What should procurement people do if a key supplier hates auctions?

I spoke the other week at a Huthwaite conference which was aimed at helping sales people to understand procurement better, with presentations from a mix of procurement and sales folk.

A recurring theme during the day was reverse auctions and how organisations should respond to them in their sales strategy. From the sales side, there were a number of views; rightly or wrongly, this was probably the consensus from that side of the table;

  • They are often rigged; the lowest bidder doesn't win, often because the whole process is just aimed at driving some cost reduction out of an incumbent supplier
  • They do not allow the consideration of added value and non-price factors.  So the winning auction bid may not offer as genuinely good value for money as unsuccessful suppliers could.
  • They are generally bad news for sellers, for relationships and possibly for buyers too.

Now clearly many of us would disagree with this, but it is useful to hear how suppliers perceive what we are doing in the procurement world. And there was a particularly interesting presentation on that note from Alfredo Morate, a senior sales guy with  Schindler, one of the world's largest 'vertical transportation' (lifts, escalators etc) companies.

Morate said that basically Schindler will not participate in auctions.

“We will submit a written bid, even if it is not requested. If we like the client or the buyer, we may take part in an auction in the sense that we will submit an intial bid that reflects our written submission; but we won't then enter any further bids.  We tell the buyer that is what we will do; if they aren't happy with our approach we will just withdraw. In other cases, we will just explain we don't do auctions”.

And they still apparently win quite a number of the auctions that they 'participate' in.

Now Schindler are in a fortunate position – they have a good market position amongst a pretty small group of serious suppliers, so maybe don't have some of the pressures most firms face.  And you have to respect them for taking a strong stand here.

But how should procurement respond if faced with suppliers taking this approach? Is it a question of education – if Schindler understood that the auction was just one part of a complex sourcing process, with structured evaluation that took into account a range of non-cost factors, would they be more likely to co-operate?

Would the complex optimisation capability of firms such as Trade Extensions or CombineNet persuade them that there was more to this than simple 'tactical leverage' as they currently see it? Can we show that auctions can live successfully alongside strong supplier relationships? If there are only 3 or 4 serious suppliers in the market (as may be the case with 'vertical transport') are auctions the best option anyway?

Or...should we just say "fine, if that's how you want to play it, then we'll focus our efforts on developing suppliers who will play ball, and do appreciate our need for the best possible value for money, which we believe auctions help us achieve".

My feeling is that as usual, it is hard to generalise.  Every market – indeed every supplier – is probably different. But organisations for whom auctions are an important element in the procurement armoury should be thinking about how they respond to the 'Schindler Gambit,' as we might now term it.

Voices (13)

  1. Christian Herlain:

    All – thank you for this interesting debate.

    Let me bring some complementary highlights to it, by saying that there is no good auction without a good preparation, that is without a valuable supplier information collection through an RFx.

    Running an eRFx prior to an eAuction enables you to pre-qualify your suppliers and make sure that whoever you’ll invite in an auction and will win it will be a good supplier for you. Additionally this RFx stage will allow you to capture all non-price differences between suppliers’ offerings, give them a weight (score) and factor accordingly suppliers’ price offers submitted during an auction.

    Auctions are often perceived as a threat by many incumbent suppliers, but as a true opportunity by challengers.
    The advice we give an incumbent supplier invited in an auction is : “make sure that all price- and non-price components of what you currently offer to this customer are carefully communicated to all competitors, and if you consider that buyer’s specifications in terms of product quality or service level are too vague and could be misleading for other suppliers, tell it to your buyer : he will often be grateful and will quickly improve his initial specifications in order to avoid post-auction litigations with the winning supplier.
    Our main advice to buyers is : “invite in your auction only suppliers you would be happy to work with and make sure your awarding rules are very clear : this is the only way you have to get at once the best price and the best supplier”.

    One last word: please don’t believe that only suppliers hate auctions : many buyers have exactly the same feeling, for numerous reasons : we have listed to date more than 30 “good” reasons for buyers not to run auctions! Objection list (and reply to objections) available upon request!

    Christian Herlain, MD
    Procurra Sourcing
    cherlain@procurra.com

  2. Garry Mansell:

    Ohh and one further point Andy, since Arsenal had lost their lead to Partisan I decided to read your paper you linked to now, rather than in the morning.

    It is excellent, a good piece of work and I will share it further with our buyers and bidders if that’s OK, we will attribute it always. Your report really does echo what we see, and actually you give the same advice in the summary to bidders as we do. In GENUINE reverse auctions…my most common mantra to bidders is (from my original posting)

    “They can use a modified version of the Schindler approach, where they make their best offer at the start of the auction that gives them the profit margin they would need, and then they switch the PC off and wait for the result.”

    In our case its designed to prevent the reverse auction overheating and a “winners curse” being the outcome…For those who don’t know what it is, (or who can’t guess) just put “winners curse” into google, games theorists have written about this in reams.

