eAuctions are an essential alternative to traditional negotiation methods.
With tangible benefits for buyers, eAuctions could help your organisation survive the economic downturn.
In this article we will:
- Explain eAuctions and their benefits.
- Bust some common myths and misconceptions about eAuctions
- Compare eAuctions to traditional negotiation methods
- Explain how to implement a successful auction strategy in procurement
- Explore the features of eAuction tools, including our recommendation DeepStream
An essential guide to eAuctions success
Throughout the article we’ll be referencing wisdom from industry expert Jacob Gorm Larsen, Author of ‘A Practical Guide to E-auctions for Procurement’, and founder of MoneyballCPH.
Jacob also recently appeared as a guest on the Procuretech Podcast, if you’d like to hear more of his insights on eAuctions.
What is an eAuction?
eAuctions are a negotiation method that allow buyers to leverage market-driven pricing opportunities.
This ensures they get the best deal possible with their suppliers.
These negotiations take place in real time, with all prospective suppliers at once. This saves buyers not only money, but hours of conversation time.
Reverse Auctions explained
One of the most popular eAuction methods is the Dutch auction, or reverse auction.
This involves suppliers competing in sequential bidding.
Live, and within an allotted time period, suppliers lower their prices against the nearest competitor in order to win your business.
Reverse auctions are typically run as the final negotiation stage as part of an RFX process.
Buyers will have already vetted the suppliers they want to invite to the eAuction and suppliers will start out with their initial bid at the beginning of the auction process.
eAuctions vs. Traditional negotiation
What are the differences between eAuctions and traditional negotiation?
And how can eAuctions expedite the negotiation process to drive savings for your business?
Downsides to traditional negotiation
- Traditional negotiations involve a lot of work: Tons of emails and often multiple face-to-face meetings with suppliers. This back and forth is very time-consuming.
- Traditional methods put a lot of negotiation power in the hands of suppliers, as they largely drive the agreement conclusion with price.
- Another drawback is unconscious human emotional bias: Maybe you favour a long-standing supplier who you’re familiar with, and this blinds you to cost-saving opportunities with a new supplier. Such human elements can be costly to any organisation.
The benefits of eAuctions
There’s one crucial difference between traditional negotiations and eAuction strategies:
In an eAuction, the suppliers negotiate between themselves online in real-time.
As shown below, this means that the buyer is no longer the go-between for negotiating during an eAuction.
Let’s look at the other benefits of running an eAuction.
Lower prices
Suppliers who win a closed bid often experience “winner’s curse” (regret at offering a lower price). As such, they build a premium into their pricing to avoid this.
The open bid nature of eAuctions removes this risk for suppliers, therefore removing their need to build in this premium. This delivers the buyer lower unit prices.
eAuctions typically achieve an average 15 – 20% saving on spend.
Increase negotiation efficiency
eAuctions are time efficient – usually 20% to 40% faster than conventional negotiation methods.
This not only saves time and human resources. It also improves your agility across everyday procurement processes.
Create a competitive environment
If you’ve used eBay, you’ll know how auctions create a sense of competition and excitement.
This is ripe for generating savings at speed.
Keeping up with an unstable world
“With a recession on the horizon all procurement teams will be looking at their cost base, eAuctions are the most efficient way to negotiate prices with suppliers.” – Jacob Gorm Larsen
Between the aftermath of COVID 19 and continuing global unrest, we’re at the brink of another world recession.
Supply chains across the world have been hit hard with long lead times – increasing on average 207% this year.
eAuctions are a great way to remain agile and cost-efficient. This helps to bolster your business against disruption.
Witness e Auctions in action…
An eAuction strategy can be applied across 1000s of industries.
One such use case is Merlin Entertainments, a UK-based company who own 124 attraction sites across the globe.
Merlin’s CPO John Butcher chose to pilot a test e Auctions strategy on their UK Food and Beverage category.
