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eAuctions: Friend or Foe?

For most companies, the mere mention of the word 'eAuction' is enough to fill them with dread. eAuctions can incite a fear of total profit erosion, destruction of a long-term relationship with a buying organisation, loss of business to new offshore companies, or even eradication of a complete industry. There can be no doubt that eAuctions have shifted the balance of power in the negotiating process towards the buyer, but the typical reactions are nearly always grossly overstated. In fact, with thorough preparation and understanding of the process, the eAuction can become an efficient and effective tool to market, facilitating access to new geographies and industries whilst providing direct market feedback on the competitiveness of a company's product portfolio.

The eAuction itself tends to get blamed for more than it is guilty of. The reality is that any commercial organisation is always looking to obtain the best value for the products or services it procures. The eAuction is simply the implementation of what civilisation has known since the Romans started procuring slaves: assemble willing parties together in a dynamic market, and you will obtain the best deal the market will sustain. Indeed, in a traditional auction, the lead protagonist is asking the market to give him money; in an eAuction (or reverse auction) he is offering to give money to the market.

The power of eAuctions for buying organisations is compelling: 15% average savings; up to 50% cycle time reduction; visibility & standardisation of procurement processes; and access to a global supply base. Because of this power, eAuctions are not going away. Respected research company AMR Research predict eAuctions to continue growing by 75% per annum for the next three years. Many large organisations ranging from British Airways to Royal Bank of Scotland are aggressively implementing eAuctions across their entire organisations; once deployed, there is no going back to 'traditional' negotiating. 85% of FTSE 250 companies have purchased an eAuction tool; however, the majority have run only a handful of eAuctions. It is only a matter of time before they dramatically accelerate the use of eAuctions on everything they buy, and smaller companies are already following suit.

The most important difference between traditional auctions and eAuctions is first place does not automatically win the business. Whilst at Sotheby's the highest price takes the painting, the lowest price in an eAuction is rarely guaranteed the business. Buying decisions are always taken on value. Non-price factors - such as perceived quality, reputation, delivery schedules - are all important factors to that go into an award decision. Suppliers need to understand how the buyer perceives their non-price factors, and how this affects the overall value that is being offered. For example, an incumbent supplier of machined aluminium die-castings, whose factory is half a mile away from the buyer's factory in Manchester, does not need to beat the price of a relatively unknown supplier from Bulgaria. It is likely that the incumbent could be 5-10% behind the Bulgarian company and still hold onto the business. This is because buyers are inherently risk averse, and are prepared to pay for this. However, many organisations have not thought this through when bidding in an eAuction, and give away huge amounts of margin as they fight head-to-head with companies that are not in the same ball-park.

Another major difference between traditional and eAuctions is that eAuctions are not a free-for-all. Only provisionally screened suppliers are allowed to participate. However, some buyers will introduce a 'price-driver' into an eAuction in order to stimulate competition. It is important that a supplier fully understands the market place within which they operate, and that they are able to interpret the feedback from the market to try to identify where the price-drivers are, and to modify their strategy accordingly.

It is a safe assumption that there will be more suppliers in an eAuction than in a traditional negotiation. This is because a buyer can only really manage aggressive face-to-face negotiation with up to 4 suppliers, but in an eAuction the number is unlimited. This means that it is likely there will be suppliers from new geographies included in the process (assuming that transport costs are not restrictive).

In preparing for an eAuction, many organisations adopt strategies that will do them more harm than good. For example, some companies simply refuse to participate. This hurts them more than the buyer, and the eventually always come round to the fact that they have to be 'in it to win it'.and start competing in the end. Other companies treat the eAuction as 'best-and-final'; this means they get no feedback from where there competitors are and in some situations end up winning the business far ahead of the market.giving away margin without actually knowing it.

When developing a strategy for an eAuction, consider three elements: current relationship with the buyer; price competitiveness in the market; and the effect of your non-price factors on the award decision. From this you need to define a strategy that will get you to a point where you can 'just' win the business, namely where do you need to finish in the market versus your competition that will enable you to win the business. There are no right or wrong answers here, and much of this is more art than science.

eAuctions are still an emerging technology. This means there is still inconsistency in procedures and practices and unethical behaviour remains a problem. As a supplier, there is little that can be done to overcome this, other than pushing the buyer for a clear set of terms & conditions for participating the in eAuction. At the end of the day, it is the same for all competing suppliers, and those who accept this and get on with competing invariably come out best.

The eAuction itself typically runs between ½ - 2 hours each. During this time, dependent upon the type of eAuction used, there will be clues that a supplier can identify to maximise the amount of information they receive. For example, audio feedback when other competitors bid can indicate the 'velocity' of the market, particularly useful when the market is about to close. In the closing minutes of an eAuction, a leading bid will extend the market by 1-5 minutes, allowing competing suppliers to respond to other bids. This typically will continue until all suppliers stop bidding.

Once the eAuction is complete, the buyer is under pressure to chose the best value supplier and implement the contract. At this point, it is critical to continue supporting the buyer by demonstrating your ability to support the implementation. Independent of where you finished in the eAuction, do not give up hope of winning the business until you have received formal communication from the buyer of the award decision. If you don't win, understand why and identify ways of doing better next time.

The eAuction process can be destabilising to unprepared suppliers. Even those who are thoroughly prepared can find they end up with some margin compression. One simple way of fighting back is to use eAuctions on your own internal spend categories. eAuctions are here to stay and the sooner you get on board, the sooner you'll be able to benefit from the significant benefits they can deliver.

James Anthony, Machinery, 2 July 2004