Getting Hit With the Reverse Auction Hammer: The Supplier View

Over on the Alan Buxton's excellent blog, Where Next, a recent guest commentator offered up some thoughts on how suppliers view reverse auctions. These observations came from questions and interactions with UK sales executives at a Strategic Account Management conference. My takeaway from looking at these observations is that suppliers are getting more savvy about when to walk the walk when it comes to reverse auctions versus simply when to walk away. According to the post, "only after participating in 4 or 5 reverse auctions do sellers realise that procurement indeed reserve the right to award the contract to any participant and that price is not the sole criteria. One key research finding came from analysing the incumbent's final bidding position: 93% of successful incumbents won the contract without being the cheapest and the median final rank was third!"

Another insightful observation is that the "reverse auction is rarely the end of the decision process ... In research involving 39 Fortune 500 selling organisations, unless procurement explicitly stated, 'lowest bidder wins', post auction negotiation always took place with incumbent. Indeed, the average time from auction to contract award is 7 ½ weeks. Critically, when further negotiation did occur; only one in ten incumbent suppliers were informed, pre-auction, that post-auction negotiation was going to happen!" I observed firsthand in five years of experience at FreeMarkets in the early days of e-sourcing that transparency was the major driver of the significant savings we often identified. As companies have transitioned to self-service models, I fear that declining transparency -- and a lack of enforcement of market rules -- have damaged the credibility of auctions in the eyes of many suppliers beyond the point of repair. Perhaps this explains why, I'd argue, actual reverse auction usage is down inside many companies despite the widespread availability of tools to all sourcing professionals (this is my observation, not an empirically based fact, mind you).

- Jason Busch

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