Why aren’t reverse auctions used more by procurement people?

I met an old friend last week; Jonathan Rollason who was CIPS President when I was on the Board.  He has had an interesting career as an Army Logistician, a CPO for large investments banks and now runs his own consulting business, Horizon Associates.  He also offers a low cost e-auction service, providing both the software and consulting support.  He's been pretty successful, largely in the private sector, but we discussed why e-auctions still haven't got the coverage we might have expected, given the results they often produce,and Jonathan identified two factors.

Firstly, procurement people sometimes lack the confidence to run them; fair enough, if it is your first time; and that's why he offers support to clients, which is usually well received.

Secondly, and less flattering for our profession, he believes procurement people are often scared of running auctions because they might expose how badly they are currently buying!  It is a bit of a double edged sword I suppose; you make lots of savings, so you're a hero, but the CFO says "we must have been getting ripped off previously!"

Looking at it with a Machiavellian point of view, I guess there are a couple of mitigating strategies. The most obvious is to run auctions when you are new to an organisation, a role or a category, so it's not your fault if previous prices were high.  Or if you can't do that, make sure the specification - or the quantity - of what you are buying is different enough to that bought previously.  Then you have the valid argument that comparisons are not truly like for like....and you're doing a great job!

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Voices (5)

  1. Kevin Potts:

    Peter – from our experience working with over 100 companies adopting e-sourcing and reverse auction technologies, having a CPO who sees the value and has a mandate from the CEO and CFO to use these tools can really help adoption. For example, one of our customers had been using reverse auctions since 2005. However, adoption was low – say 4-5% of total annual spend. In 2008, a new CPO arrived (ironically from another customer of ours), and he knew the impact of this technology on the process. He started a change management initiative, and in 2009, adoption spiked to 2 billion euros. Their plan is to grow that by 50% in 2010.

    Kevin Potts
    VP of Product Management and Marketing
    My blog: http://emptorisinc.blogspot.com

  2. Martin S Jensen:

    Mr. Smith,

    Personally I have runned several eAuctions world wide with great saving results – and I must say you are spot in your observations about the causes why eAuctions are not more widely used in procurement organisations.

    However, my experience tells me that education is the key to success.

    Too many procurement people do not know how to use IT systems to support their negotiations, but I think this will change dramatically when procurement people starts to work with the systems rather than fighting them.

    CFO’s normally praise improvements (i.e. great saving project) so I doubt that you will get any complains like “we must have been getting ripped off previously” allthough that may be the case 🙂

  3. Edvin Bekkhus:

    I can only support using this purchasing tool.
    We have used this tool since 2001 with great success. Both regarding Direct Materials and outsourced Contract Manufacturing.

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