Three cheers for on-line reverse auctions!

“Scandalous”, “Cynical”, “the graveyard of industry”. Name it. Reverse auctions have recently given rise to a surprisingly raucous denigration campaign. Bodies as diverse as MEDEF, CCIP, and the European Commission in Brussels are up in arms against this new practice. But what really are reverse auctions? And what is the real reason behind this reaction?

 

On-line reverse auctions are basically rapid negotiations of Purchasing terms between companies pursuant to an invitation to tender. A buyer invites suppliers world-wide to tender as part of a framework agreement for the purchase of goods and services over a period of one year. Having defined his requirements carefully and in as much detail as possible, the buyer contacts a large number of suppliers who might be interested and having sent them its specifications, receives their responses and compares these on a technical basis. The Purchaser then shortlists the best suppliers as part of a process which may last for weeks or even months. Then the Purchaser allocates a pseudonym to each shortlisted supplier and instructs them to access an online auction room at a specific time and date whereupon they must put forth their best price offer. The unique feature of this system is that it allows each supplier to see the offers placed by its competitors (under the pseudonym allocated by the Purchaser). Should a supplier be under-bid, it can drop its price to have a chance of winning the auction. After a short period of time, in general one or two hours, the supplier who has offered the lowest price wins the auction and in principle the tender.

 

What is wrong with this system?

 

The system is said to be destructive. It is said to push suppliers to lower their prices to an excessive extent during the auction beyond what would be reasonable, to the point where some suppliers might be driven to file for bankruptcy as a result. This argument however presumes that suppliers are not responsible and that they quote prices just like some people go to a casino. Why should suppliers be any more irresponsible during an online reverse auction than when they quote a price on paper or meet a Purchaser from a major retail chain face-to-face?

 

It is said that reverse auctions are particularly hard on SMEs. Does this mean that only large corporations know their way round the Internet? That would be absurd. Experience shows that SMEs are at least as nimble as large corporations when it comes to using the Internet. What’s more large corporations are exposed to extensive security considerations which tend to slow them down. Also, online reverse auctions offer less scope for subjective elements. Yet subjective elements are developed and put forward by sales staff. And only large companies can afford extensive sales forces.

 

Another argument is that reverse auctions focus solely on price: other considerations, such as the quality of the products or services on offer, are overlooked, which puts the best suppliers, who focus on quality, at a disadvantage. This is an utterly misleading argument. All reverse auctions which are carried out professionally are equalised: the suppliers’ bids are weighted in real time in terms of quality considerations. The organiser of the reverse auction defines up-front the weighting coefficients which take into consideration factors other than price that impact the overall purchase cost in one way or the other.

 

Because they are run over the Internet, it is claimed that reverse auctions do away with the personal relationship between Purchaser and supplier. This argument overlooks the fact that a professionally run reverse auction requires at least as much preparatory work and care and attention as any traditional negotiation process. There is no more and no less of a human relationship than during traditional negotiations. Unless one considers that hours spent horse-trading in boardrooms as part of traditional negotiations constitutes the epitome of human relations. In that case, one might say that online reverse auctions do away with all the time-wasting make in negotiation between multiple parties.

 

It is said that reverse auctions lack transparency. That the rules for winning such auctions tend to be blurred and unclear. On the contrary, what traditional tendering process enables suppliers to know with certainty the offers made by their competitors? The organisers of reverse auctions are sometimes criticised for not selecting the best priced offer at the end of an auction. Indeed, the organiser is free to make up its mind at the end of the auction. But can they really be blamed for doing so? There are all sorts of reasons why the organiser of a reverse auction might not go for the lowest bid. For instance, it might not make sense to select a separate, lowest priced supplier for each particular batch which is up for grabs.

 

It is said that reverse auctions favour delocalisation. It is true that reverse auctions enable an organiser to consult many more suppliers than traditional invitations to tender, and buyers can invite suppliers from countries with low labour costs to take part in the auctions while applying equalising coefficients to take into consideration factors such as distance or the difficulty in managing such suppliers. But can reverse auctions really be blamed for differences in labour costs between different countries? If so that would be like shooting the messenger instead of tackling the cause.

 

Reverse auctions, when run responsibly and ethically on the contrary bring undeniable transparency and a level playing field to negotiations. The purchasing process has always been viewed with some suspicion. Reverse auctions cast off the veil from Purchasing once and for all. Reverse auctions provide suppliers with all kinds of advantages: they enable them to ascertain their relative price positioning on the market. Suppliers can find out objectively whether they are competitive or not based on an objective competition process. Reverse auctions also enable suppliers to ensure that they end up winning tenders which are financially viable. After all, it is terribly frustrating for a supplier to lose a contract because he thought that the buyer was bluffing when he said his quote was too high…

As for the Purchaser, reverse auctions offer the ultimate in efficiency. A negotiation process completed in a couple of hours at most! Reverse auctions in turn require Purchasers to draw up more detailed specifications and to seek maximum competitiveness, as well as to generally enhance the professional aspect of their trade.

 

So why such raucous opposition against this modern and efficient system?

 

Well, for a start, reverse auctions bring home to everyone that negotiations, whatever their type, require the parties involved to commit themselves to dealing in an ethical manner. Those who engage in bluffing, misrepresentation or omissions during traditional negotiations may resort to trying similar tactics during a reverse auction for instance by making bogus moves. However, something which might be tolerated in traditional negotiations would be seen as an outrageous deviation in a reverse auction whose fundamental principle is transparency. And some people find this shocking.

 

Finally, reverse auctions embody something which no one actually likes: competition. Buyers would prefer an idyllic world in which their long-term suppliers with whom they have established a relationship of trust would ensure that they always provided them with the best value on the market. As for suppliers, any competitive tendering process is like being put on hot coals, at a time when they are looking forward to acquiring new clients and raking in the profits. No one likes competition and yet it is competition which pushes all players in the economy to strive for ever-greater efficiency. Free-market economics, capitalism, globalisation and competition have finally emerged from secret negotiating parlours to paint dramatically efficient curves over the Internet. A lot of people seem to be raising a hue and cry about reverse auctions.

 

Let them stop castigating a new practice which is designed to help all the economic players progress and let them instead foster its spread in the industry.