Reverse Auctions have been around since the mid-1990s and have grown in popularity with the evolution of the Internet and its role in business commerce. Companies like GE, Target, 3M and Pfizer pioneered the use of reverse auctions and now consider them an integral part of their purchasing process. According to a study conducted in 2009 at the University of Arkansas’ Information Technology Research Institute, approximately 25% of all firms and almost 45% of all large firms use Internet-enabled reverse auctions to facilitate procurement process. Research also finds that over $400 billion of goods and services are procured using reverse auctions in the United States alone.
As with most new technology, the use of reverse auctions is sometimes met with resistance, fear and caution. In any business, uncertainty exists when implementing a new process and there is always risk involved. But allowing these emotions to interfere with adopting cutting edge technology can mean lost profits and allows your competitors to gain the edge.
The Commerce Department estimates e-commerce for the third quarter of 2010 at $41 billion, up 13.6 percent from the same period last year. E-commerce is not going away.
The premise of reverse auctions is simple: buyers solicit suppliers for a defined product or service. Suppliers submit specifications and enter their pricing online, rather than on paper. Suppliers then go online and place subsequent lowering bids during a defined period of time.
The reason this process works is this: because of the dynamic environment, suppliers have the opportunity to place subsequent lowering bids and the time-sensitive bidding opportunity calls them to be more efficient in their pricing. Historically, reverse auction procurement saves an average of 10-20% net on everything run through the process.
Consider the evidence from reverse auctions for an internet content filtering solution for a large school district on the West Coast. The school system had estimated the purchase to cost about $795,000. Seven suppliers bid in the reverse auction event. The on-line event produced a total of 546 bids, with first-place changing hands 46 times, between 7 suppliers on the 4 line items. At the conclusion of the bidding event, because of the competitive opportunity, between suppliers to win the business, the school district is enjoying a 46% savings versus budget.
At eBridge we offer a web-based reverse auction solution along with the consulting and advisement to make your reverse auction a successful event. There are several factors to think about before running your first reverse auction event. Below are a few of the high notes when considering this procurement practice:
1. Your first event may take some getting used to: Change is difficult and while the reverse auction process isn’t difficult, it is different and may require some additional effort in understanding how it works.
2. Make sure the item is a good fit for the process: Not everything you and your organization buy is a good fit for the reverse auction process. Many first time users are not aware of the importance in picking the right purchase to make sure it works in the process. Because of this, the auctions don’t yield the results they were promised or hoped for. Items that are not clearly defined or do not allow for a wide range of suppliers do not lend themselves to highly competitive events, thus don’t see the greatest benefits of the reverse auction process.
3. It takes leadership. But remember, change can be difficult and it requires a champion to carry your team members and suppliers through to success. Innovation and risk help you stay ahead of your competition!
Whitney Headlee is the Marketing Director at eBridge Business Solutions. For more information visit www.eBridgeGlobal.com