Case Study

The Impact of B2B Reverse Auctions

This case explains the process of a reverse auction and the types of products suitable for purchase by this method. The benefits of reverse auctions are explored through many examples from different sectors including purchases by government departments.

A dozen people sit in a room staring at the projection of a computer screen on the wall. For 20 minutes or so nothing much happens. Its a little like watching paint dry, says Steve Dempsey, government partner with the consulting firm Accenture. But suddenly someone miles away, linked via the internet, makes a bid. A pale blue dot registers at the top of the screen. Soon others follow, different colours representing different companies. An e-auction, aimed at cutting the price the public sector pays for anything from paper to computer equipment to air freight, is under way. Reverse auctions where companies bid their way down to the lowest price at which they are prepared to supply are a commonplace tool in parts of the private sector. Operating a little like eBay in reverse, they are a way for buyers to negotiate, online, with suppliers to source a range of goods those whose quality and nature can be defined with absolute clarity.

Accenture has run more than 1,500 such auctions in the private sector in businesses as diverse as the oil and chemical industries, industrial equipment, marketing and foodstuffs. More than 125 different commodities have been bought and sold this way, including fork lift trucks, coffee, foil, fuel, filters, pallets, pipes and structural steel. Auctions have also included services, such as temporary staff and contracts for earth removal.

The approach has now come to the public sector and has been greeted with enthusiasm by the Office for Government Commerce, which is charged with lopping 1bn off the governments 13bn civil procurement bill over three years.

E-auctions are not suitable for everything, Mr Dempsey says. The product has to be a commodity one where the purchaser can specify precisely what standards the desired good or service has to meet. It could not, for example, be used to buy in the services of lawyers or consultants, or something where the purchaser has to design the service or innovate. But about a third of all commodities are suitable for auction, Mr Dempsey says. For the government, that may mean hundreds of millions of pounds worth of goods a year. The auctions it has conducted in the private sector have produced average savings of 17 per cent on the historic price of previous contracts, Accenture claims.

In the public sector, only the Driver and Vehicle Licensing Agency, Royal Mail and the Police Information Technology Organization have used the reverse auction approach buying computer supplies and security watermarked paper, for example. The four auctions, however,

have each produced savings of between 22 per cent and 25 per cent on the previous contract.

The reason, Mr. Dempsey argues, is twofold: the field of suppliers can be widened from those who traditionally do business with government; and the auction takes place in real time, increasing the competition on suppliers to find their lowest price.

The process works by the purchaser spelling out precisely what is needed, advertising the requirement and then drawing up an approved list of those who can meet it. Potentially, Mr. Dempsey says, that opens up the market to small and medium-sized companies that might not normally see the government as a customer. The parameters of the auction are then set, the suppliers trained and battle commences. Usually auctions are set to last 30 minutes but are extended for 10 minutes each time a bid comes in during the last five minutes. An average auction runs for about 90 minutes, although some have lasted for several hours.

You can really feel the tension and excitement, Mr. Dempsey says. A company may, for example, have excess stocks of what the government needs. Or it may 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. Its 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 argues that the process can prove quicker than traditional procurement, while cutting the administrative 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. Another barrier is that government contracts tend to run for many years.

But over time e-auctions could become commonplace. 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.

Questions

1. Summarize the operation of a B2B reverse auction from both the buyers and sellers 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?