A recent Spend Matters post alerted me to a CAPS Research study (free registration required) that indicated that eAuction usage had declined to an average of 2.58% of total spend in 2007 from 3.24% in 2005.

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An article in the Go Pro (Government Procurement) magazine I received today, touted the growth of eAuction usage among government agencies buying electricity and other energy commodities.

I was alerted to a recent article in Printing Impressions magazine whose title says it all about the tone of the article: “The Fading Reverse Auction.” This article references a survey that indicated that 85% of print buyers are not using reverse auctions and 48% of print suppliers say that none of their customers are using reverse auctions.

So, are reverse auctions growing? Declining? Both? Neither? What’s the reason for the change if there is one? Does the reverse auction still have value or is it going to be the dinosaur of tomorrow?

Here is my impression…

Reverse auction usage, and its appropriateness, is tied to economic conditions.

When the economy is growing, prices are rising, and supplier capacity is filling up, some suppliers can afford to pick and choose their customers and can decline opportunities to bid if they dislike the bidding mechanism (i.e., the reverse auction format). When the economy is in a recession, prices fall, and suppliers are eager to fill their capacity to keep their workforce employed and to stay in business. They can’t be choosy with what opportunities they are presented with.

So when the economy is bad, reverse auctions are good for buyers because they maximize the competitive forces that drive prices down. When the economy is good, reverse auctions need to be considered more carefully.

Note that I didn’t say “reverse auctions are bad.”

That’s because they still can work in good economic times. You just have to evaluate the impact on competition. If you have a significant percentage of suppliers declining to bid because they do not like the format, conducting a reverse auction can effectively reduce overall competition although the competitive forces at work for those suppliers that do participate are still maximized.

This perspective is a natural extension of the thoughts I expressed on this topic in my 2004 articles “eSourcing & Supplier Relationships, Part I” and “eSourcing & Supplier Relationships, Part II.”

What concerns me is that people who misuse reverse auctions blame the auction and not the person. There are too many examples of such in the Printing Impressions article.

One print buyer was quoted as saying ““We only did a reverse auction once, and we’ll never do it again. With a reverse auction bid, you get what you pay for—but if you vary from the bid, you will get charged handsomely.”

This is Purchasing 101. If you do any RFP – auctioned or not – you need to request pricing for work that goes outside of the specification. Don’t leave that to chance. So is it the auction or the skills of the buyer that caused the problem here?

And, wait. Isn’t “We tried that once and it didn’t work” supposed to be one of the excuses that purchasing and supply management teams try to fight when working with internal departments? It’s one of the worst excuses in business.

If something didn’t work, figure out why it didn’t and fix it. That’s how you learn and improve.

That buyer went on to say “Reverse auctions are only good if you absolutely need to have rock-bottom prices and can sacrifice quality and service.”

That is simply an untrue statement.

In our class “Expert Purchasing Management,” we list “10 Keys To eSourcing Success.” #6 is “Invite Only Suppliers To Whom You Would Want To Award Your Business.” Why would you invite suppliers who have unacceptable quality and service? Again, is it the auction or the skills of the buyer that is at fault?

The buyer goes on to say “We have found, even with due diligence, reverse auctions can drive down the price, but then you get nickel-and-dimed in production. In printing, there are many variances that cannot always be outlined in the initial specifications.”

But wouldn’t the specifications be the same whether you got your proposals via a reverse auction or via an envelope? So, you’d still be paying over-and-aboves either way, right?

Uh, huh.

The Printing Impressions article was overly-biased in my biased opinion. The article ranted about the evil reverse auction, but explored little contrary perspective. At the very end, the author noted that “I am not suggesting that all buying companies are against reverse auctions. While the majority of print buyers don’t support them, 15 percent of our May Quick Poll respondents found them to be effective.”

The author quoted another print buyer as saying “We use reverse auctions regularly. We find that they’re very useful when your commodity is well-defined, when there are six or more pre-qualified bidders, and when all bidders understand that the bid will be awarded at the end of the reverse auction (so they must give their best and final price at that time).”

So 15% are successful and 85% are unsuccessful. That calls to mind the Pareto Principle and sounds pretty typical of success in business. A small number of people account for a large percentage of the success. So why not interview the successful 15%, learn the secrets to their success, and help the majority of people who are struggling?

Sounds like the suppliers make the rules in the printing industry and most of the buyers are unnecessarily at their mercy.

What’s wrong with this picture?

Reverse auctions are a tool. They are not a replacement for smart buyers. Like any tool, they can be misused by a less-than-fully-educated user.

Don’t hurt yourself.

Recommended Reading

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