Archive: August, 2016

The secret to eAuctions

The pros and cons of eAuctions have been debated since the technology was launched in 1990s. Michael Lamoureux, the Editor-In-Chief of Sourcing Innovation has recently added some weight to the argument against with a white paper called  The Dangers of e-Auctions.

In summary, he argues that e-auctions:

–     Don’t capture lowest cost

–     Don’t ensure quality

–     Don’t split awards optimally

–     Increase risk

He goes on to argue that eAuctions lead to:

–     Market shrinkage

–     Relationship souring

–     Increased disruption risk

I’ve managed a number of eAuctions over the last 15 years for a variety of products ranging from stationery to complex telecoms equipment. Furthermore, I’ve managed eAuctions both as an employee and as an external consultant rewarded on the basis of a percentage of the savings.

Managing eAuctions is one of the essential skills of a procurement professional. And the secret to a successful eAuction is knowing when to use it. But like any tender it is vital to get the specification right, engage with the suppliers and evaluate their responses in line with the stakeholder’s strategy.

eAuctions are only appropriate for certain categories of spend. Where the market is an oligosony and the product is a commodity then eAuctions should be the default approach. If, however, the buyer has little power and the product or service is highly differentiated then eAuction may not lead to the best outcome.

As a procurement practitioner, I have witnessed stakeholder’s excitement during an eAuction. It has not only helped drive down the cost of a product but it has facilitated the discussion about the wider adoption of procurement technology.

If Michael’s criticisms hold any weight then they are criticisms of procurement in general and not just eAuctions. Game theory and its application in the telecoms market clearly demonstrate how auctions can drive down cost. Michael’s other points about managing relationships, quality and risk are just the secrets of being a successful procurement professional.