Here’s a truth that will not surprise you: Sometimes people don’t want to do an e-auction. I’ve talked about convincing the skeptics in the context of procurement transformation, but this is more specific. This sounds like, “An e-auction might be a good idea, BUT . . .” or even “An e-auction might be useful for OTHER categories . . . not this one.” It’s the special snowflake rule: “This is a useful tool and will bring us value, but my category is a little different.” Every category IS different, but I’m still a firm believer every category could use an e-auction as its negotiation tool. Today let’s talk about three real-world experiences I’ve seen with significant pushback: engineering services, marketing, and roofing nails. We’ll talk about the situation, who was pushing back (it might not be who you’d expect), what we did about it, and the result we saw. It is worth noting that these three examples actually come from three different companies, and I picked them because they are incredibly common for the kinds of conversations I have every day.
Engineering Services
Situation: Engineering services is one of those categories that is traditionally “non-auctionable.” This is having a supplier design and manage projects for a company, in this case those projects were generally utility lines. Many companies outsource at least some engineering work similar to this work, unless they have a very large fleet of in-house engineering staff or are a purely services company (like financial technology). In this scenario, a utility client was switching from hourly rates to per-mile rates (unit rates), but all suppliers had current contracts in place.
Who pushed back: Pushback came from multiple points in this scenario. First, the business unit had never run an e-auction before, so they pushed back because it was something new. Suppliers didn’t really push back because many of them had already been in e-auctions with this client over the preceding months. It’s very important to note that none of this would have worked if previously the company had decided to waive the e-auction requirement in response to supplier pressure. These were also big suppliers, like Burns and McDonnell. I’m not saying Burns & Mac had pushed back against e-auctions, but it’s inevitable that some suppliers will do so. After all, suppliers would like to continue to see companies pay above-market prices and are concerned an e-auction will not take into account quality considerations or start with true level playing fields. This is where the e-auction team has to know what they’re doing and do it right to avoid a non-value-added race to the bottom.
The category manager had not yet run an e-auction, despite e-auctions being standard policy at this client for several months. She and her team also pushed back because they were afraid of doing something differently. I think there was also an undercurrent that if the e-auction achieved large savings, what would it say about her abilities as a category manager?
Side Note: Fear of significant new savings on a category that has been negotiated manually or simply bid for years is often an unspoken undercurrent in e-auction programs. It is incredibly important that e-auction programs are not internally punitive. The procurement leader has to recognize the additional victories and value that come from e-auctions and NEVER ask the question: why didn’t you get these savings previously? Different tools achieve different results, and an e-auction is simply a tool. No more, and no less.
Action: After being denied an e-auction exception, the category manager worked with the e-auction team to determine bid strategy. It was decided to run an English Reverse e-auction with no ceiling, which was highly unusual. It was done this way because the switch from hourly rates to unit rates meant the company did not have good baseline data, and they did not have time to run a full RFP ahead of e-auction due to contracts expiring. Running e-auctions without ceilings always makes me nervous because I’ve seen suppliers do some crazy things in a wide-open field like that. We had enough suppliers, so I knew we had the competition required to make it work.
Result: This e-auction was an incredible success. Using the lowest bid from every supplier starting out and comparing to the lowest bid ending, the e-auction reduced pricing by 54%. That is one of the highest percentages I’ve ever seen. It’s notable the auction reduced so much AND the technical team still had freedom to award work to the higher-than-low supplier when it actually came time to allocate work. All the suppliers knew that the “bid rank 1” auction winner would not necessarily receive the full award from the very beginning. This e-auction fulfilled everything that is the biggest advantage to suppliers:
- The auction was far faster than their typical manual negotiation cycle (negotiating with more than 10 suppliers manually is an incredibly time-consuming process, and the technical team wouldn’t allow a smaller bid list due to the volume of work and their desire to sometimes award to a second, third, or higher-priced supplier)
- The auction was more transparent because it required communicating the award scenario to suppliers so they could make their own business decisions in a crowded field. It also gave them great information about where they were in that competitive space.
- The auction was clearer because it required crystal clarity on the bid scope, the change from hourly rates to unit rates, and the potential award scenario. There was no fuzziness on what suppliers were bidding on, how it would be billed, or what factors would drive the business unit decisions on awarding work as it came up.
Marketing
Situation: Marketing is one of the most common questions I get when people are challenging me about whether every category can be e-auctioned. In this case, the company was unhappy with their incumbent marketing firm and were seeking a new one. Marketing services included creation of TV, radio, social, and written media; handling the outreach in those markets, and also running the branding for the parent company and their subsidiaries.
Who pushed back: The marketing team was incredibly reluctant to even run a full RFP for this work instead of just letting their top few firms run a dog and pony show and picking their favorites based on that presentation. This was also a category traditionally sourced by the marketing team without any procurement involvement (This is common in HR, finance, and marketing across multiple industries in my experience. It’s one of the ways I tend to measure procurement maturity if procurement is running sourcing events in these categories). The marketing team requested an e-auction exception and went all the way to a Senior Vice President for approval (this is another organization where e-auctions were required for all bids without a written exception). That SVP did not grant the exception and insisted that this previously un-negotiated category really needed to show value and use e-auctions as a tool to stay within budget. The marketing team led the RFP phase, allowing suppliers to demonstrate their approach and also gathering pricing for services.
