eAuctions: friend or foe?

For most companies, be they in the security sector or otherwise, the mere mention of the phrase ‘eAuction’ is enough to fill them with dread. eAuctions can incite a fear of total profit erosion, the destruction of a long term relationship with a buying organisation, the loss of business to new offshore companies or (dare one say it) the erosion of an entire industry as they know it!

There’s no doubt that eAuctions have shifted the balance of power in the negotiating process towards the buyer, but the typical reactions from suppliers – as evidenced in ‘End of the Line’ (SMT, October 2004, pp33-34) – are nearly always grossly overstated.

Given thorough preparation and a complete understanding of the whole process, the eAuction can become an efficient and effective tool to market, facilitating access to new business sectors while providing direct market feedback on the competitiveness of a security company’s services and/or product portfolio.

The eAuction itself tends to be blamed for far more than it is guilty of. The reality of the situation is that any commercial organisation is always looking to obtain the best value for the products or services it procures. The eAuction is simply the implementation of what civilisation has known ever since the Romans began to procure slaves: assemble willing parties together in a dynamic market, and you will obtain the best deal the market can possibly sustain. Indeed, in a traditional auction the lead protagonist is asking the market to give him or her money. In an eAuction, that person is offering to yield money to the market.

Power bestowed on buyers

The power of eAuctions for buying organisations is quite compelling. 15% average savings. Up to 50% cycle time reduction. Visibility and standardisation of the procurement process. Access (potentially, at least) to a global supply base. The power that they offer clients means that eAuctions aren’t going to go away. It’s no good security providers trying to hide from them. Specialist research organisation AMR Research predicts that eAuctions will grow by 75% per annum over the next three years.

Many of the larger blue chips ranging from British Airways to the Royal Bank of Scotland are aggressively implementing eAuctions across their entire organisations. Once deployed, there’ll be no going back to the more traditional contract negotiation table, that’s for sure. 85% of FTSE 250 companies have already purchased an eAuction tool.

Many corporates have only run a handful of eAuctions to date, but it’s really only a matter of time before they dramatically accelerate their use. Smaller organisations are slowly beginning to follow suit.

The most important difference between traditional auctions and eAuctions is that first place doesn’t automatically win the business. While at Sotheby’s the highest bidder takes the painting, the lowest price in an eAuction is rarely guaranteed the contract.

Buying decisions are always taken on value. However, non-price driven factors – including perceived quality, reputation and service delivery – are all important in the mix that affect a contract award decision. Suppliers need to understand how the buyer perceives their non-price factors, and how this affects the overall value that’s being offered.

For example, an incumbent supplier of security uniforms doesn’t necessarily have to be in first place in the pecking order to retain the business. If the incumbent’s quality and service levels are high, the buyer will not want to switch suppliers. If they’re bidding against an unknown supplier from Eastern Europe, whose quality is sketchy and support unproven, then the incumbent can easily finish 5-10% behind them and still retain the business. This is because buyers are inherently risk averse, and prepared to pay for being so.

However, a good many organisations haven’t thought this through when bidding in an eAuction, giving away huge amounts of margin as they fight tooth and nail with competitors that aren’t in the same ball park.

Introduction of ‘price drivers’

Another major difference between traditional and eAuctions is that the latter aren’t a free-for-all. Only provisionally screened suppliers are allowed to participate. That said, certain buyers will deliberately introduce a ‘price driver’ into an eAuction to stimulate competition. It’s important that a supplier fully understands the market place within which they operate, and that they’re able to interpret the feedback from that market place in identifying where the price drivers are (such that they might modify their eAuction strategy accordingly).

It’s a safe assumption that there’ll be more suppliers in an eAuction than in a more traditional negotiation process, mainly due to the fact that a buyer can only really manage aggressive face-to-face negotiation with up to four or five suppliers. In an eAuction, though, it’s usually the case that participating company numbers are unlimited.

When developing a strategy for an eAuction, the security provider must consider three elements: their current relationship with the buyer, price competitiveness in the market and the effect of non-price factors on the award decision

In preparing for an eAuction, many supplier organisations adopt strategies that will do them more harm than good. For instance, some will simply refuse to participate. This hurts them more than the buyer, and – inevitably – boils down to the fact that security suppliers have to be ‘in it to win it’… and start competing in the end. Other companies treat the eAuction as ‘best and final’.

In other words, they receive no feedback from where their competitors are, and in some situations end up winning the business far ahead of the market… giving away margin without actually realising it.

When developing a strategy for an eAuction, the security provider must consider three elements: their current relationship with the buyer, price competitiveness in the market and the effect of non-price factors on the award decision. From that point, the contractor needs to define a strategy that will enable them to reach a stage whereby they can ‘just’ win the business on offer (in other words, that point where the bidding organisation needs to finish in the market versus its competition that will enable the contract to be won).

There are no right or wrong answers here, though. Much of this is more art than science.

eAuctions are still an emerging technology, meaning that there remain inconsistencies in procedures and practices. Unethical behaviour remains a problem. For security suppliers, there’s little they can do to overcome this, other than forcibly push the buyer for a crystal clear set of Terms and Conditions before participating in the bidding process.

It’s going to be the same for all competing suppliers. Those who accept that fact and determine to compete will come out best.

The eAuction itself will typically run for between 30 minutes and two hours. During this time, dependent upon the type of eAuction process used, there’ll be a series of clues that security providers can identify with a view to maximising the amount of information they receive. For example, audio feedback when other companies bid can indicate the ‘velocity’ of the market (particularly useful when the market is about to close). In the closing minutes of an eAuction, a leading bid will extend the market by one to five minutes, allowing competing suppliers to respond to other bids. A process that will continue until such time as all suppliers cease bidding.

Once the eAuction is complete, the buyer’s then under pressure to choose the best value supplier and implement the security contract.

Maximising information levels

At this point, it’s critical for the security company to continue supporting the buyer by demonstrating their ability to fulfil the contract implementation.

Independent of where they’ve finished in the eAuction proper, it’s true to say that security contractors should never give up hope of winning the business until they’ve received formal communication from the buyer of the contract award decision. If a supplier doesn’t win, they should attempt to understand why and identify ways of improving for the next time they bid online.

True, the eAuction process can be somewhat destabilising for unprepared security companies. Indeed, even those that have done their homework may discover they end up with some margin compression.

One simple way of fighting back is for them to use eAuctions on their own internal spend categories.