  3. Garry Mansell:

    Hi Andy,
    I would be happy to speak or be on the panel, just let me know the date.

    I am not surprised by your findings at all by the way. They match ours.

    The fact is most people refer to reverse auctions and don’t actually run one in the true definition of it. If you run a reverse auction the lowest bid has to win or it is not a reverse auction. Very few of the events run using our software are reverse auctions, less than 2% of the spend in fact, but we are seeing that increase this year. When we challenge manufacturers and retailers about their desire to run reverse auctions and the implications of what they are planning they largely back away once it has been explained what a reverse auction really is. Without trying to bore or be too repetitive the fact is people do need to be educated about what a reverse auction really is and they can have benefits for both parties despite some of the other comments here.

    Reverse Auctions can work well for some well defined, well specified buying events, but they don’t suit everything. Most times the reason suppliers are irate is because the rules of the buying process as they were told them have not been stuck to, or they heard one thing and another happened.

  4. Andy Moorhouse:

    Peter – Thanks again for presenting at our ‘Winning with Procurement’ event!

    Garry – we are repeating the event next year and will run a section specifically on reverse auctions. Fancy a seat on the panel… facing 200 irate suppliers?

    I lead Huthwaite’s research division and have interviewed many sales directors that use the the Schindler style ‘best and final offer’ strategy.

    This is very effective when used by the incumbent. In our research they secured the contract 88% of the time! (In 2008 we completed the first ever global research study that looked at strategies used by Global 2000 companies when bidding in reverse auctions).

    We also found that the lowest bidder was explicitly guaranteed the contract in just 16.2% of examples. Of course – the reverse auction is just a means of getting a best and final offer from the pre-qualified participants. We saw many cases of the incumbent securing the contract even though they were ranked in third place.

    Incredibly SAP wrote a white paper where they advise procurement professionals NOT to select the lowest placed bidder due the quality concerns!

    I’m happy to discuss the research findings – and you can download the whitepaper here: http://tinyurl.com/2fkevpw

    Peter / Garry – see you at our next event?

    Andy.

    amoorhouse (at) huthwaite.co.uk

  5. Kevin Potts:

    It comes down to “Negotiations 101” and “don’t threaten to do what you cannot or are not willing to do.”

    I sat on a plane flight from New York to Boston Friday night. A three year old girl traveling with her mother did not want to buckle her seat belt. Her mom said, “If you don’t buckle up, you have to get off the airplane.” The girl said back to her mom, “Where’s the exit? I want to get off the plane.”

    Can you threaten to move the business to another vendor if the supplier doesn’t want to participate? If you can’t, you need to decide what it will take to make that threat have teeth.

    Kevin Potts
    VP of Product Management and Marketing
    Emptoris, Inc.
    http://emptorisinc.blogspot.com

  6. Tim T:

    If you think of the reverse auction as a function of the negotiation process then you have to remember the a few key “rules” of great negotiating.

    Never become emotionally involved – so many people have a love hate relationship with the reverse auction process. It truly is just a tool to achieve an end result. I believe most people who “dislike” the process are either 1) very inefficient in their business or 2) Content with Their high margin business and not willing to budge on pricing (See Rule of Negotiating below)

    You must be willing to walk away – You have to know what your “walking Price” will be prior to starting the negotiation. Schindler decided they were willing to walk at their price period. The suppliers that are successful in the RA world have used to process to become more efficient themselves and to discover what that “walk away” price is for their business.

    In traditional face to face selling discovering the time frame for a client to make the decision is not always the easiest thing to do. With the RA process the sales cycle is compressed and the results are immediate. There inevitably be a review process prior to award but this is a significantly reduced cycle.

    As a life long sales person I believe that the RA process is what you make of it and how you approach the opportunity. It is not going away! SO why not embrace it and become a master of the process?

  7. Guy:

    IF run well, Auctions are good for the supply base, except the incumbent. They provide a level playing field and help the host organisation ask some difficult questions of themselves, such as , ‘yes we do like our incumbent, but is that comfort really worth the 10% saving on offer from a source we dont normally consider’

    However badly run auctions are a waste of time and quite detrimental to relationships. I have recently assisted our sales team in auctions they were asked to take part in by blue chip FTSE 100 customers. In none of them was the prize of winning defined (ie if we won the auction, what did we win?). Also as they were multi lot auctions, and because of the way they were constructed, we couldnt tell our ranking in the overall process during the auction, so felt no real competitive prerssure. All in all pointless and it felt like the Procurement Department were running them just to tick boxes to achieve a certain amount of spend through eAuctions.

    On the other hand, I have seen well run auctiuons reduce costs by 20-50% and introduce brand new suppliers to the host organisation, which resulted in new, strong relationships being built.

  8. bitter and twisted:

    Of course auctions are bad news for suppliers. If run badly they are unfair. If run well they cut profit. Lets not be mealy-mouthed and claim resistance is down to ignorance requiring “education”.

