16 January 2003

When Royal Mail Group ran a trial on its e-auctions capability, it had the unusual effect of focusing board members' minds on purchasing. Tim Peacock explains

July 18 2002. We had arranged live Internet viewing in our London head office so that our most senior managers could witness the first e-auction event undertaken by Royal Mail Group (then Consignia). Subject to public procurement regulations and worth more than £1.5 million a year, the event was eagerly awaited by the purchasing teams.

However, we needed to attract board-level attention so that board members would attend and stay for the duration. Needless to say, we desperately wanted a positive result that delivered real business benefit. We need not have worried on any count.

Three board members attended and stayed through many "extensions" to see the auction conclude with savings of more than 9 per cent (against a forecast of only 2 per cent). One member even postponed his following meeting. How often does purchasing get extended airtime with board members in your organisation?

This was the positive start of our e-auction experience. Actually, that's not strictly true. A year earlier we had used a standalone version of our then quite basic e-procurement system to run some small print contracts through e-auctions. These delivered savings of about 11 per cent. Twelve months later, spurred on by our business's need to make significant savings, we were running a proof of concept (PoC) trial of e-auctions, the first event being that described above.

This involved using an externally hosted solution to help us to evaluate the benefits e-auctions can deliver and, importantly, to help us to decide whether we could move to a permanent in-house e-auction tool based on our e-procurement system.

In the PoC, we ran three events. The first was for inland airfreight, the second for electricity (for sites using more than 100MW), and the third for places on our print roster. Electricity and print contract values were £8 million and £2.9 million a year respectively. Electricity produced savings of more than 19 per cent against a forecast of 5 per cent, and print 28 per cent against a forecast of 15 per cent. All three together produced significant cash savings.

The PoC was a success. When we deducted the costs of running the three events, they had brought savings of more than £700,000 to the end of March this year and more than £870,000 to the end of March 2004. Nevertheless, we needed to run more events if we were to convince the board of the benefits. We needed to scale up our activity to better demonstrate what auctions could deliver.

The case based on the results of the PoC was pretty compelling and funding was made available to allow us to continue with the programme to the end of March 2003.

We also had to advertise our growing requirement for the e-auction technology and support services via the Official Journal of the European Communities (OJEC), a process we hope to have concluded soon. And, yes, we did consider running an auction for this service - but on whose system could we have run it to ensure impartiality?

We have continued with our scale-up, buoyed by the results from the PoC. Further events have been held, but with varying degrees of success.

Price saving problems

Price savings brought two disappointments. First, for a vehicle purchase, the process failed to deliver a better result than had been anticipated during the pre-work. However, both unit costs and process costs were reduced and a considerable amount of negotiation time was saved. The other involved a range of consumables for which prices were successfully pegged, but the auction, though in part demonstrating a dynamic process, failed to beat the best opening bid and did not deliver forecast reductions.

We now had a five-game form guide that had gone from promising wins to what my boss called a football manager's boardroom "vote of confidence". The last two games had been useful learning experiences, with some good individual performances, but "nil points" as the French jury might say. Sacking was avoided, partly due to a phantom event that delivered significant savings.

Let me explain. A large contract was due for renegotiation and an e-auction was planned as part of this. The bidders were very much aware of the intention to hold a reverse auction and their initial responses reflected their respective positions. Opening bids were extremely competitive. The business's need for rapid results prevailed and the auction was not held. On review, it was agreed that the e-auctions approach had contributed to the savings achieved, with the business effectively accepting the opening bids. A sort of "pools panel win".

This win did not stop us carrying out a significant review of the two events that had failed to produce cash benefits. There were a number of fundamental lessons.

For example, do not be tempted to change your procurement process to embrace e-auctions unless you have sufficient time to get it right. The vehicle procurement was complex and time was spent making the many and complex attributes of the bids work within the system at the expense of reviewing the available market intelligence. A month was not enough for such a complex tender and subsequent evaluation process. For the computer consumables, there was sufficient time, but the available market intelligence was not tested appropriately. A common problem with both was that not enough emphasis was put on reviewing the available market data at the different stages of the event. Had it been rigorously tested, we might have taken the decision to revert to traditional processes.

Since then, some smaller events have produced large percentage savings against fairly modest cash figures. We are currently working on a number of high-profile events involving international contract expenditure of many tens of millions of pounds. Some of these look promising in terms of benefits and the work has generated some interesting departures from historic practice.

We plan to hold another 26 events by the end of March. This experience should allow us to put together a well-informed business case. We will consider at least three options: first, to stop and not do any more; second, to do only very limited numbers and provide a tool for occasional use, probably via an externally hosted solution; and third, to do many more, providing it on the desktop of all the buyers as a tool readily at their disposal, either externally hosted or via our own e-procurement system or a combination of both.

Despite the variability of our experiences, we are showing a healthy return on investment. It is unlikely we will be calling a halt and there is no doubt that e-auctions do deserve serious attention.

Some other observations can be made. First, you can hold e-auctions under public procurement rules so long as you follow the basic principles of being open and fair. The visibility the auction provides to suppliers has to be a plus. Second, though we currently benefit from buying some know-how to get the maximum return from the auctions, this cost will diminish. Our in-house support team will progressively replace external expertise and, more significantly, the buyers themselves will become familiar with the process.

There is one further benefit, which takes me back to the first event and the board member who was so immersed in what was unfolding before him on screen that he postponed his later diary appointment. I think I felt a certain empathy with him. I am not a buyer, but in a subsequent communication that I put out on our purchasing intranet, I commented on how the excitement had gripped me and how near I was to putting in an application for the next purchasing vacancy. There is something about watching the events on screen that grabs the attention of the observer like a soaring stock market price for a shareholder.

Visual dynamics

At a recent IT directors' forum at Cranfield, one of the research leaders said how fascinating it was that e-auctions were attracting such a lot of senior and non-purchasing attention, and how it must be, in part, due to the visual dynamic the viewing brings.

I believe the on-screen events illustrate what a buyer can often struggle to get customers to understand: that they are delivering genuine savings. It provides a very public acknowledgement for all the hard work a buyer does that the customer, not to say the board member, never sees.

This may not be a benefit to put in the business case that goes before the board, but I do believe it is one that purchasing teams in any organisation should be aware of and should use to full advantage.

Tim Peacock is purchasing development team leader at the Royal Mail Group

SMjan2003