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.

Trust Credibility and Reputation in eAuctions

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

  1. 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.
  2. From Consultancy Services to Dairy Cream there is a reverse auction type most suited to your category and supply market conditions.

Reverse Auction Tips

  1. Specifications (Remember the waterproof matches)
  2. Plan and Execute an appopriate Messaging strategy
  3. 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
  4. Auction structure impacts success (Remember the UK vs Swiss 3G auctions)
  5. 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 4)

An effective instant messaging strategy is critically important if you want to get the maximum benefit out of your reverse auctions. 

Here’s my slide to illustrate the point: you will need to click to enlarge.

eAuction Messaging Strategy

There are 6 suppliers, A through E bidding in an eAuction that started at 11am and ran until just short of 1pm. This was for an eAuction for pet food, but the same applies to every category I have seen.

The blue crosses represent when a bid was placed. The red diamonds are when an instant message was sent from the buyer to the supplier. A green triangle is when a supplier sends an instant message to the buyer.

Immediately you see the a few key facts:

  • Sending a message to a supplier is a very powerful way of encouraging them to bid. I have marked with orange ovals on the slide where a message was almost immediately followed by a bid
  • Messaging is an important means of bringing the human conversational touch back into the negotiation. The human side can be all too easily lost in an eAuction but you can see here several exchanges of messaging between buyer and supplier. In particular I have marked one with Supplier B towards the end of the event.

Some questions I get when I make this point:

  • Isn’t in unethical to favour one supplier by messaging them? It is a wrong assumption that messaging a supplier implies any kind of favouritism. If the message is reminding one supplier that they haven’t bid for 20 minutes then I believe that this is a perfectly fine message to send. Of course messaging, like any other tool, can be used well or badly so it pays to have someone who knows what they are doing managing the messaging strategy.
  • Wouldn’t you get the savings anyway when the reverse auction comes towards the end? Well, arguably you might. But it’s pretty clear that you guarantee those additional savings through judicious messaging. And I think most buyers would prefer to be sure of getting additional bids through a well-designed messaging strategy rather than to sit and hope!

To continue the last point – one of my colleagues in a past life did some analysis of instant messaging in reverse auctions. His analysis suggested that instant messaging increased the average savings from a reverse auction by about 6 percentage points. Now I haven’t seen the analysis, and my personal view is that it is pretty hard to put a number on the savings that messaging would get you. But without a shadow of a doubt an effective messaging strategy does generate more activity which does generate more savings.

So it surprised me enormously when I found out that some eAuction software out there (yes, even in 2008) does not support instant messaging during an eAuction. And I’m talking about some of the more highly regarded software in the marketplace. So: if you are looking at a reverse auction, make double sure that your provider not only has the facility to do messaging, but knows how to use it.

Does Procurement eAuction Design Matter? (part 3)

I’ve used 2 slides so far introducing e-auctions in general and outlining why you would want to run an e-auction and how different e-auction types will

The next 5 posts (including this one) will outline 5 different tips that buyers should consider when running their sourcing projects to maximise the benefits from e-auctions:

One of the highest savings I have ever seen in an eAuction was the one we achieved for waterproof matches for an arm of the UK’s Ministry of Defence. They had been spending about £1.5million a year on these. The eAuction identified savings of just over 75%.

Is this because eAuctions are some kind of magical system to achieve ludicrously low prices which are probably then going to be unsustainable by the suppliers?

No. Well not in this case anyway. Why will become clear later on.

In this case the buyer was strategically sourcing this category for the first time in a long time. During the process he discovered that his organisation was buying matches in boxes of 17. It turned out that manufacturers these days make them in boxes of 25. So they buying organisation was paying for someone to unwrap the boxes of 25, take out 8 matches and then wrap them back up again.

The buyer did some investigation: Was there a particular army regulation that stipulated that a squaddie can only have 17 waterproof matches in a box at a time? Are more than 17 matches in a box likely to light themselves spontaneously, and

So this is the first tip out of my five tips is: Revisit your specs, talk to the suppliers about the specs, make sure the specs make sense and make sure the suppliers are clear on the specs.

This is arguably a strategic sourcing issue as much as an eAuction issue. But there are two reasons why this issue relates particularly to eAuctions:

1. For an eAuction to be successful, all suppliers need to be bidding on a level playing field. One element of having a level playing field is having clear specificiations. While strategic sourcing best practice might be to have clear specs when you go to market, an eAuction forces you to adhere to this practice.

2. If you make such a fundamental change to the specifications as happened in this case, then how do you know what the market price really is? You don’t, and the only way you will find out is by running an eAuction. Without an eAuction in this case you could almost guarantee that the suppliers would offer some level of discount, but would not have offered anything like the 75% achieved in the eAuction.

I know that there are some buyers who are afraid of running eAuctions because they don’t want to generate “too many savings”. They want to “save some for next year” and/or are afraid of being asked by their boss to explain a large saving: “so what have you been doing for the past 2 years?” Both of these may make sense from an individual buyer’s perspective, depending on their individual targets. But they are not the way to achieve real game changing results for the buying organisation. So double praise to the buyer in this instance for challenging old assumptions, engaging with suppliers and achieving such a tremendous saving as a result.

For completeness, here is the slide I used for this story. This one did bring me back in line with the 10/20/30 rule.

Auction Tip Specifications

Does Procurement eAuction Design Matter? (part 2)

You’ll be glad to know that this post is shorter than part 1. On this slide of the presentation I broke the 10/20/30 rule by using bullet points and font sizes of 14 – 16. Oh never mind.

Not all eAuction designs are created equal. Choosing the right eAuction type is an important step in maximising the benefits you can achieve from the event. Here are 3 examples I often use:

Hygiene Services

  • Saving from RFI only: 17%
  • Suppliers did not know there was going to be an auction involved
  • Saving from RFI + Auction: 39%

In this case a potential client had already run their own sourcing exercise, achieving a 17% saving for Hygiene Services. TradingPartners was challenged to see if an eAuction would do better. To cut a long story short, the eAuction did much better, increasing the 17% saving to 39%. Now, in theory the buyer may ,have been able to negotiate some slight increase in savings beyond the 17%, but would not have been able to get to the 39% saving level without an eAuction.

We see this time and again with eAuctions: With open competition you get a better result than through doing your sourcing offline.

Consultancy Services

  • Saving from a normal Reverse English Auction would have been about 12%
  • Run as a Weighted Auction and so delivered saving of 18%

This auction was the first one run in the UK under the 2006 procurement regulations. These regulations state that, if an eAuction is used in the public sector, then the winner of the auction must win the contract (with certain caveats). These regulations have driven increased adoption of weighted auctions. Interestingly enough, weighted auctions often achieve greater savings than would be possible under simple English price-only auctions. This is because they do a very good job of levelling the playing field amongst higher price/quality and lower price/quality suppliers. And is another reason why weighted auctions should be used far more by buyers than what is currently the case.

Levelling the playing field amongst suppliers by using weightings improves the results for both buyers and suppliers

Dairy Products

  • Saving from a normal Reverse English Auction would have been at most 5 – 6%
  • Run as a Japanese Auction and so delivered saving of 12%

I still remember fondly the first Japanese eAuction we ran in the back end of 2005. The market place for this category at the time was very tight. So an English eAuction wouldn’t have been a great choice. So we ran it as a Japanese eAuction and got a dramatically improved result. Again, you can speculate that with judicious messaging, for example, you might have been able to achieve more than the 5-6% savings we calculated would have been achieved under an English auction. But again, an English eAuction would never have been able to achieve this increased level of saving.

Use particular auction types (e.g. Japanese or Multi Directional) when the market conditions dictate