Reverse Auctions are a great way to generate significant cost savings. According to CNBC, companies are typically saving 10 to 20% by using reverse auctions, but I’ve also seen others quote savings over 30%. However, it’s got to be done right. So, how do you run a successful reverse auction?
The first thing to understand is that reverse auctions (otherwise known as eAuctions) are a product of the internet Age. So, the first key requirement of running a successful e-Auction is choosing the right reverse auction software.
Not every category, product or service is suited to an eAuction. In our experience, the best categories for e-auctions include (but aren’t limited to):
As a rule of thumb, one in five categories is perfectly suited to eAuctions in Australia and New Zealand. Once you have selected an appropriate category, you have to study the marketplace and know your place within it. For example, if it is a seller’s market, you might not generate the necessary interest for an e-Auction. But if it is a buyer’s market or if it’s a competitive category, you’re likely to generate the necessary interest to hold a successful eAuction. So it’s important to do your research ahead of time so that you have market trends working in your favour.
Communication is a major factor in a successful reverse auction. You have to be very specific about what you are looking for so that competing vendors offer what you want and not what THEY think you want.
What this means is that you need to be upfront and transparent. Make sure your suppliers know your selection criteria and what they’re getting into. Are you judging based solely on price, or are there other factors in play? Communicate clearly and check that they’ve understood you.
At the same time, while you are communicating, make sure that you don’t get talked into not holding the auction. Vendors may offer deals to skip the auction and go with them. Resist temptation and trust the eAuction process.
Reverse auctions offer the most benefit to buyers, but that doesn’t mean it’s a zero-sum game where the sellers lose out. The reverse auction format levels the playing field as all sellers work from the same set of information. Reverse auctions also give sellers insights into the market at large by exposing everyone’s lowest price point. It’s important for you to communicate these benefits to your vendors – especially if this is their first eAuction – because you want sellers who are engaged with the process.
As reverse auctions involve technology, it’s a good idea to get suppliers comfortable with the software. A pre-bid is a good way to get suppliers engaged with the process and also serve as a check for your specifications. Communicate that you are running a two-stage process.
We strongly recommend you don’t skip the first step; you don’t want your eAuction undermined by technical misunderstandings.
Setting a hard time stop in a reverse auction means leaving money on the table. Because we are so reliant on technology, it’s highly recommended that you aren’t rigid with your time limits. Almost all e-auction software has auto-extension facilities. So, if a bid comes in the last few minutes, it’s best to extend the auction to allow others to counter bid.
Essentially, extensions discourage “sniping”, where a vendor places a bid likely to be more than the current highest bid as late as possible, leaving no time for a counter bid. You want to give all sellers a fair shot at winning your business, so give the others a chance to respond to last-minute bids. If none do, close the auction and make your selection.
Last but not least, make sure to communicate with all suppliers and notify them of your decision and be transparent with your process. Remember that your vendors spend a lot of time preparing and participating. If you do not actually award business at the end of the process, they are unlikely to participate in the future. Of course, if you don’t get a good bid, you don’t have to accept any of the offers, but you need to explain why you aren’t awarding your business on that day.
A well-run reverse auction can provide procurement teams great savings while providing suppliers with a fair but competitive field. So, communicate well, follow the steps outlined here and happy savings!
As we’ve outlined, reverse auctions can save you significant money if run well. If. Run. Well. Sometimes it’s best to leave it to the experts. Ben Shute of Purchasing Index has run reverse auctions for years for both the private and public sphere, from relatively small contracts to those in the millions of dollars. A successful eAuction means you’ve left nothing to chance and nothing on the table.
For more information, check out Purchasing Index’s comprehensive page on reverse auctions, and catch the short video in which Ben breaks down the process for you.