Recently we encountered a twist on standard eAuction formats which worked byconcealing supplier rankings at the end of an auction whilst allowing new bids to be submitted.
You can think of it as a post-auction sealed bid phase but lasting minutes, not days or weeks.
We say “post-auction” as it may technically still be part of the auction process, though by no means can you call a sealed bid process an ‘auction’. For example the Merriam-Webster online dictionary defines an auction as ‘open public bidding’, which a sealed bid quite clearly isn’t.
The idea is that whilst the bidders would battle it out amongst themselves during the eAuction, they could further reduce their bids during this post-auction ‘cool-off’ without alerting their competitors. In other words, it would leave all auction participants in the dark as to where they were finally positioned, much like a typical RFP.
This can give the buyer an advantage by avoiding the situation where the bidder knows they finished in first place but is later upset at not being awarded the contract. It can happen for many reasons, albeit almost exclusively in the private sector, and typically it is due to the first-placed supplier not quite offering a compelling enough reason to be chosen.
A secondary advantage is that it can also prevent ‘bid shadowing’ which is where one or more bidders closely follow the lead bidder to ensure they are in with a chance of securing business but without having to give away as much margin.
However, it doesn’t necessarily solve these issues. The winning bidder during the auction may still be upset if they were not to be awarded the contract. You couldn’t help but empathise with the bidder that, if anything, they now have even less information to go on than if it were just an eAuction, adding to their frustration.
Furthermore, it possibly undermines the purpose of an auction. An auction is driven by open competition and interaction amongst bidders. If the process was to be settled at the end via a sealed bid, you might as well have simply opted for a sealed bid process only. The auction was a mere distraction.
In our former lives as eAuction consultants, best practice was not to allow post-auction bids, as it can compromise the auction itself.
To validate this point, we deliberated what we would do if we were invited to this two-stage negotiation process of eAuction followed by sealed bid.
Firstly, we would identify our BAFO: best and final offer. We would be forced to make an initial bid, be it during the RFQ or as our auction start price. We would go in high; not so high that we get eliminated but high enough that we are conceding very little.
Next, we would sit and observe the auction, not making a single move. We might have an understanding of how many other players are involved, which is always nice to know, as well as where our uncompetitive offer finished up.
Once we enter into the sealed bid phase, we make our move knowing that our competitors will have no idea. We’d hop in at our BAFO and hope that it would suffice.
How would our strategy differ to a single-stage sealed bid process? We don’t believe it would. Hence the irrelevance of the eAuction in this case.
The trouble is the concept becomes a self-fulfilling prophecy. Once bidders are told how this two-stage negotiation operates, they will logically hold back during the auction. Why give the game away early? And so to the client using this feature, they will see a not-very-successful eAuction followed by what appears to be a hugely exciting sealed bid process that has appeared to save the day! Well, yes, of course it has: the bidders have already realised the auction serves no purpose and have bypassed it. That is the consequence of allowing post-auction bids.
As a final illustration of why interactive auctions are more powerful, here’s something we’ve all no doubt experienced on eBay:
You decide to bid on an item so you enter the maximum price you’ll be willing to pay – your BAFO. As the final minutes tick by, a new bid drops in that knocks you off the running. You quickly decide to improve your offer – now call it your absolute BAFO! – if it means you might have one last chance of being successful.
And so what you’ve done is exceeded the bid that you initially thought was as far as you’d go. You’ve done this because competition has pushed you and you’ve decided that you still have the smallest of margin left to offer if it means you still have a chance. The alternative is that you know you’ve lost.
The second parallel with eBay is that you can be ‘sniped’, whereby someone pips you to it right at the end, even though you would have relished the chance to react. This is precisely what the sealed bid phase detrimentally encourages.
Hence the conclusion is that communicating to bidders that there will be a post-auction sealed bid period fundamentally impairs the very thing you’re looking to accomplish – using market forces to negotiate the absolute market price.
This article is a follow-up piece by Nick Drewe, co-founder of Market Dojo, who used the Market Dojo eSourcing tool to let a contract with local builders for his own home extension. The series of articles (found here, here and here), written in late 2013, was picked up by Peter Smith at Spend Matters who raised some interesting observations.
Several months have passed since I conducted my domestic eSourcing event involving some 96 Bristol-based builders. The outcome of the event was implemented savings to the tune of 33% versus my best pre-tender offer. Furthermore, due to the preparation that is typically required to enable an eSourcing event to be run, the implementation was simply a case of ‘sign here please’. The contract has since been signed with the successful builder and work is due to start imminently.
The reason I bring this up is that I stumbled upon the coverage of Part 2 of this series by Peter Smith at the excellent Spend Matters UK blog. You can find the original article here. Peter raised a number of interesting points, which I attempted to answer via the ‘Comments’ facility on the blog. However, I would like to re-address some of those points here, as they deserve further attention in my view.
First of all Peter asks:
“Can auctions be used for pretty much anything?”
