Auctions and Sustainability

Reverse auctions are unsustainable. They force suppliers to lower their prices to such a degree that they risk being driven out of business (bad for economic sustainability) and incentivise suppliers to cut corners in order to deliver at such low prices (bad for social and environmental sustainability.

OK, so this is an extreme caricature, but I am sure that some of you will identify to some degree or other with the sentiment.

And yet, forward auctions are a central tenet of carbon emission trading (good for economic, social and environmental sustainability).

So where’s the disconnect?

Truth be told, reverse auctions are just a tool. They can be used in a sustainable way or an unsustainable way.

Here’s one way you can use a reverse auction unsustainably:

• Include suppliers of all different kinds of quality, even ones you are not really going to be prepared to deal with
• Bid just on price
• Wait for high quality suppliers to drop their prices in an attempt to compete with the lower-quality suppliers
• Then just use the information you gained from the reverse auction to beat your incumbent into accepting a price decrease

Any time you buy something at a price that is lower than what the supplier can genuinely afford to sell at you are damaging not only your supplier relationships but you are damaging the economic sustainability of the supplier marketplace. And you may well be causing knock-on effects that damage environmental and social sustainability as your suppliers struggle to deliver at the agreed prices.

Here’s one way you can use reverse auctions sustainably:

• Weight the different suppliers so they are competing on a genuinely level playing field
• Be prepared to award the contract to a supplier who provides best overall value for money rather than simply best price

So long as suppliers are bidding on a level playing field, the prices they are prepared to offer should be sound. Or at least you can see where different quality suppliers really drop out of the bidding. Certainly from a theoretical point of view, an auction run on a level playing field is the best way of allocating goods and services to those who value them most. In the interests of practicing what you preach, this is the approach I took in my recent reverse auction for software development services.

This may mean paying more on a per unit basis, but if you’ve done your sums right in the weightings part of the project you’ll be better off overall. As will your supply market.

Happy smiles all round.

Two sides to the CSR/Sustainability argument

So I’m back visiting my colleagues in Shanghai. WordPress is (still) inaccessible through the Great Firewall Of China so I am having to take alternative measures to keep posting.

Anyway – The Doctor is kicking off a Carnival of Sustainability blog posts this week. I am trying to see if I can make some useful points about the intersection of e-auctions and sustainability that are beyond the obvious.

But first, a couple of points I noticed whilst catching up on some reading on the plane. From my two favourite publications: The Economist and Private Eye.

From The Economist’s Special Report on Corporate Social Responsibility, January 19th 2008, a quote about Tata – makers of the famed 1 lakh car:

“India has a long tradition of paternalistic philanthropy. Big family-owned firms such as Tata are particularly active in providing basic services, such as schools and healthcare, for local communities.”

And now, from Private Eye, issue 1201, 11 Jan – 24 Jan 2008, again about Tata, and again under a banner called Corporate Responsibility:

“[Tata’s commitment to Corporate Social Responsibility] might surprise the farmers of Singur … where the car is being built. The 997-acre site produced three crops a year and provided a decent living to more than 20,000 people. But when Tata picked it for its new plant in 2006 … the chief minister of West Bengal … announced that the land was to be forcibly acquired … Many of the farmers and sharecroppers dug in their heels when they realised the non-negotiable compensation would be half the market value.

“Others baffled by Tata’s claims to being socially concerned include tribals of Bastar in Chhatisgarh, fighting to prevent their ancestral lands being torn up for a Tata iron ore mine; and relatives of 13 tribal people shot dead by police at Kalinganagar in Orissa in January 2006, a village earmarked for a Tata steel plant.”

The point is not to try to make a point about Tata. Nor is the point to get into a debate about where CSR stops and Sustainability starts. Will the Tata site in Singur be better or worse for the farmers? For the people who will now be able to afford the new car? Will the factory be more sustainable than farming? Who wins from CSR and Sustainability? Who loses? The point is to remember that, yes, the whole sustainability issue is genuinely complex. And, yes, pity the poor overburdened word “sustainability” which seems to mean all kinds of things to all kinds of people.

And then, when you start to despair of the sheer complexity of the task at hand, have a read about Norway’s audacious, inspirational (yet fundamentally pretty simple) plans to become carbon neutral by 2030.