Busting the Big 3 Myths of Reverse Auctions

Reverse Auctions are ONLY about Price

Reverse Auctions, run properly, by experienced professionals, are designed to drive the best possible value and lowest total cost of ownership (TCO) for the buying entity.

Critical factors such as service levels, product quality, switching costs and other quantitative AND qualitative factors must be considered along with the use of reverse auctions as a pricing tool within a sourcing event.

This myth gives rise to the uninformed notion that only highly commoditized categories are suitable for the application of reverse auction methodologies as a sourcing tool.  This is also false, reverse auctions are suitable for any category, from commodity to construction, where there are multiple, QUALIFIED, suppliers who can provide the product or service being sourced.

 Reverse Auctions only work for commodities

Reverse Auctions come as a price gathering component of a sourcing event.  Sourcing professionals around the world, in enterprises as large as GE and FedEX and as small as entrepreneurial startups often leverage the real-time market competition of Reverse Auctions to determine what the best available price point is.

This strategy, as one function within the sourcing strategy, can be applied to categories as diverse as highly engineered products and machines, legal and auditing services, custom packaging and a host of other categories that are not highly commoditized.

Bear in mind, good sourcing organizations purchase on the basis of best value for the enterprise…not necessarily best price.  Price is a component of value and when the price comes down, assuming that quality and service remain static, value increases.

 Reverse Auctions damage the Supplier-Buyer relationship

The application of a best practice in the negotiation of price can, and often does, actually enhance trust and credibility within the Supplier-Buyer relationship.  No negotiation tool delivers a higher level of transparency to both sides in the negotiation.

The Reverse Auction shows suppliers, in real time, whether they are, in fact, or not the lowest cost provider of the product or service being sourced.  There is no room in this process for the vagaries of an individual declaration from the buyer’s side as to whether or not the supplier is competitive, the auction process takes care of that on an independent and unprejudiced basis.

Finally, while the process does impart downward price pressure on the supplier to be cost competitive, the ultimate value proposition must take into account multiple factors, price being only one.  Strong relationships survive the reverse auction process.

 

Public Sector Budgets and Procurement...Who's in charge?

As a former elected official, my colleagues and I who were elected to serve the people of our community spent hours of hand wringing, debate, meetings, constituent input and flat out arguments about how best to manage each year's budget.  Contrary to popular belief, public spending is a challenging endeavor, made more so by the knowledge that the taxpayers are already stretched to their limits, no one wants to raise taxes and no one wants to cut services. That experience is part of the reason that LGX Corporation now offers services to public sector entities to allow them to reduce costs by applying real-time market pressure to suppliers through the reverse auction process.

Some significant sized public sector governing boards have seen the value of stretching their budgets through the reverse auction process and have directed their staffs to engage organizations like our to help save money, but what happens when the staff refuses to use this cost savings tool that the governing board requested?

Elected Officials vs. Staff

The people of any given jurisdiction have entrusted the spending of their tax dollars with the folks they elect.  Elected officials entrust the execution of their spending policies to their staff.  Why then does the staff not take the direction of the elected officials?

When it comes to reverse auctions, a couple of reasons come to mind: The staff is insecure in their position or the staff is a bit too comfortable with the status quo.

We've run surveys in the past and asked staff members why they wouldn't use the reverse auction process, the overwhelming response? "Saving money is my job, reverse auctions threaten that..."  With years of data under our belt, we know that reverse auctions save 18% to 20% more than staff negotiated, or sealed bid, pricing on the categories and events to which they are applied.  Our experience shows us that 20-25% of a public sector entities budget could be acquired through this highly effective tool.  If an entity has a $500 million dollar budget, for example, $125 million in spend could be producing more savings.  In our experience, those savings should amount to somewhere in the vicinity of $20 to $25 million dollars.  That's money available to cover cost increases in areas like payroll and insurance or deliver new programs or services.

Fear of change is costing these public sector entities, and their taxpayers, greatly.

Accountability

What's the answer?  Elected officials must do more than simply adopt policies, they must ensure that their staffs are following the policies set forth in order to realize the outcomes that they rightly adopted the policies to achieve.

No Contract Management? Leaving Money on the Table.

I've been reading a great deal lately about the goings on in the Contract Management space.  Driven, to be sure, by the increasing numbers of clients who are expressing an interest in our Contract Management solution.

What I've learned has been eye opening.  More than a simple electronic filing system, more than a repository for paperwork that would otherwise end up in the filing cabinet, Contract Management is substantial tool for cost management.

I've seen data that suggests that a meaningful Contract Management can reduce the non-payroll portion of the expense line of a P&L by as much as 5%, and 60% of the Fortune 2000 are engaged in automating this process.  One report, I believe it was a PriceWaterhouseCooper publication, suggested that the ROI on Contract Management technology platforms was as much as 10:1.

My question is...where are the other 40% and why aren't more mid market companies taking advantage of this cost savings tool?