Suppliers existing on already thin margins are fearful of being beaten down on price by powerful buyers. So why would they embrace reserve auctions, which end up awarding contracts to the cheapest bidder?
Traditional auctions involve driving up the price of an object or service until just one high-rolling bidder remains standing. Reverse auctions take prices in the opposite direction, with sellers competing for the privilege of accepting the least amount for the merchandise on offer.
The latter approach has been criticized as undermining long-term relationships between suppliers and buyers. When price is the only criterion, how can quality, trust and value-added services be part of the equation?
In the age of big data and cloud computing, some software vendors are urging supplies and buyers to take a fresh look at reverse auctions. They argue that the technique can in fact accommodate concerns other than price, and lead to stronger relationships between the two parties – even as buyers optimize their spend. According to sourcing and procurement software provider ScoutRFP, procurement teams today stand to save between 12 and 24 percent through the use of reverse auctions.
What’s changed since reverse auctions were considered anathema to suppliers? Some of it might have to do with a generational shift. Chris Wada, vice president of product with ScoutRFP, claims that 95 percent of procurement leaders between the ages of 30 and 44 rely on reverse auctions. Naturally data-driven, those individuals are drawn to the practice because it yields measurable results, he says.
The attractiveness of modern-day reverse auctions comes down to three perceived benefits: simplicity, visibility, and the opportunity for real-time collaboration between buyers and suppliers. Offered under a software-as-a-service model, the tool is relatively easy to use, Wada says. Moreover, it provides rapid feedback on offers.
“In the past,” he says, “you didn’t have that experience. It felt like you were going through the motions.” Bidding often required extensive back-and-forth communications via e-mail and phone. Responses might be delayed to the point where an eligible supplier lost out on a bid.
Wada insists that today’s reverse auctions aren’t exclusively focused on price, especially when it comes to qualifying suppliers for participating in a bid. Buyers narrow down the field through a variety of criteria, including quality, service level and degree of innovation.
Nor is price the sole final determinant. The supplier’s ability to collaborate with the buyer over the life of the relationship is a key factor in that choice, Wada says. So is the status of an incumbent supplier, given the headaches involved in switching one’s sourcing.
For the buyer, savings derive in part from the increased likelihood of choosing the right supplier at the outset. Switching out a suboptimal supplier entails significant costs, Wada notes. In addition, administrative fees are lower because it takes less time and resources to run auctions with currently available software platforms. Finally, he says, reverse auctions are more likely than other methods to ensure that buyers get the best possible price in the marketplace.
What’s the advantage of reverse auctions to prospective suppliers? Proponents argue that all qualified vendors receive the same information about a bid, with equal opportunity to participate. They also benefit from anonymity and a system that rates them objectively, without the disruptive influence of special favors. Buyers can provide bidders with a further incentive by offering larger, long-term contracts that result in better relations between the parties. Suppliers, too, can cut administrative costs, such as advertising and commissions, through a streamlined bid process.
To avoid the use of cutthroat bargaining strategies, reverse auctions need to adhere to ethical guidelines. Buyers should clearly communicate their selection criteria from the start, and not deviate from them. (Again, such criteria are likely to be a mix of quantitative and qualitative measures, with the actual balance varying according to both the buyer and the bid.) Suppliers are far more likely to participate in a reverse auction if they view the process as fair.
Wada says a well-run reverse auction, set up with proper expectations and constant communication with bidders, can avoid placing excessive pressure on suppliers’ margins. That was frequently the case in the past, when a supplier would be forced to fill out an impersonal template without ever receiving feedback on its offer. As a result, it might end up crafting a bid that was below margin.
ScoutRFP recommends that buyers set up internal centers of excellence to train suppliers in the use of reverse auctions, and answer any questions they might have. Buyers can even stage trial auctions to demonstrate how the process will be carried out. “This step eliminates surprises,” the vendor says, “and allows suppliers to bring more creative solutions to the table.”