This demonstrated just how much the wider business could benefit from implementing such changes.
Within just six months of adopting an entirely new way of sourcing, the team saved between 12% and 22% across every product and service.
This paved the way for adopting eAuction strategy within Merlin. The company rolled it out to wider procurement categories globally, going on to save the organisation millions of dollars.
Busting common eAuction myths
Myth 1: eAuctions just get you the best price
Not the case if you use the right platform.
E-sourcing platforms have eAuctions built in as part of the overall RFx process.
This means that buyers can pre-qualify suppliers and consider non-price elements of the bid in the total proposal evaluation, just as they normally would before a formal proposal.
Myth 2: eAuctions will damage supplier relationships
Bad practices and unprofessional conduct always damage supplier relationships, whether you use eAuctions or not.
But if you go about eAuctions in the correct way, they can actually improve relationships with suppliers.
Why? Because eAuctions offer suppliers transparency and procedural fairness. With this, they can gain valuable market insight around price position.
Myth 3: eAuctions only work for simple commodities
As long as the market conditions are right, and eAuctions are combined with a professional sourcing process, they can be applied across hundreds of categories in both direct and indirect procurement.
One of the most common reasons for poor outcomes in eAuctions is a lack of clarity in the specification. It’s rarely down to the goods or services themselves which are being sourced.
How to successfully adopt an eAuction Strategy
In order to successfully implement eAuctions, you need to enact a thorough change management process.
The next section will walk you through best practices here, and how to avoid common pitfalls.
1. Influence internally to create a sense of urgency and need for change
The first hurdles in change management are human barriers.
Though eAuctions have been around for over 25 years, it’s still a new concept for many businesses.
Start by building a business case around this need for change, highlighting the potential savings and how this will benefit the organisation.
Present this to your senior leadership team, in particular your CPO and sponsors within your internal stakeholder structure. You will need their full support.
2. Build a network of committed stakeholders
The next stage is to build a network of stakeholders, committed to adopting change.
This network will help you coordinate changes, communicate throughout implementation, and be your advocates in promoting change.
3. Form a strategic vision with clear KPIs
It’s vital to have a defined vision, agreed with your stakeholder network and C-Suite level executives.
Off the back of that defined vision, set clear KPIs to ensure that everyone is continually moving towards achieving the new strategy.
SMART goals are a great way to structure this:
- Specific
- Measurable
- Achievable
- Relevant
- Time-Bound
An example SMART goal could be: Increase use of eAuctions across procurement direct spend to 40% by end of Q4 2023
4. Ensure buy in across all levels of the organisation
Next, ensure you have buy-in across all levels of your organisation.
Book in regular meetings across your stakeholder network. Ensure everyone is continuing to move forward, and that communication is filtering down through all levels of seniority.
5. Enable action by removing any barriers
The next stage is to remove potential barriers to ensure your eAuctions strategy is a success.
An example of this can be team silos rather than a collaborative unit – communication is important to ensure all stakeholders remain involved and feel part of the change.
6. Generate short term wins
Impact needs to be generated and demonstrated at speed. Always take time to celebrate short term wins – and make lots of noise about it!
Positive buzz keeps stakeholders onside and helps C-Suite level executives to understand your reporting.
7. Use results to sustain acceleration
Obtaining data and learning from those results to make iterative changes is vital.
Consistently reflect on your progress, and use results to drive change where required – rapid adaptation is imperative.
8. Change management – “It is a lifestyle, not a diet!”
Even when a change is implemented, your job is never done. You must continue to promote the culture of change.
Use methods such as organisational newsletters, lunch-and-learn sessions and town halls to keep stakeholders involved and address issues swiftly.
Continuous change management keeps you ahead of the game!
Change management metrics to track
Let’s look at the metrics that matter when proving the success of your eAuctions strategy, especially when presenting this to C-Suite level executives.
In the early days of adoption, metrics can be as simple as how many eAuctions have been run in a specified time frame.
