TradingPartners: Does Restructuring Portend Changes in the Reverse Auction Market? (Part 3)

In the first two posts in this series (Part 1 and Part 2), we looked at the current state of TradingPartners' business. One could read into this situation that the stand alone market for reverse sourcing services, the area in which I originally came from at FreeMarkets, is growing at a slower clip than it once was. Yet TradingPartners CEO Marc Halpin suggests something else entirely. In his view, demand is "increasing and we are dealing with many customers who have gone down the self-serve path and are looking to use full-service." TradingPartners is seeing a trend toward "fully-managed auctions" delivered in a flexible manner. Part of this flexibility comes from the willingness to work a contingent-based model with no up-front costs (under this approach, TradingPartners typically shares a percentage savings in the 30% range across some of its clients).

Yet at the end of the day, there are many providers that will engage in contingency models. As I look at TradingPartners' model for full service reverse auctions, it's the relatively low fixed-fee project-based pricing that stands out. Here, Marc suggests "TradingPartners can enable end-to-end sourcing projects with a significant technology component for materially less than competitors like Ariba and AT Kearney." How much less? Marc suggested 25%, typically. The technology piece is not something we should ignore, Marc suggests. TradingPartners, unlike other boutique services-firms that deliver similar sourcing capability on top of third-party software, continues to develop its own technology.

As I wrote previously on the subject, TradingPartners has "created their own bidding software -- which is not for sale separate from use in bidding events -- with a significant number of formats ... For example, they have, like many other providers, rank and transformational bidding, as well as more exotic types of auction formats such as Japanese, which create additional opportunities for procurement organizations in split of business situations (where a single supplier or low-cost award option is not always practical, but where you want to maximize competition among the most suppliers to create options)." Going forward, Marc continues to see the linkages of heavily customized software and processes for complex, full-service reverse auctions as critical to maximize customer savings.

He also believes that the market will sustain the type of demand necessary for continued growth for full-service sourcing leveraging auction formats (rather than scenario analysis, optimization, etc.) Yet I think there are a handful of wildcards in the full-service reverse auction business model that suggests any niche approach will have its own set of challenges, owning entirely to a set of externalities which include:

  1. Reverse auction exhaustion -- many buying organizations have faced reverse auction saturation, especially as they have tried to cram events into an auction format where different negotiation approaches might yield better, implementable (versus just identified) results
  2. Supplier push-back -- as every year goes by, more suppliers have been burned by unscrupulous reverse auction practices. Even though TradingPartners delivers auctions in a neutral third-party manner, they can't make up for all the bad behavior of others on the outside that has tainted many suppliers' views
  3. The growth of alternative business models to deliver sourcing results, including staff augmentation, managed services (e.g., Denali -- see previous posts here and here), and BPO firms taking on increased sourcing activity for clients
  4. More flexible (and granular) on-demand services -- Ariba's success with on-demand (they call it cloud) sourcing services is a great case study. Delivering support at very specific points in the process (full-service for select stage gates) rather than offering end-to-end full service may very well be a future wave of reverse auction and strategic support services

What do you think? Is there increasing demand for stand alone reverse auction services (what FreeMarkets pioneered), or will this approach become a small sub-set of a broader market that has undergone a period of rapid transformation?

Jason Busch

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