A Practical Guide to E-auctions for Procurement

How to Maximize Impact with e-Sourcing and e-Negotiation

Jacob Gorm Larsen

• Editorial: Kogan Page
• Año: 2021
• ISBN:
  9781398600294
• Edición: 1
• Categoría: Business
• Categoría: Operations

WINNER: 2021 Plume d'Or - Grand Prix ACA-Bruel Award. A Practical Guide to E-Auctions for Procurement provides guidance to procurement professionals on how to realize the potential of e-auctions. Now is the time to optimize your e-negotiation strategy using key insights from the author Jacob Gorm Larsen, who is responsible for one of the most successful and award-winning e-sourcing programs in the world. A Practical Guide to E-Auctions for Procurement presents a proven process for developing an e-auction and e-negotiation strategy, along with a catalogue of change management initiatives for securing buy-in internally in the organization. The different e-auction formats and benefits are explained in detail and demonstrated with practical examples, templates and advice that can be adopted by the reader.Jacob and the team at Maersk are at the forefront when it comes to developing robots that execute e-auctions from end-to-end and are kicking off a transformation that will fundamentally change how we consider e-auctions and negotiations. In addition, with learnings from more than 10, 000 e-auctions globally, this is the book for those in procurement looking to implement, deliver and maintain a thriving e-auction program.

part One

Understanding e-auctions

About Part One

For any procurement organization with ambitions to leverage e-auctions, there are a number of questions that the organization should understand (what, when and why) as part of building a professional foundation for accelerating the use of e-auctions as a credible negotiation method.

The first step in understanding e-auctions is an introduction to the definition of e-auctions and how they differ from other ways of collecting/negotiating price information from suppliers. Adoption of the right definition is one of the most important things for an e-auction programme that will be successful for the long term, which is a topic that will be covered in depth.

Second, there are lessons to be learned from the history of e-auctions. In 1995, e-auctions were the first technology solution developed for upstream procurement, and the experiences so far provide guidance on user adoption as well as on how the technology has developed, becoming more sophisticated over time.

Third, a key challenge has been the question of when to employ e-auctions. Different methods for assessing the potential of various spend categories are introduced and the typical ‘excuses’ addressed, which leaves two simple criteria that can be adopted to assess whether an e-auction can be applied to a specific category.

Finally, the question of ‘why’ is a critical dimension for understanding e-auctions. The value created is often presented through anecdotal evidence or via subjective arguments, but in order to truly understand why e-auctions work and create value, we need to review it from a number of different research perspectives. By reviewing different research areas, the value created by e-auctions is explained from a theoretical standpoint – a high-level introduction to some of the key areas of research that can be used to explain the value proposition of e-auctions. This will be very useful for any e-auction programme and will ensure that facts, not emotions, are at the forefront in discussions of whether an e-auction or a traditional negotiation will deliver the best result.

The what, when and why questions addressed in this part of the book are also important for ensuring a professional approach to e-auction strategy, as well as for the internal process of continuously driving user adoption. These are subjects that will be addressed in the subsequent parts of the book, so the in-depth introduction to the key questions about e-auctions also serves as a foundation for the rest of the book.

01

What is an e-auction?

The definition of an e-auction might seem trivial at first, since the answer appears to be obvious: if an e-auction system is used, the process can be classified as an e-auction. Unfortunately, the answer is not that easy, and a simplistic definition is one of the reasons for the many myths and negative perceptions about e-auctions that still haunt both buyers and suppliers.

In my definition of e-auctions there are four criteria that should be met before a process can be characterized as an e-auction: an online, market-driven negotiation based on total-value with commitment.

This definition is an essential part of the foundation of any e-auction programme. All practitioners should ensure internal alignment around their definition of an e-auction, as this will help and guide many decisions both internally and with suppliers. Below, I introduce the four elements of the e-auction definition and discuss how each part contributes to what I believe is the right definition of e-auctions. By applying this definition, many of the pitfalls and myths about e-auctions can be avoided.

Online

The online dimension of an e-auction is obviously an essential part of the definition, but as mentioned above, it is not the only dimension. Many procurement organizations make the mistake of equating all online collection of rates with suppliers as e-auctions, which is too simplistic a view of the negotiation method.

Market-driven

There are two ways for a buyer to apply pressure on suppliers during negotiations. You have negotiation tactics and power, which is the pressure applied by the buyer to the supplier. This is mostly done in a traditional face-to-face negotiation where the buyer, through different tactics and utilization of their negotiation power, achieves results. This kind of pressure is also referred to as across-the-table pressure, as it is applied by the buyer to the individual supplier.

An alternative or supplement to across-the-table pressure is competition, which is pressure felt by competing suppliers during the process. Competition between suppliers can be created in different ways. One example of creating analogue competition between suppliers comes from Apple, where Chief Procurement Officer Tony Blevin invited multiple glass makers to the Grand Hyatt in Hong Kong for a negotiation concerning the glass encircling Apple’s new headquarters in California. By placing glass makers in different meeting rooms simultaneously, he could move from room to room, pushing them to go lower by leveraging lower bids from other glass makers to drive the price down further.¹ By creating a very dynamic process with multiple glass makers, competition was leveraged as part of the pressure applied on the glass makers along with the traditional negotiation power that a company like Apple has when placing what was one of the largest orders for glass in history. A similar kind of competitive pressure could have been put on the participating suppliers if an e-auction had been held, without the hassle of flying all the suppliers to Hong Kong.