The first thing that popped into my mind was that I wasn’t necessarily running an eAuction. At this point, I was conducting what would be more formally recognised as an RFP, using online scored questionnaires and a bespoke pricing structure. Ultimately, the RFP was all that was needed, as it became clear that any further significant cost savings would arise from changing the specification and not from negotiating the rates.
As I mentioned at the time, I did think about running a weighted tender, taking into account the supplier questionnaire responses, my opinion of their site visits and testimonials from their previous clients. I decided against this because although a weighted tender helps to identify the overall top performers, sometimes you just have to go with ‘gut feel’ – totally illegal in EU Procurement rules, I know! I simply wouldn’t know what price to quality ratio to set, nor how much weighting to assign to aspects like the client testimonials until I actually heard from the clients. If the clients were all impassive, I would largely disregard this criterion. However, if the clients were passionately pro or against a particular supplier, it would weigh heavily on my mind, perhaps far more so than the price itself. In a word, a weighted tender would have been too ‘rigid’, whereas sometimes there are merits in having a fluid decision-making process.
“And perhaps most striking, is the thought that there might be domestic applications for some B2B eSourcing tools. Might a consumer be able to use sourcing tools when buying a new car? a holiday?”
Now this I know the answer to – yes, absolutely! Aside from my case in point, which is the first example I know of that incorporates a true business-to-business eSourcing tool for a domestic purpose, there are a host of other ‘eSourcing’ tools that can be used by consumers. There were numerous eSourcing tools for the building trade, such as RatedPeople.com or MyBuilder.com. Buying a new car via reverse auction can already be done on AutoeBid.com. Another example I used was when I recently transported a sofa from my flat in Bristol to my parents house in Sussex. I sourced the delivery using AnyVan.com. In the end my final price was entirely free by piggy-backing off an existing delivery, although my parents gave them a fiver for carrying the sofa upstairs!
Electronic sourcing is about finding online the right supplier at the right price for the right goods or services that you desire. A good eSourcing tool will make this task easier, quicker and more effective for you, and so the fact that there are so many eSourcing tools for consumers is testament to those benefits. The question is, as the internet becomes more ingrained in our daily lives, which of B2B or B2C will adopt eSourcing more comprehensively? At this rate, I’m inclined towards B2C.
Anyhow, before we deviate too far from the main topic, let’s get back to more from Peter:
“One barrier [to eSourcing]is that you need to have some real competition to get the benefit of tools and indeed of the processes themselves. So it is less applicable if you definitely know which hotel in Obertauern you want to visit, as in our case!”
The reliance upon competition is certainly true. However, the trick is to create competition. If you want an iPad, you know Apple is the only manufacturer and so you might think you have zero competition. However, there are many distributors, retailers, stockists etc. that you can involve. They each have regional, time-bound or even personal targets to meet. They have their own margins they can play with. I’ve run an eAuction in the past where an Apple stockist outbid Apple themselves!
In the hotel example, whilst Peter knew which hotel he wanted, he could have created the competition by involving other hotels that he may equally have been attracted to if the price was right (and there should always be such a price, e.g. if another 5 star hotel offered rooms for £10 a night perhaps?). So in the eSourcing context, invite hotels that you could be incentivised to book with and see what they can all offer. Perhaps you’ll find a reason to book with another, or perhaps you’ll head back to the original choice but with a better deal. Other consumer eSourcing tools like LateRooms.com or Trip Advisor might also be able to find you that deal despite the initial lack of competition.
A final point raised by Peter was:
“Another issue of the consumer is that we often don’t have significant repeat business to offer, unlike most corporate situations. So if Nick accepts a low bid, will the builder really care about doing a great job, knowing that he probably isn’t going to buy another project for some time, if ever?”
Now this simply comes down to finding the right supplier, someone who will respect your value of business. It has very little to do with the eSourcing process itself. If I asked Balfour Beatty to sort out my house extension, I’d be laughed at and quite rightly! As the largest construction company in the UK, what would they care about my project? However, if I approached a company that has an excellent reputation but is still in their early days and wants to use this opportunity as a stepping stone for greater things, they will be devoted to the project so they can use it as a flagship case study for their future proposals.
Hence this comes back to using an element of ‘gut feel’ when awarding the contract, as you get a sense of this motivation only when you meet the suppliers. As it happens, the builder I signed the contract with was not the most competitive and yet I signed with them for exactly those aforementioned reasons.
Anyhow, that wraps up some of my thoughts when I re-read the commentary that Peter kindly provided on the original piece. Since then we’ve negotiated a new kitchen and bathroom (aggregated together to leverage the extra spend) and boy did we wish we had reverse auctioned that to save time! We were actually glued to the phone in the car trying to finalise which supplier we were supposed to drive to whilst our three shortlisted suppliers went back-and-forth undercutting each other! It was worth it in the end, as we did implement a 50% saving from the initial discounted offer, but a part of me wonders what would have happened in an eAuction. I guess we’ll never know!Would we participate in a reverse auction?
Reverse auctions and even e-sourcing software has become a commodity product. There are numerous players in this market offering broadly the same functionality. Sure, some have a few more bells and whistles and others can integrate nicely with other e-procurement solutions, but on the whole there is little to distinguish between them aside from cost and aesthetics.
