Running a Simple Reverse eAuction Without any New Software

Over the last several weeks we blogged on running phone surveys with InstantLoop, and doing basic research on consumer-purchase behavior with Bundle. This week we'll look at a low-tech option for simple reverse eAuctions.

- Ryder Daniels, Capsaicin, LLC

Six years ago, I began running some simple MRO reverse eAuctions for a client unprepared to take the plunge on licensing new software. This method can work for very simple reverse eAuctions involving just a few suppliers. It's designed to drive price reductions through live bidding, which essentially accelerates the negotiating process from phone calls, emails, and meetings into a single 20-minute auction. Much has been written about the success and failure of eAuction strategies. A quick trip to Google provides a number of viewpoints; suppliers, academics, practitioners, and software providers have weighed in on the various pros and cons. Despite the lively debate, reverse eAuctions arguably can often provide a fast, market-driven approach to achieve further price optimization faster than a traditional process. This simplified solution uses your Instant Message client (MSN, AOL, Yahoo, Google, Jabber, etc). Obviously, this doesn't compete or replace the offerings of major software providers; instead, it's designed to help you test the waters with a constrained (read: zero) budget.

What You'll Need

  1. You'll obviously need an instant message account with a provider, and your bidders will as well. You can use a multi-protocol IM service like meebo to conduct the eAuction entirely in your browser. Each bidder is in his own window. You can IM each one, but this is not a group chat, so they cannot IM each other.
  2. You've conducted your RFP and selected down to the final ~6 bidders or fewer. They've all agreed to legal terms, performance, payment, and other items you require. In general, price is now the final primary determining factor (these simple IM eAuctions are not good for determining complex criteria).
  3. For this example, let's assume a simple eAuction for temporary services. All 6 bidders are providing a markup rate of 30-32%. We assume costs are the same for skills, but you can also create a more complex Excel model that dynamically creates a true total cost comparison based on your anticipated volumes.
  4. You need to decide whether to list the lowest price in your eAuction, or just the rank of the supplier (again, there are pros and cons to both approaches). For this example, we'll provide only the rank to each supplier of where they are in the bid order, from 1-6, 1 being first, 6 being last.

Setting It Up

  1. Prepare an email, bcc'ing your bidders, and announcing the process. Include date, time, and the rules of the reverse eAuction. For example: "We're conducting a live reverse eAuction on 3/1/2010 from 2-2:20 PM EST. You'll need to have an IM account on XYZ service and add you@company.com as a contact. We'll start the bidding with an opening price. You can only bid down in 0.25% increments. The auction will end after 20 minutes and 2 minutes of no bidding. Please log in 15 minutes before the auction…" etc.
  2. 15 minutes before the live reverse eAuction, you'll need set your windows up. Align and resize chat windows on your screen so that you can see all ~6 IM windows in two rows. In each window will be a supplier who is bidding. They will IM confidential bids, and you will respond to each separately, confirming that a bid has been received, and the new rank it holds.
  3. It's also helpful to have an Excel window open on the side or bottom of your screen. Use this to help set up some simple formulas to help you calculate the low bid, for example.
  4. It's also helpful to have a number of cells ready with pre-canned text like "Please bid," "10 minutes remaining," etc. This allows you to copy/paste text in the ~6 IM windows quickly, rather than having to type repeatedly.

Running the Auction

  1. When the auction begins, have your canned text available to easily copy/paste things such as welcome/introductory text, rules, etc.
  2. As a bid comes in via IM, you can enter the bid price in your spreadsheet and see how it changes the rank of suppliers. Once you see the new rank, you simply IM canned text, "A bid was received. You are now ranked #x". If you are not using the ranking method, you can simply IM the lowest bid to everyone.
  3. In this example, Vendor #3 bids down 0.25%, followed immediately by Vendor #4, who does the same thing. Vendor #1 then bids a full 0.5% lower.
  4. If a bidder doesn't abide by the rules, you'll need to address it via IM. In our example, we only permit bids lower than the current bid by 0.25% increments or more. If someone was to bid 0.1% lower, you can IM them that the bid does not follow the rules, and is not accepted.
  5. As the 20-minute mark approaches, you may see higher activity. You'll need to be pretty fast and focused with the copy/paste activity to keep things moving. This can get a bit hairy.
  6. After 20 minutes, you can choose to observe the 2-minute rule, where the eAuction remains open until no bids are received for 2 minutes.
  7. In our example, the lowest bid came in at a 26% markup 24 minutes after we started.

At the end of the process, you can call the low bidder to discuss next steps. (In some cases, clients don't choose the low bidder. Once knowledge of this gets out in future auctions, it can cause bidders to hold back a bit.) What are Spend Matters readers experiencing with their eAuctions either as a buyer or a bidder? What are the lessons learned? Has anyone tried this or another, low-tech approach?

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