This blog will look at what a Buyer should consider ahead of choosing to auction their business and what they should do to run an event that results in a positive outcome for all involved.
eAuctions remain as popular as ever
eAuctions are an important procurement tool and don’t show any signs of losing their popularity any time soon. Some still see them as a faceless, impersonal benchmarking tool used to drive down the price of the incumbent and waste the time of those involved, used as nothing more than a stalking horse. However I strongly believe that there is a place for eAuctions within procurement as long as they are managed properly, transparently and run under the right conditions.
Factors to consider when considering an eAuction
There are several factors that need to be considered by a Buyer when deciding whether or not to auction a contract.
First and foremost, in order to protect existing relationships with Suppliers and when looking to build new relationships with new Suppliers, only ever auction a contract you are willing to move from the incumbent. Standard negotiating is a better method to achieve a reduction in price or improve contract terms if you plan to stay with your existing Supplier. New Suppliers can become disillusioned if they realise they never had a chance of winning the business and may refuse to participate in future events. This can affect your organisation’s reputation.
Choosing to auction the business of a strategic partner is not a unanimously bad decision and is something I have seen work very well in the past, albeit not frequently so tread carefully. I have seen eAuctions support dramatic change and drive significant savings from well established strategic partners. When standard negotiations have failed and the Buyer is willing to move business from one strategic partner to another, all the benefits of running an eAuction can be realised. As with any event, the Buyer should be prepared to follow through and move the business if they want their Suppliers to respect and have faith in the process.
Buyers also need to look at the contract history, when it was last negotiated, how many times it has been auctioned and what the result was of each previous negotiation / auction. eAuctions help drive competition and can introduce Buyers to new and exciting Suppliers but if an event is run year in, year out, with the same Suppliers, they will very quickly start to become ineffective.
Commodity items also need to be treated carefully, running an auction instead of negotiating directly with your incumbent, when commodity prices have increased, can result in a poor event. A price increase can be unavoidable on the back of a poor harvest, so make sure that you have discussed the future of the contract with your incumbent ahead of an auction. It is also helpful if Buyers can sync their contract negotiations in line with the relevant season or when their Supplier contracts for the raw materials. Trying to auction tinned tomatoes, for example, half way through the season, can result in Buyers paying a premium as growers have already committed their stock elsewhere. Running an event at the right time of year can be the difference between realising a good saving and taking a significant price increase.
Our top tips on how to run an effective eAuction
Whether a company has chosen to manage their auctions in-house or through an external contractor, the key points of running an effective event are the same:
- Invite good quality Suppliers, there is a big difference between having enough Suppliers and having Suppliers that you are willing to contract with.
- Be prepared to create great quality specifications! I cannot express enough just how important quality specifications are. Spending time on this will save time later when you don’t have to sit down and review samples that are way off spec. A tight and detailed specification will also give your Suppliers confidence that everyone taking part is bidding like for like.
- Communication with Suppliers is very important for both Buyers and Suppliers. Talk to them when carrying out any Supplier sourcing exercise; it is important you understand as much about them as possible in order to decide if you will invite them to the auction. Talk to them when details of the auction have been published, as relying solely on documentation can cause problems when assumptions are made and these problems can later result in the whole process being undermined. Talk to them again closer to the event, last minute questions left unanswered can be the difference between an OK auction and a great auction.
- Be fair and transparent when sharing information relating to the auction. You will get the most out of your Suppliers when they have faith in the process.
- Feedback to Suppliers after the event, by doing this Suppliers gain valuable knowledge on what they could improve on ahead of any future event. Suppliers spend a lot of time and money taking part in auctions and are often left frustrated and angry when provided with no or limited feedback. Keeping a Supplier happy following an event that hasn’t resulted in business for them, is key to having them participate again in the future.
If run properly, auctions can be beneficial for both Buyers and Suppliers, it is when they are managed poorly, used for the wrong products, at the wrong time of year or for the wrong reasons when they become damaging. They are only one tool within a whole set and they don’t work for every job.
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