Case Study 2.1 The impact of B2B reverse auctions FT This case explains the process of a reverse auction and one where the purchaser can specify precisely what the types of products suitable for purchase by this standards the desired good or service has to meet. It method. The benefits of reverse auctions are explored could not, for example, be used to buy in the services of through many examples from different sectors including lawyers or consultants, or something where the purchases by government departments. purchaser has to design the service or innovate. But A dozen people sit in a room staring at the projection about a third of all commodities are suitable for auction, of a computer screen on the wall. Mr Dempsey says. For the government, that may mean For 20 minutes or so nothing much happens. 'It's a hundreds of millions of pounds' worth of goods a year. little like watching paint dry', says Steve Dempsey, The auctions it has conducted in the private sector government partner with the consulting firm Accenture. have produced average savings of 17 per cent on the But suddenly someone miles away, linked via the historic price of previous contracts, Accenture claims. internet, makes a bid. A pale blue dot registers at the top In the public sector, only the Driver and Vehicle of the screen. Soon others follow, different colours repre Licensing Agency, Royal Mail and the Police Information senting different companies. An e-auction, aimed at Technology Organization have used the reverse auction cutting the price the public sector pays for anything from approach - buying computer supplies and security water- paper to computer equipment to air freight, is under way. marked paper, for example. The four auctions, however, Reverse auctions - where companies bid their way have each produced savings of between 22 per cent and down to the lowest price at which they are prepared to 25 per cent on the previous contract. supply - are a commonplace tool in parts of the private The reason, Mr Dempsey argues, is twofold: the field sector. Operating a little like eBay in reverse, they are a of suppliers can be widened from those who traditionally way for buyers to negotiate, online, with suppliers to do business with government; and the auction takes source a range of goods - those whose quality and place in real time, increasing the competition on suppliers nature can be defined with absolute clarity. to find their lowest price. Accenture has run more than 1,500 such auctions in The process works by the purchaser spelling out the private sector in businesses as diverse as the oil and precisely what is needed, advertising the requirement chemical industries, industrial equipment, marketing and then drawing up an approved list of those who can and foodstuffs. More than 125 different commodities meet it. Potentially, Mr Dempsey says, that opens up the have been bought and sold this way, including fork lift market to small and medium-sized companies that trucks, coffee, foil, fuel, filters, pallets, pipes and struc- might not normally see the government as a customer. tural steel. Auctions have also included services, such The parameters of the auction are then set, the suppliers as temporary staff and contracts for earth removal. trained - and battle commences. Usually auctions are The approach has now come to the public sector and set to last 30 minutes but are extended for 10 minutes has been greeted with enthusiasm by the Office for each time a bid comes in during the last five minutes. An Government Commerce, which is charged with lopping average auction runs for about 90 minutes, although 1bn off the government's 13bn civil procurement bill some have lasted for several hours. over three years. 'You can really feel the tension and excitement', Mr 'E-auctions are not suitable for everything', Mr Dempsey says. A company may, for example, have Dempsey says. The product has to be a commodity - excess stocks of what the government needs. Or it may 88 Part 1 Introduction Another barrier is that government contracts tend to run for many years. But over time e-auctions could become common- place. The DVLA and Royal Mail, having tried them on a pilot basis, both plan to use them again. And the Office of Government Commerce, happy they now fit within EU procurement rules, is encouraging other government departments to use them. Source: A bid to save money for the government. By Nicholas Timmins. Financial Times, 29 January 2003. have a hole in its production run, or a sales target that the contract fills. 'It creates real time, dynamic competition between suppliers', he says. It's a real marketplace. The DVLA, for example, saved more than $200,000 buying several tons of watermarked paper. It is now working on a similar e-auction for millions of the envelopes it uses every year. The Royal Mail, having saved 550,000 on its first two e-auctions, is in the process of buying more than 20m of air freight space to shift air mails. Paul Cattroll of the DVLA says the reaction of suppliers is mixed. Some feel that it has forced them to reduce their profit margins. "But it is an opportunity for the government to get better value for money for the taxpayer', he says. Despite the need to prepare the auction carefully, Accenture enture argues that the process can prove quicker than traditional procurement, while cutting the adminis- trative cost for both purchaser and provider. E-auctions have been slow to take off in the public sector because there was a question mark over whether they breached European Union procurement rules. Questions 1 Summarize the operation of a B2B reverse auction from both the buyer's and seller's perspective. 2 Which types of products are suitable for purchase by reverse auction? 3 Explain the benefits of reverse auction to purchasers. 4 What are the implications to selling companies of the reverse auction