So, if I had responsibility as a buyer for a large company to implement an e-sourcing solution, why would I not consider conducting a reverse auction to settle the negotiation and how would I go about such a thing?
Well, if you look at the key ingredients for a successful e-auction, purely and simply it comes down to being able to accurately and robustly define what you need and to ensure you have enough capable and interested participants who can meet those needs.
In terms of e-sourcing software, I would draft up the core features and functionality that I would look for in any capable vendor. Now, I could do this the complex way and draft up a weighted RFI followed by a weighted auction to allow bidders who have “special” features to score more highly, but then why make this difficult. Simply knock up the list of “must-haves” and make each participant verify that they can satisfy the requirements. I would request a 2 hour web-demo with each participant to help me decide whether or not to include them in the bidding process. Since the whole process will be run on “Buyer’s Choice”, I will decide post-negotiation which participant to award the business to, taking into account the price of their solution as well as the other features and service levels that they can be distinguished by.
Having done this, I have my list of capable and interested participants. To complete my requirements, I would also compile my commercial and contractual terms, such as length of contract, number of users, approximate number of sourcing events, suggested payment terms, my training requirements and so on. This would allow my participants to submit accurate and sustainable quotations.
The next step is to conduct the negotiation and for this we could choose the reverse auction. The interesting step here is to pick a platform on which to conduct the auction, as it would most likely be inappropriate to use the software of one of the competing vendors, even though I could probably source a free event from them! Perhaps one of my earlier unsuccessful candidates would supply this, which would at least be something of a consolation for them.
With the auction and hence price negotiation complete I would be in the position to award the business, using my buyer’s choice to take into account all the other differentials.
So, would we as a company participate in such a process?
The short answer is most certainly yes! Whilst some organisations refuse to take part reverse auctions on the basis that they are too price-focused and that they drive you to prices that are unsustainable, we would actually be very keen to take part in any such opportunity as we know this is not true.
Firstly, the sales process is much shorter. A buyer would be approaching us with a genuine interest to buy and has been given the green-light from above. We would not have to spend much time at all writing proposals, reviewing proposals, re-writing proposals and so on! Instead, the buyer has taken the time to lay all of this out for us in advance. All we have to do is examine whether it is within our core capability and interest to supply it and at what price. Since we know from experience that the entire reverse auction process and award decision takes approximately 8 weeks, this method is far quicker than the 6 months it can take in a traditional process.
Secondly we have huge belief in our business model and offering to the extent that we think we would perform very well under competitive pressures. Should we not be successful, at least we have live and dynamic market feedback on how we compare to our genuine competitors. If we continued to be unsuccessful against the competition then it would provoke us to carefully review our business, thereby mitigating the risk of longer term failure that would inevitably have occurred should we not have pitted ourselves against the competition.
As for the potential objections, sure the auction itself is focused on price however the award process is not. During the process, as a participant I would be in regular dialogue with the buyer, building up the relationship, advising where the specifications are not quite right, being supportive, proactive and punctual. Let’s not forget that the negotiation is still part of the sales process and so by demonstrating a high degree of professionalism and that you are a company that can be trusted, you are greatly influencing the buyer’s decision once the auction is over. This can make the difference between success and failure, despite your ranking in the auction.
The only ground for objection here is that the auction is simply too effective as a negotiation tool. With my buyer’s hat on, sometimes I do wish that suppliers I am negotiating with stopped offering me all these extra services and features that I don’t want and simply reduced their price for those that I am actually asking for! This is where the auction is so powerful.
As for auctions leading to unsustainable contract pricing, this is where you need to do your groundwork and stick to it during the auction itself. Sure, it can be tempting during an auction to submit that “one last offer” only to later realise you cannot commit to it, but it is in no one’s interest for this to happen. The buyer is looking for a capable partner at the most competitive price level and we as a participant are looking for a new customer at a price level that allows us to grow. There is certainly middle ground here where both parties can win. Again, if you keep losing out whilst bidding on auctions, it is time to take a look at where you are leaking costs or to re-think which markets you should be competing in. Perhaps all those additional service levels and quality accreditations are simply not important to your customers, or on the other hand, perhaps your run-of-the-mill offering is not specialised or distinct enough to convince your customers to partner with you. An auction plus award decision offers genuine market feedback combined with specific personal feedback. You can really use this to your advantage to improve your sales performance in future activities. In fact, should you be successful in an e-auction, why not shout it from the roof-tops. You have just positioned your company as one of the best in the market. What a fantastic statement to make when you are next in a sales dialogue.
One final note is that we as an e-sourcing and e-auction software vendor, who encourages organisations across the globe to tender their business via this approach, really should be able to put our money where our mouth is and wholly support any buyer who would like to auction us.
Well, it would be our pleasure!
About: Market Dojo provides business-to-business e-auction and e-sourcing software. Find out more at www.marketdojo.com10 (and a bit) things you didn’t know about Market Dojo