“What is the best deal you can offer me?” This question is at the heart of negotiations. Of course, a lot of factors must be taken into account when arriving at the answer. The “best deal” isn’t necessarily the lowest price, but the one that allows both parties to achieve their objectives. Contrary to what some believe, reverse auctions aren’t simply a tool that buyers can use to bully vendors. In fact, reverse auctions are a tried and tested tool to hone in on the “best deal” – for both parties.
Let’s take a look at how this powerful function can transform the way you do business.
What are reverse auctions? A brief introduction
In the case of normal auctions, the vendor puts up a good, and potentials buyers offer up prices until the highest bidder emerges. In the case of a reverse auction, a procurer puts out a call for services. It is then up to the vendors to offer the best deal at the lowest price. Due to their nature, reverse auctions (also known as eAuctions) occur exclusively online using electronic negotiations platforms where vendors can offer up detailed contracts for consideration.
5 compelling benefits of reverse auctions
Why reverse auctions? Because you get a better result, quicker. It remains competitive and gives all suppliers a level-playing field to bid in real-time, with transparency and fairness at the core of the activity. Corporations and government organisations can hold reverse auctions as a competitive procurement tool for raw materials, supplies and services.
The benefits of reverse auctions include but are not limited to:
- Lower purchase costs through increased competition;
- The potential to gain better savings then a present “target” amount;
- Time Savings through a reduced negotiation phase;
- Increased ability to meet deadlines thanks to having a set auction date; and
- Reverse auctions can also increase transparency for suppliers as they all have the same information at the same time.
A reverse auction should be used as the last leg of sourcing and tendering to obtain the best price by encouraging competition. In other words, by the time reverse auctions happen, the procurement needs must be clear.
So, you still must go out to tender and you still must evaluate the qualitative criteria and produce a shortlist. It is only after a shortlist of vendors is created that you can hold a reverse auction with the goal of awarding the contract to the vendor who offers the best deal.
But there is a dark side
Every silver lining has a dark cloud. Reverse auctions are not without their detractors. Critics argue that reverse auctions are a form of procurement thuggery. They see reverse auctions as a stick which is used to beat suppliers into submission and possibly bankruptcy.
However, while early days of reverse auctions did result in notoriety and horror stories, like all tools, we have learnt to use reverse auctions better. Most procurement professionals care about a lot more than just savings. Procurement does consider value for money, quality, supplier relationship and contract success. Reverse auctions are a tool to reduce costs, but responsible procurement professionals know that it is a tool that is best used to forge lasting relationships and not butcher willy-nilly.
5 implementation guidelines
In the paper: “Implementing reverse e-auctions: A learning process”, Daesik Hur outlines five considerations organisations should take to implement e-Auctions successfully:
- Build e-auction competencies;
- Organise for knowledge management;
- Create a holistic sourcing process;
- Focus on the total cost of ownership; and
- Experiment with e-auction designs.
Develop Your Reverse Auction Capabilities & Crush The Market
Purchasing Index can help your organisation with all five tasks. We can help you build e-auction competencies, leaving the knowledge inside your organisation and not a single employee who might – one day – walk out the door. Our consultants can help you implement processes that enable you to reap all the benefits of reverse e-Auctions, while avoiding the negatives associated with trying to negotiate the best deal possible. Our team has managed thousands of reverse auctions across a plethora of categories – and, yes, you can auction services (including audit, advisory, legal and recruiting services).