22 June 2009

E-auctions have been around for a while, but are they being used to their full potential? Rebecca Ellinor asks buyers and providers how purchasers can achieve the best results

Paul Baker, senior procurement manager, Telefónica O2 UK

I've worked in procurement for more than 10 years and witnessed the evolution and use of e-auctions. Companies fall into three categories.

There are those who use e-auctions as nothing more than a gimmick to please stakeholders and show willingness to change. They believe e-auctions devalue strategic supplier relations. Their lack of understanding leads them to believe only widgets can be e-auctioned; they do not consider strategic requirements, because they are deemed to be too high risk.

Then there are some who embrace the theory, but don't really know how to integrate it within their sourcing process. They constantly look to develop the use of e-auctions, but never seem to successfully embed it within their process.

Lastly, there are companies who embrace the theory fully, understand the practical application and embed it. These firms ensure the whole organisation knows what is needed to produce the required results. This complete adoption is the most successful approach and should be used as the baseline for any organisation.

Adam Smith, purchasing manager, Morgan Advanced Ceramics

Having seen the good and bad of e-auctions, there are three elements to take into account: first, know the markets of the commodity you are planning to e-auction. If it's not competitive, or your business is not attractive to suppliers, the auction is unlikely to provide positive results.

Second, communicate your intentions to suppliers several months ahead of running the event. Many suppliers are suspicious of e-auctions. Some will not have experienced them before and others simply won't participate. You need to have enough participants to avoid being a disappointed auctioneer.

Third, ensure you're willing and able to move business. Don't use e-auctions just to beat down your current supplier. You'll lose trust and credibility if you don't award business to those that come out on top in the bidding.

Toby Fogg, engagement manager, buyingTeam

Opinions on e-auctions are divided. Advocates claim significant cost savings and reduced negotiation time, while opponents cite a lack of flexibility, potential supplier relationship problems and a focus on price at the expense of quality and value.

E-auctions lend themselves best to commodity categories with easily defined requirements, for example MRO or office supplies, but can be used on a much wider basis. Even categories such as recruitment can be e-auctioned if suppliers are well managed and the specification is strong enough. There must also be sufficient spend and supplier interest to generate strong competition.

There are some considerations to extract maximum value. First, preparation must be extensive and specification must be extremely well defined with no ambiguity.

Second, suppliers must be carefully managed - excellent communication and transparency of the process are paramount.

Third, software must be reliable, intuitive and easy to understand - provide an instruction pack showing suppliers how to use the software and conduct a test event prior to the live e-auction; alternatively, consider using a managed service.

Rob Knapman, e-commerce director, Buying Solutions

E-auctions deliver significant cost savings and benefits by encouraging competition. This is why they are increasingly used across government. A recent initiative to drive e-auction capability across the public sector saw Buying Solutions, an executive agency of the OGC, sponsor 12 e-auctions for mobile systems, IT hardware and furniture. These enabled customers to make savings ranging from 13 per cent to 45 per cent.

Choosing to run an e-auction through our framework agreements and other procurement arrangements eliminates investment start-up costs and offers buyers an innovative mechanism that can help achieve best value for their organisation.

To have a successful e-auction, include a statement in your OJEU notice that you may choose to use this procedure to negotiate commercial terms.

Engage a service provider early in the sourcing process to tap into their experience and maximise the benefits. Get the best spend data available before starting the project. You don't need complete data, but it helps. Ensure products and/or service specifications are concise and clear, so that suppliers know what they are bidding for. And communicate the process clearly to suppliers and internal clients.

Joe Stock, strategic procurement officer, Worcestershire County Council Worcestershire County Council has pioneered e-auctions as the standard process for school, social service and bus transport contracts.

There are certain factors that must be present for an e-auction to be successful: sufficient contract value to merit the cost of running an e-auction; sufficient competition in the marketplace; a degree of standardisation of requirements, and flexibility (that is, not being brand-conscious).

From July 2007 to July 2008, Worcestershire tendered 90 contracts this way, with just under £1.25 million (21 per cent) saved on anticipated total life costs. The key was overcoming scepticism about moving away from traditional procurement methods.

Suppliers also need to be given sufficient time to prepare for the change. In our case, all operators were able to undergo training from the software provider. They also had time to study and cost up the routes before the event. They were advised to note the lowest price at which they could operate the deal and still make a profit - and not to go beyond it.

Bus and coach operators love conspiracy theories, but the transparency of proceedings makes everything visible to participants.

Natasha Kobrak, head of products & technology, TradingPartners

For buyers to benefit fully from e-auctions they should be prepared to do a degree of pre-qualification work. This will ensure participating suppliers can provide the products and quantities necessary and can achieve the minimum quality levels that are required.

Next, a buyer should decide which e-auction type to go for, because tenders suit different variants. For example, while at times price can be negotiated through the traditional English reverse e-auction, it may sometimes be preferable to allow suppliers to negotiate on certain non-price factors too. This can be achieved by using a multi-attribute e-auction. Buyers should take the time to understand what e-auction types are available and which one offers the most benefits.

Whichever is chosen, one of the main elements is to never neglect your suppliers. Adequate training and support should be given throughout the process to guarantee vendors are comfortable participating and ensure everything runs smoothly on the day.

John Hatton, vendor management director, BT Operate

E-auctions have been around for 10 years in Europe and, as knowledge of their effective use has developed, so has the quality of the result.

There is now a fairly widespread understanding of when they should and shouldn't be used. And increasingly flexible tools and options are now available. These include Japanese auctions - ideal for events with fewer bidders - and multi-attribute events, in which dynamic bidding takes place on several parameters in addition to price.

Buyers are now adept in respect of supplier engagement in the auction process from development of the specification, to instant messaging during the event, to award and beyond.

There is also recognition that auctions are appropriate in a rising market. While the result may well be a price higher than currently paid, it should still reveal the best available price in the marketplace. From a relatively slow start, BT is now a heavy user of e-auctions, and I don't see this changing.

MORE INFO: Types of auction

• Reverse English: The most common type in purchasing. The price starts high and suppliers offer decreasing bids, thus driving the overall price down. At the end, the buyer knows the finishing price for all suppliers, and can award the contract to a second or third-placed bidder, should the 'winner' not be appropriate. These rely on active competition and are usually best when there are four or more vendors.

• Reverse Dutch: This is a suitable tool where price is the only consideration. The price starts low and the auction manager gradually increases it until one supplier makes a "bid" and wins the business at that price.

• Reverse Japanese: An alternative when there is a limited set of bidders. The price starts high and the auction manager gradually decreases it. Usually recommended in categories where there are only a small number of suppliers, but where price is not the only differentiator.

• For more on reverse auctions, see the article on the SM website: http://tiny.cc/79jrF

SMjun2009