This will give you a good indication of any blockers that are coming up and where there could be training gaps within the team.
As time moves on and your team are becoming more comfortable with running eAuctions regularly, you can move onto tracking actual spend throughput via eAuctions (this could include annual spend, spend across contract lifetimes or overall spend across the programmes lifetime).
This is a great metric to measure, as it shows how much impact has been made on real spend numbers. This is easy for C-Suite executives who aren’t part of the procurement team to understand.
How to find the best tool for your eAuction strategy
If you want to drive an eAuction strategy, you’ll need a versatile tool that’s easy to use for suppliers and procurement teams alike.
Let’s look at some of the features you should look for in an eAuction solution, before taking a look at our recommendation in this space, our software partners at DeepStream.
Features to look for in your eAuction software
Showing suppliers where they rank
eAuctions work best when they’re open and visible to all participants.
This way, buyers can see in real-time where suppliers are ranking, and suppliers can see their ranking.
If you have many suppliers very close together on initial price, you can show them where they rank and what the lead bid is. This encourages competitive bidding.
Pre-qualifying suppliers ahead of the eAuction
You should be sure that your bidders are suitable before going to auction. So features that allow you to scope out suppliers in advance are always useful.
For example, DeepStream’s Request Stages allow you to pre-qualify suppliers – ensuring they’re suitable for your business’s needs.
Ability to define transparent awarding principles
Awarding Principles allow for clear communication with potential suppliers.
This could be “This auction will be awarded on a ‘winner takes all basis” and “The entire order and contract will be awarded to the supplier that wins the auction”.
This transparency helps increase supplier satisfaction and drives higher engagement.
Pre-bids for suppliers
Submitting pre-bids ahead of the eAuction is helpful for suppliers. It means they don’t need to start from scratch or worry about entering opening bids in a time-pressured environment.
It also allows buyers to see the range of bids before the eAuction starts.
Ability to auto-extend deadlines for last minute bids
Auto-extend features allow you to add more time to an auction if a supplier bids in low last minute (‘sniping’). This gives other suppliers the opportunity to bid against them.
Minimum reduction amount
Minimum reduction amounts allow you control the margins by which suppliers can reduce their bids. This ensures the auction continues to move competitively – suppliers can’t just bid down to the smallest decrement.
Benefits of DeepStream to succeed with eAuctions
One tool offering all of the features above is DeepStream.
This best-of-breed e-Sourcing platform offers an eAuctions module developed closely with Jacob Gorm Larsen.
“DeepStream is already well known for setting the gold standard when it comes to usability for REX solutions. Their clients will quickly achieve great results and cost savings with the eAuction module.” – Jacob Gorm Larsen
Here’s a brief overview of DeepStream’s benefits:
- Encourages best practices for eAuctions strategy.
- Provides step-by-step implementation guides for users.
- Allows you to invite, assess and negotiate with suppliers through a cloud-based platform
- Active visibility encourages suppliers to drive down bid prices.
- Offers easy RFx integration, allowing you to build eAuctions into your RFx process.
- Intuitive interface for simple navigation.
Conclusion and key takeaways
- Adopting eAuction strategy yields significant savings and isn’t limited to a particular product or service.
- Time is money. You can save 1000s of hours eliminating face to face negotiations – enabling faster speed to market and improved agility.
- Change management can be challenging but with the right strategy, structure and technology, results can be achieved quickly.
- eAuctions are not just beneficial to the buyer. Suppliers also benefit with market insights – transparency helps improve your relationships.
With supply chains stretched and recession looming, today’s businesses need the best tools to stay ahead of the game.
Implementing eAuction strategy could be the change your organisation needs to survive the coming storm.
But doing so also necessitates having a solution provider that is not only affordable and versatile.
Most importantly, you need a solution which suppliers are also happy to use, thanks to its industry-leading user experience and easy onboarding.