When competition is leveraged, it is referred to as ‘same-side-of-the-table-pressure’, as suppliers are on the same side of the table, putting pressure on each other and driving the price down by competing against each other. This is also referred to as a market-driven negotiation because the market determines the outcome through competitive bidding.

E-auctions (Figure 1.1) apply competition to determining the true market price and are considered a market-driven negotiation method. The competitive element is facilitated through an online platform which, in addition to other benefits, provides a time-efficient and location-neutral platform for leveraging competitive pressure across participating suppliers. Thus, the buyer avoids the hassle and cost that Apple, for example, went through to negotiate the glass deal.

Figure 1.1 Traditional negotiation versus e-auctions

Figure 1.1 details

The radial diagram of the traditional negotiation shows buyer in the centre and the suppliers directly in contact with the buyer. The network diagram of the e-auction shows the suppliers connected to other suppliers.

Competition also means that there must be more than one bidder participating in an e-auction. By adopting the principle of only applying e-auctions when true competition exists, companies can avoid some of the unethical behaviours (e.g. using an e-auction with only one bidder participating) that have been identified as a challenge in adopting e-auctions. Insisting on having true competition in e-auctions is a sound principle that ensures the long-term sustainability of your e-auction programme.

An e-auction does not exclude across-the-table pressure, but when and by whom what type of pressure is applied should be clear, in order to secure a credible negotiation process. In my view, the optimal strategy in many cases is a combination of the two types of pressure. This arrangement (also referred to as ‘negotiauctions’) was developed with the aim of combining the best of both types of pressure.²

When I look back at the more than 10,000 e-auctions I have been involved in, those that I view with most pride are the ones where we managed to combine both types of pressure in what I believe to be optimal negotiation strategy, which includes a strategic sourcing process that leads to the final e-auction negotiation. I will return to the concept of negotiauctions, and how they can be applied by procurement organizations, in Part Two.

Total-value

One of the common myths about e-auctions is that they are a pure price negotiation that does not include important parameters such as quality, service levels, switching costs, warranty periods and other non-price parameters.

In the early days of e-auctions, particularly around the bubble of 1999 -2000, some companies attempted to use unsophisticated, price-only approaches to e-auctions without providing buyers with the necessary skills, training and infrastructure. These approaches did not succeed and tarnished the reputation of e-auctions. Today, all successful e-auction programmes for procurement use a total-cost approach with buyers who understand how to structure and maintain the integrity of e-auctions. All mature e-auction software platforms also include different types of handicap and advanced bidding models that can include non-price parameters. This is sometimes referred to as transformational bidding.

Having a total-value mindset and a solution that supports it is a prerequisite for strategic categories where price, in many cases, is the only one of the parameters considered in supplier selection. Hence, it is important to include the value parameter in the definition of an e-auction. Otherwise, it would not be possible to award the business based on the e-auction result, which relates to the last dimension, commitment, as a critical part of the definition.

This is not to say that companies that adopt this definition of e-auctions need to develop value models for all e-auctions. Many negotiations amount to nothing more than a commercial discussion around price, and whichever supplier is chosen makes no difference to the company. In such situations, price is 100 per cent of the awarding principle, but nevertheless it has been considered and a conscious choice made that this negotiation/e-auction is exclusively on price.

Commitment

The fourth dimension of the definition is around commitment in the e-auction. Commitment to awarding the business according to the e-auction result is one of the key differentiators for e-auctions. In many procurement organizations, the mandate is to negotiate with suppliers but not to award the business, which is subject to a sourcing board or management approval before a final decision can be made. This may reduce the incentive for further supplier concessions in the final stages of the process.

Another typical challenge is that many organizations do not include commitment in e-auctions, which creates several problems. An online market-driven event without any commitment is not an e-auction. Commitment is such an essential part of an e-auction that a process can’t be defined as such without commitment to the awarding of the business. This might be considered controversial by many, but the impact of staying true to this principle is significant in the long run.

One important clarification to make on commitment in e-auctions is that commitment does not necessarily mean ‘winner takes all’. Commitment can be created in many ways and be at many different levels, which I will address in Part Two when introducing e-auction strategy. The key is that commitment is known upfront and honoured after the e-auction.

The history of e-auctions

The history of e-auctions can teach us many lessons about the risks and opportunities associated with e-auctions, both in terms of technology and the human factors. Any professional who wants to become world-class at sourcing can avoid future mistakes and seize future opportunities by learning from those who have gone before. I will start with a walk-through of the major events.

Glen Meakem and General Electric

Glen Meakem was the lead inventor of e-auctions for purchasing. Meakem earned his undergraduate degree at Harvard studying economics, history and government. He later obtained his MBA at Harvard Business School and then became a consultant with McKinsey & Company. At McKinsey, Meakem worked for clients on business strategy, strategic sourcing and commodities trading.

In 1994, Meakem left McKinsey and joined an internal consulting group at General Electric. This consulting group was based at the company’s headquarters and its leader reported directly to Jack Welch, GE’s celebrated CEO. While most members of this consulting group focused on mergers and acquisitions, business strategy or production process improvements, Meakem decided to focus on strategic sourcing because he and his colleagues at McKinsey had saved clients so much money in this area.

Just weeks after joining GE, Meakem heard a purchasing leader talking about a supplier event held at a Marriott hotel outside Pittsburgh. Interestingly, this event now sounds a little like the Apple negotiation in Hong Kong which I described above. In this GE example from back in 1994, current and potential suppliers of custom manufactured metal-machined parts were invited to review specifications for parts GE needed for its assembly of locomotives. These current and potential suppliers were then invited to another conference room where they could submit bids for the prices at which they were willing to supply...