eAuctions at Procurement Solutions Tomorrow

I’ll be at the Procurement Solutions for the public sector event at Earls Court tomorrow 9th June. Doing a talk on auction types at 10am and then at 2:40pm an auction demo with Chris Chettle from OGCBuying.Solutions.

Hope to see some of you there.

Buying in Ancient Times

Enjoyed reading Purchasing at the Parthenon by Bob Soames in a recent Supply Management article (subscription required for online access). It describes procurement practices in ancient Greece, 2,500 years ago – the challenges they faced then were very similar to the ones buyers face today: cost overruns, fraud, poor quality supplies etc.

Two interesting solutions of theirs:

The city of Ephesus contracted its works out to private companies. When agreeing a project, the architect had to sign over all his property to the city as security. If the project came in under budget then all well and good. The city would even pay for budget overruns up to 25% of the agreed budget. Anything beyond a 25% budget overrun would be paid for ourt of the architect’s own purse.

Buyer beware: during those times a distinction was made between business-to-consumer and business-to-business deals. In B2C sales, the buyer was allowed to return your goods as not fit-for-purpose. In B2B, however, professionals were expected to manage risks themselves.

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.

When suppliers benefit from online auctions

At least if they are hoping to break into selling to public sector bodies in the European Union.

As we approach the anniversary of the implementation of the new EU directive on public procurement it’s worth reflecting on some experiences under the new regime.

In a nutshell the new regulations force buyers who are using auctions to build all the weightings for non-price attributes (delivery, quality, service, etc) into the auction. So the auction is no longer just about price, but the supplier in 1st place is the supplier with the best overall value for money.

Why is this good news for suppliers?

1. To win the business a supplier does not need to have the best price. To win the business a supplier needs to offer best value for money.
2. And what the buyer means by “best value for money” is made completely transparent in an auction scenario.

Any supplier who has received a vague debrief after failing to be awarded a contract (or who received no debrief at all) will recognise the benefit of knowing, up front, exactly what the buyer means by “best value for money”.

Feedback from suppliers that I have seen so far is positive towards these kinds of auctions as compared against the traditional price-only auction. But what is now becoming clear is that suppliers are actually better off going through this auction than by not going through this kind of auction.

With these new kinds of auction (jargon: “multi attribute” and “weighted” – the difference is subtle and not important for now, but it’s as well to know the terms) each supplier knows exactly where they stand at any one time. Exactly where they stand means just that: at any point you know whether your offer is the best value for money or whether it is not, and if it is not you will know exactly how much more “value” you will need to add in order to be best value for money.

Any new supplier who is trying to break into a market will recognise the benefit in knowing exactly what the buyer wants and being able to compete against the incumbent on a completely level playing field.

So while incumbent suppliers will never want to encourage competition, new suppliers would be well advised to encourage buyers to run these kinds of auctions.