The Funny Thing about Auctions…
Last month, Alun Rafique from Market Dojo and I co-wrote an article for Procurement Insights about Variables in the Adoption of Auctions. A discussion about the article really picked up steam in the ISM group on LinkedIn, and one of the questions posed in response was “Someone explain to me how a Reverse Auction is fair and equitable to the supplier..."
After considering that question carefully, Market Dojo published an article that asks a question in response: “Should Suppliers Still Fear eAuctions?” The article, which you can read here, takes an interesting look at the progression of auctions from carefully managed consultant resource, to part of an ERP system, to their somewhat questionable state today – in limbo in a world where procurement is driven to create as much value as savings. A third question in this discussion might be, are auctions still relevant?
I’ve admitted in the past that I don’t think auctions are quite as evil as they are painted. And yet, I can see why suppliers would push back, preferring to negotiate traditionally or not at all to keep the business they have enjoyed in the past. As Market Dojo points out in their recent post, the professionals executing auctions have as much to do with their reputation as the actual dynamic of bidding online in a dynamic fashion.
Like it or not, auctions are still a resource that we can chose to use as appropriate. That being said, there are a couple of facts to which we need to reconcile ourselves:
At the end of the day it is still about savings.
We talk about the fact that auctions emphasize cost (although they are not limited to price-only award decisions) like it is a bad thing. As much progress as procurement has made as a strategic value creator for the organization, we are still measured first and foremost on our ability to negotiate and deliver savings. Ardent Partners’ CPO Rising 2014 report found that although metrics such as innovation and compliance are gaining ground, savings is still the number one metric for our performance. The good news is that it is possible to simultaneously create value and generate savings, especially when we work with our suppliers to reduce their process and material costs or when they help us better manage demand or specs.
Sloppy is as sloppy does.
Auctions require a lot of up front work – far more than creating the RFx’s that lead into them. As Market Dojo points out, “You need to have the Service Level Agreements and specifications tied down as well as have sufficient market liquidity. By this we don't just mean having suppliers who can bid, but suppliers who will bid and to whom you are willing to award the business.” Procurement professionals that have difficulty running effective auctions were also probably going to execute less than ideal traditional negotiations. But in the case of auctions, the results and weaknesses have nowhere to hide. To the contrary, they are high visibility internal events, often drawing an audience of executives from throughout the organization. The end result is that negotiating via auctions ends up looking like a bad strategy, when talent and or effort are to blame.
The goal here is not to point fingers, but we do need to better understand the negative associations with auctions to separate out what is the technology or approach and what is poor planning or execution. Auctions are not right for every project, just as there are different negotiating strategies and approaches. What we do need to accept, is that as technically simple as they may be to build and administer, the bulk of the work still needs to be done by skilled people. If the goal really is, as the question put it, to be “fair” to suppliers, we need to make sure we are being fair to auctions too. Making sure that they bear no more and no less of the blame or credit than they deserve.
What do you think of Auctions? Have they gotten a fair chance to be used properly as part of the procurement toolkit? Join the discussion by commenting here or by responding on Twitter: @BuyersMeetPoint and @MarketDojo.