thought it would be entertaining to share some tips on what not to do.

The benefits electronic reverse auctions bring (clarity, rapid price discovery, low-cost sales channels for suppliers, etc) can be neutralised by managing them badly. Perhaps the simplest example is post-auction negotiations. It may sound counter-intuitive to recommend that buyers do not negotiate further on price after the auction finishes. After all, if there are a few $$ left on the table then why should the buyer leave them there? From a short-term perspective this is probably right. But from a long-term, economically sustainable perspective, this doesn’t work. As soon as suppliers wise up to this tactic they either refuse to take part in future auctions or they hold back in the expectation of post-auction negotiation. Bang, auction benefits neutralised for many years to come for that buyer.

Even eBay offers some basic advice to sellers on how to produce a listing and how to behave during and after an auction, so how much more important must it be for participants in $000,000 electronic reverse auctions to think carefully about their strategies in order to get the best result?

With that in mind, here are some top tips on how not to run an electronic reverse auction:

For the buyer (i.e. auction manager)

  1. Make sure the Invitation To Auction (or whatever you call it) is as vague as possible. Fit it onto 1 sheet of paper, max.
  2. If any bidders ask for clarifications then don’t answer them. After all, it will be more fun if all the bidders think they are bidding for something different.
  3. Don’t waste your time qualifying suppliers before the auction. You want to leave as much work for yourself after the auction as possible. And, hell, chances are you want to stay with your incumbent anyway so there’s even less point finding out if the other bidders are serious.
  4. Don’t communicate with the suppliers during the auction. You wouldn’t want any good old fashioned negotiation to get in the way of the technology, would you?
  5. Obviously you have no intention of changing suppliers, you are just running the auction with the intention of beating down your current incumbent’s price. So why not call the incumbent up after the auction asking them to match the leading supplier’s bid?
  6. Or, if you have fallen out with your incumbent, then treat the final bid from the auction as a starting point for negotiations with your preferred supplier.
  7. Don’t tell the bidder who came first in the auction that she hasn’t been awarded the business until at least 3 months have passed. Until then don’t answer any calls from the bidder asking for updates on the contract award process.

For the supplier (i.e. the bidder)

Remember that the buyer is only running the auction as an information-gathering exercise and has no serious intention to award the contract based on the auction results.

  1. Turn up on time to show some willing and place a few bids if prompted, but otherwise just sit tight and watch the other guys. If you’re lucky you might not have to bid at all and you’ll end up finding out your competitors’ pricing.
  2. Make sure you wait until the auction is running before you ask any questions about the specifications or auction rules. Whatever you do, make sure that your interpretation of what you are bidding for is different to what the other bidders are bidding on.
  3. Whatever you do, make sure you don’t come first. After all, what’s the point?
  4. Wait until after the auction then call up the buyer offering to negotiate offline, perhaps even matching the leading price. This way other bidders won’t be able to respond to your offer – isn’t that great?

The benefits of weighted auctions

Readers of this blog will have seen a few posts about the impact of new public procurement rules on the use of auctions.

Over the past year I have seen some pretty interesting results and I want to share a couple of illustrative examples. On the one hand these auctions can deliver increased savings (sounds counter-intuitive, I know, but it’s true). On the other hand these auctions can let higher quality suppliers win, even if they can’t compete purely on price.

Generalising, suppliers are either high quality/high price or low quality/low price. In your common or garden online reverse auction the high quality/high price supplier can’t compete on price with the low quality/low price supplier. This means that the low quality/low price supplier doesn’t have to work so hard to get into first place.

In a multi attribute or weighted auction, the quality is fed into the auction mechanism to produce a comparator score – this compares the total value of each offer. The winner of the auction is the one with the best comparator score, not necessarily the one with the lowest price.

The high quality/high price supplier ends up with good overall value for money, even if their price is relatively high. So a lower quality/lower price supplier has to bid far more aggressively on price than they would have done in a price only auction.

Two real-world anecdotes I’ve seen recently highlight what can happen when you start running these auctions:

1. An auction where the winner of the auction was the supplier with the highest price: Best value for money overall but highest price. The winner of the auction had a price about 10% above the lowest price in the auction, but because of their higher quality and better delivery they were able to win on a total value for money basis.

2. An auction where the winner of the auction was the supplier with the lowest price, but they had to compete very aggressively to match the overall value for money of the higher priced suppliers. The savings generated through the auction were 18% but if non-price factors had not been included into the auction then the saving would only have been about 12%.

Caveat: If this all sounds too good to be true, then that is because this kind of auction is hard work to set up. Additionally it is not appropriate in all situations. For example, if I want a 2 day lead time and I really don’t care if you offer me a 1 day lead time instead, or if I want trainers with 2 years experience at least and I really don’t care if you offer me trainers with 5 years experience then building in weightings for these attributes would be a waste of time.

The Trouble With Dutch Auctions

I am not a big fan of reverse Dutch auctions on the internet, from either the buyer’s or the seller’s point of view.

Dutch auctions were initially invented and adopted to speed up the sale of flowers in Amsterdam. Potential flower buyers would sit in a room which contained a clock. The clock would initially show a very high price – much higher than any flower buyer would be prepared to pay. The price shown on the clock would then tick downwards until it reached a price that one buyer was happy with. The buyer would press a button to “stop the clock” and could buy as many lots of flowers as they wanted at the price shown on the clock. If more flowers remained to be sold then the clock would continue downwards until all the flowers had been sold.

Software providers have adapted this kind of auction to internet procurement auctions, but the practical implementation leads a lot to be desired.

In a reverse dutch auction the price starts very low and gradually increases until a supplier “stops the clock” and offers to supply at the price shown on the clock. Apparently, the faster the clock, the more excitement and the higher prices would be (i.e. better for the auctioneer).

Of course, on the internet, you can’t legislate for the speed of bidders’ internet connections. So all implementations of online reverse Dutch auction that I have seen allow the bidder to place their best bid before the auction starts and then have the system work out when to stop the clock. The system gradually ticks upwards and eventually reveals the winning supplier’s bid to the buyer.

In other words, they aren’t auctions at all. There is no competition, no unleashing of those “animal spirits”, no nervous energy. In short, nothing of what makes auctions the best tool for allocating goods and services in a market.

As if that isn’t bad enough, the buyer only ever gets to see one supplier’s bid – so if there are any quality or other issues with that supplier the buyer is not able to switch to another supplier.

In fact, I am aware of one major retailer which has been updating its Dutch auction software to reveal all the suppliers’ bids. In other words they are turning Dutch auction software into Sealed Bid software.

The moral of the story – think carefully before running a Dutch auction on the internet. You’ll be running a second-class sealed bid. 9 times out of 10 the real solution would be to use a Japanese auction …. but that is a different story post.