  9. Garry Mansell:

    We have been asked this question many times by buyers of our software and solutions and the answer is actually always the same.

    As a buyer you have an obligation to be legal, decent, honest and truthful. If this sounds like the code of conduct for an advert you place then that is no surprise…the same rules apply when you are buying something.

    We always emphasise to buyers running auctions that if they are running a true reverse auction then they must award the business to the lowest bidder, and must stick to the rules they set. To not do so is foolhardy. Most markets that people buy in are small and poor behaviour on the part of the buyer, or their organisation is always discovered by their supplier base.

    Classic reverse auctions do have their place in this world. Some of our clients use our software to run very effective reverse auctions based on well defined, well executed commercial approaches, and if some suppliers don’t like auctions conducted in this manner then they are missing out on some serious opportunities with some major buyers.

    When faced with auctions, suppliers (bidders) have a few options. They can refuse to take part, or use the Schindler approach as your article documents…and frankly I think your analysis is right for their market and why they get success still.

    They can use a modified version of the Schindler approach, where they make their best offer at the start of the auction that gives them the profit margin they would need, and then they switch the PC off and wait for the result.

    Or they can be clear about their walk away price, participate in the auction and maybe be pleasantly surprised at winning business at a higher margin than they anticipated. On the other hand, they could indeed lose business they had in this auction, but if their preparation is right, then they can also learn valuable information about their market from this participation.

    It is all about the way the auction is designed and executed. At the cost of repeating myself, auctions do not mean that you lose the buyer/supplier relationship. Good buyers spend a great deal of time talking to their suppliers before an auction and only then do they decide if they are going to buy on “price alone” when they know they are comparing apples with apples in all other aspects of the buying process.

    The fact is we all like to think we differentiate ourselves from our competitors but if the buyer doesn’t perceive this, then the seller is either fooling himself or herself or has failed to communicate the message.

    There are indeed hundreds of ways buyers can run auctions, and deciding which approach suits your particular requirements, or indeed if the goods or services you are buying are right to be auctioned is a science in itself. Its only about the rules of the auction, many are not just lowest price wins, your have to bid lower than the previous bid. Good software allows you to configure auctions to suit your needs and circumstances and thus to take your bidders along with you. In Trade Extensions we have helped people design many different types of auction, as have CombineNet and many others of our competitors.

    Its just as your article says Peter, some things can be auctioned others are less suitable. For example where an offering is a service, or has a large service element to it you do need to do as you stated, use tools such as Trade Extensions and CombineNet provide to take account of all of the other factors that constitute the buying decision, that’s what optimisers are for.

    In my opinion its wrong to say, Reverse Auctions are wrong, they just need to be used in the right manner, in an open and honest way and always remember there are hundreds of different auction designs to suit different sets of circumstances. My cry as a supplier and potential bidder in an auction would not be “don’t compete in auctions”, it would be “challenge me by all means, do it electronically by all means, but learn how to chose the appropriate process and auction design to ensure fairness, then I don’t object to losing, because I will learn from it”.

    Finally if any of you reading this are saying “he would say that, he runs a business that sells e-sourcing software”, you are right, but I say it because I believe in supplier relationships, efficient and effective buying and the thorough training of buyers.

    Ohhh and yes, we have participated in auctions for our software, some we have won some we have lost, we have seen good process designs and bad…and we have sold consulting expertise after we have lost some auctions to the company that ran them to help them get better next time.

    I would have enjoyed the Q&A after that event Peter, tell the organisers to invite me next year; you know how much I enjoy a good debate. I’m also available for weddings, bah mitzvahs and funerals ……..I also know that I’m not right all the time, but I’m happy to share my dogma and be shot at. Over to the rest of you now……

  10. marketdojo:

    Apologies, I forgot to mention that the Bristol Business School, in association with The Chartered Institute of Purchasing and Supply, conducted some fantastic reseach into the use of reverse auctions in thier i-Adapt report, which collated the views of a wide sample of both buyers and suppliers.

    The most surprising outcome was that the use of reverse auctions actually improved quality, flexibility and the overall buyer-supplier relationship! Hard to believe, for sure, but those were the results.

    If anyone wishes to read more about this, the link to both reports can be found here:
    http://www.marketdojo.com/resource

  11. marketdojo:

    I have respect for participants (the suppliers) that stick to their guns and decide to turn down a reverse auction. It is not an easy decision to make, as there is that huge risk the host company will cease to involve you further. This is a decidely more difficult decision to make as reverse auctions are typically used to tender contracts of significant value.

    I would, however, not be inclined to involve a participant in a reverse auction if they had no intentions of actively partaking. One advantage participants have by taking part in events is to have the interactive market feedback and I feel that this advantage should only be offered to those who are operating out of their comfort zone by professionally engaging in the reverse auction process.

    Offline bids are welcome but they remain just that – offline.

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