Action: Marketing gets tricky because there aren’t always good estimated quantities for a bid comparison. Yes, we need a Branding Specialist and we will pay them by the hour, but how many hours do we need in a year? (this is why services need part numbers!) In this case, we bid a couple of typical projects the marketing firm would do and had them price those. For example: develop and film a 30-second TV ad and place that ad in these particular markets. Using those sample projects, we were able to create a reasonable apples-to-apples bid that focused on results instead of method. This meant suppliers with strong competitive advantages in certain markets or types of markets could show that strength and have it come out in the numbers. The technical team also evaluated multiple suppliers until they were down to a short list of two, either of which was high quality and could do the work well. Interestingly, the leader of the technical team favored one supplier and most of the rest of the team favored the other.
Result: The team saw about an 18% reduction in pricing from the RFP to the e-auction. This worked best for a few reasons:
- All suppliers invited were qualified by doing high-quality work, in the right markets, and had demonstrated their ability during the RFP. The technical team was torn in their choice of which firm was better, so the decision really was going to come down to price.
- The scope of work and bids spoke to the results, not methods for how to do that work. We didn’t tell the marketing firms how many hours a brand manager or videographer needed to put in. We told them the work that needed to be done and let them have autonomy on how to price and value it. More efficient firms with better experience in the space thrived under this model.
- Checking back with the marketing team a few months later, they were genuinely thrilled with the supplier who won the auction. Because they had reduced their pricing, the marketing team was actually able to do more with the same budget, and the supplier ultimately did more work for the company than if the marketing team had awarded after a mere presentation.
Roofing Nails
Situation: Experienced e-auction practitioners might be surprised to see nails on this list. On paper, this category is everything an e-auction is built for: it’s an incredibly high volume widget for this company, the specifications are clear and concise, and it’s a total of about ten part numbers. No-brainer as an e-auction, right? Well . . . as with all things, there are special considerations. There were only a few part numbers, but those part numbers were being shipped to more than 600 locations. Pricing needed to include the shipping fees to those locations and the company was reluctant to combine locations because every penny matters at high volumes. That meant the ten part numbers actually represented more than 6,000 lines of data. While those could be combined in an e-auction using spreadsheets, the award scenario was for cherry-picking the best price for each of those six thousand lines. In addition, this bid was being run via email every six weeks due to ordering cycles and previous market volatility.
Who pushed back: In this rare instance, the most pushback actually came from the software provider, who noted how unreasonable it was to ask suppliers to manage six thousand lines in an auction scenario. An auction that large was also likely to crash the system due to the sheer volume of data from the seven suppliers invited to bid. The procurement team was slightly reluctant to e-auction as well due to unfamiliarity, but they did understand the benefit of getting all of this manual work out of email and into a system.
Action: In Chapter Six of my book, I refer to what I call a pseudo-e-auction. In some platforms (including the one this company uses), this is called a Dynamic RFP. This ended up being the perfect tool for the scenario. Suppliers would have about a week to enter prices into the RFP, and all bids are due on a Monday afternoon. Then, suppliers have until noon Tuesday to adjust their bids based on feedback. They can prioritize the locations and part numbers that best suit them, and it gives them their bid rank for each line so they can adjust. Every six weeks, the buyer can copy the previous bid and simply restart the cycle.
Result: The savings for each of these bid cycles is only about 1% (measured as the reduction from the initial lowest price to the final lowest price when the dynamic RFP closes). The true savings has been in the time invested by the buyer and the suppliers, in addition to the greater process transparency and feedback.
- Rather than manually managing an email chain and literally scheduling his vacation around this six week bid cycle, the buyer can easily copy the previous bid and give access so other buyers can cover for him.
- Rather than a manual bid where suppliers get no real feedback on their bids other than an order or no order, suppliers now get bid rank information and can adjust or not based on their current market needs.
- Rather than spending 6-8 hours on sending emails and building a comparison rate sheet to drive orders, the buyer now spends 2-3 hours every six weeks with very minimal manual intervention. The entire process is much faster and enables him to do other things with his time.
If you are wanting to do e-auctions and you are seeing major pushback, do try to start with some “easy wins” – often IT hardware, high volume widgets with lots of competition, or even just a recent RFP where the category manager doesn’t have time or bandwidth to do a full negotiation. Even with easier categories, be prepared for pushback and be ready to stick to your convictions that an e-auction truly is the best path for all parties involved. Expect objections from the technical team, procurement team, and suppliers. If you can get past those objections and meet the needs of all parties, you might find you get excellent results with less effort and still keep value at the forefront of the conversation.
If you would like to talk about tricky e-auction categories or the pushback you’re seeing, let’s chat. If you’d like to get these articles weekly straight to your inbox and never miss one, sign up for my newsletter.
My book, Transform Procurement: The Value of E-auctions is now available in ebook, paperback and even hardcover format: https://www.amazon.com/dp/B0F79T6F25
