Can you apply auctions for the 'auction services'?
During our discussion with CPO of Energy & Gas client we were asked to share best practices on auctions. Though the company experienced quick and significant savings from the recent auction projects, there was widespread resistance from his own team as well as supplier community. And the most prominent feedback was due to auctions there's perceived supplier relationship deterioration due to inconsistent, non-standardized auction processes & tools. So it became one of the top priorities of CPO to institutionalize standard auctions process in line with best practices. The CPO was also contemplating whether to opt for SaaS or in-house implementation of auction tool. During our intense discussion the CPO in a lighter mood commented - in view of various alternatives why they can't we should do auction for the 'auction services'. It immediately struck me then while we consider auction as one of the essential negotiation strategy how tempting it is to fall for auctions in most of the negotiation situation.
Let's face it, auctions had been adopted at a frenzied pace during last one decade resulting in immense benefits and savings, however the ongoing economic slowdown has also educated us to strengthen supplier relationship to reduce prevalent supply risk. And the auction tools vendors have suitably responded to this fact by providing better flexibility into its decision making tool by factoring in quality, stability, delivery, incumbency etc than just focusing on cost alone. In spite of this we have noticed increasingly reduced usage of auction tools over other strategy during past few years. There are some key aspects one has to keep in mind while deciding on auctions:
- Availability of complete & clear data, specification and requirement. Essentially devil is always in the detail and the more you detail out, better will be your chances to get a competitive proposition from your suppliers.
- Nature of spend. Identify category of spend where margins are perceived higher and where labor contribution, value add to the overall cost is more. Incentivize supplier to be more efficient if you feel there is need to be. Some of the sample category examples are complex machined metal component, printed circuit board assemblies, IT hardware, consulting services etc.
- Supply base dynamics. It is difficult to achieve competitiveness if supply base is not homogeneous eg. if there are patent or proprietary technology and the market supply is limited.
- Attractive business scale. It is necessary to aggregate your spend volume to make the business attractive to the supplier. Again we need to keep in mind that a million dollar in annual spend might not be enough to entice 'building material' suppliers to bid competitively in an auction, but the same spend for 'security alarm system' will generally get a lot of attention.
Well finally the client didn't opt auctions for the 'auction services' but on a similar note many organizations are seriously contemplating using auctions for the nearest category - 'enterprise software' in a creative way by boxing entire software application and services using functional point approach to convert apples into oranges for fair bid value comparison for this category.
