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Home : Articles : Reverse Auctions

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REVERSE AUCTIONS

Full Service Reverse Auctions

by Glenn Wheaton, December 27, 2009

Overview

Reverse auctions are a powerful tool for purchasing departments of organization in the private and public sectors when they are used effectively, at the right time, and for the right purchases. Reverse auctions can deliver large cost savings, reduce the cycle times, improve supplier negotiation, and allow a purchasing department to focus resources on high value activities. However, in order to realize these benefits, a purchasing department much conduct the reverse auction event well. This means using the right system, inviting the right suppliers, structuring the event optimally, and properly executing the event. Since effective reverse auction execution often requires specialized knowledge, expertise, and familiarity with the process, many companies turn to an outside vendor to provide these services. When organizations use an outsourced vendor to provide some or all of the auction services, this process is often referred to them as "full service" reverse auctions. When the organization decides to use software and to conduct the reverse auction events themselves, this process is often referred to as "self service."

Full Service Definition

The term "full service" when applied to reverse auctions can be an ambiguous term. Different vendors will define full service differently. However, when purchasing personnel speak of full service in reference to reverse auctions, they are referring to the setup, management, and execution of a reverse auction that is accomplished using software, hardware/networks, and services. The software portion includes an application that is capable of supporting reverse auctions, collecting bids, ranking the bids, and delivers visibility into event and bidder activity. The hardware/network portion of the solution is the infrastructure required to host and make the application accessible to bidders, buyers, and others. The services that are delivered often include consulting services designed to maximize the value of the event. These consulting services can include event set up, bidder invitation, event management, help desk support, and event reporting. There are also other value added services that may be delivered as well.

Reverse auction vendors will describe some of the elements above differently. For example, a vendor that offers exclusively software as a service (SaaS) might describe all parts of the reverse auction as services. What this vendor means by providing services is that the vendor hosts the event on their servers, network, and data center and offers access to the software for event participants over the web. Other vendors will describe their offerings in terms of software or a system and will sell consulting services to the purchasing organization. It is important to be familiar with the different ways that vendors speak of full service reverse auctions in order to compare apples to apples and to make sure the reverse auction provider can actually do what is required to make the event successful.

Why Full Service Reverse Auctions

There are many reasons why organizations decide to go with full service reverse auctions. Some of these reasons include scarce purchasing resources, time constraints for the purchase, fear of failure, a lack of expertise, the size and scope of the purchase, to develop internal expertise and best practices, and to reduce liability. These reasons for using full service reverse auctions and some of the benefits that can arise from implementing full service reverse auctions are outlined in the sections listed below.

Purchasing Resources Scarce

One reason why organizations choose to go with full service reverse auctions is because they do not have a lot of time or personnel available for the project. When purchasing personnel are stretched with existing responsibilities and have many different deadlines, the use of a vendor's services can make a lot of sense. Moreover, vendors who frequently conduct reverse auctions will also be able to set up the event quickly and should have processes in place to manage it better than in house purchasing personnel.

Time Constraints

If the purchase is time sensitive, it can also make sense to go with an outside vendor to manage the reverse auction. This is because an outside vendor will often have the resources, processes, and personnel to schedule the event quickly and to produce the required results. This option is usually a good option if there is not a long period of contract negotiation with the vendor or if the vendor is a preferred supplier of reverse auction services already.

Fear of Failure

Purchasing personnel can put a good deal of time and effort into making a purchase using reverse auctions and want to meet all of the objectives. If the event does not meet the objectives, the company could end up paying more than it needed, not actually purchase the goods, or may end up having to renegotiate with vendors later using a standard purchasing process. By outsourcing the set up and management of the event to an outside vendor, the company can increase the overall chances of success.

Lack of Expertise

Another reason why companies choose to go with an outside vendor is the fact that running reverse auctions requires specialized expertise and a knowledge of the process. Personnel with expertise can often find ways to boost the overall effectiveness of the reverse auction event and can prevent problems from occurring. If a purchasing department does not have personnel with this expertise, it can make sense to seek this outside of the company.

Large Purchase

Sometimes, purchasing personnel prefer full service reverse auctions when the dollar amounts of the purchase are large. This is because the possible benefits that can be realized from a large reverse auction are potentially very great. This can offset the extra cost of using the full service option.

Develop Internal Expertise

Another reason people use full service reverse auctions is to develop internal expertise. A purchasing department can work with a full service reverse auctions with the goal in mind of having internal staff run future reverse auctions internally. This lets the internal staff see how the outside provider runs the event and can facilitate the transfer and learning of best practice reverse auction processes. This is a compelling reason for many companies to use reverse auctions.

Reduce Liability

Organizations also may choose to use an outside vendor to provide full service reverse auctions because they want to lower their risk and reduce liability. By going with an outside vendor for the actual reverse auction and negotiation of price, the company can reduce the risk of paying a bad price or eliminate other risks in the negotiation process. It can also protect itself by reducing errors that might lead to mistakes during the purchasing process.

Drawbacks to Full Service Reverse Auctions

There are some significant drawbacks to using full service reverse auctions vendors. Prior to deciding that full service reverse auctions are the way to go, it is helpful to fully understand these potential drawbacks to make sure that this is the right option for the purchase. Some of these potential drawbacks include the higher cost of using the full service options, the possible loss of control over the process, and a reliance on an external vendor. Each of these risks can be somewhat mitigated, but this takes planning. The sections below explain this in additional detail.

Cost

The cost of using an full service, outsourced vendor for reverse auctions can often be quite high. This is because the full service vendor must cover the costs of the system, provide qualified reverse auction experts, and also manage the event for the purchasing company. It is important that the purchase and the benefits are large enough to justify the costs of using the full service option. If the benefits are not large enough, it is obvious that a full service auction does not make sense for the particular purchase.

Loss of Control

When an organization elects to go with a full service reverse auction vendor, there can be a loss of control over the process. Since the full service reverse auction vendor will normally be doing things that are done by purchasing personnel, the vendor may not do them exactly the same way that the purchasing department would have done it. To reduce this risk, it is important that people from the purchasing department manage the vendor and the event effectively by giving he vendor strong guidelines and collaborating in the planning and management of the event.

Reliance on an External Vendor

If the full service vendor is excellent, it can be tempting for the buying organization to let the full service vendor run the reverse auction events on auto pilot. This is a good position for the buying organization to be in, but it doesn't help if the organization changes vendors or decides to do it in house. To reduce this risk and to maximize the value of the full service reverse auction, it is important to build in house best practices and to make sure that if something changed, both the purchasing personnel and the organization would be ready. By learning how the process works, the organization can gain valuable experience and understand the reverse auction processes in order to later replicate this in-house or better manage an external vendor.

Conclusion

Full service reverse auctions can be an important tool for an organization. An experienced vendor can add a lot of value to the process and can help the organization avoid some pitfalls that may arise. Full service reverse auction give purchasing personnel expertise and technology that the organization lacks. It can also help them build best practices and to reduce liability. However, full service reverse auctions are a tool that should be used strategically for larger purchases when it is cost effective. If the organization is able to run reverse auctions on its own using best of breed sourcing software, it should do so. This is because over the long run, this should deliver the maximum value for the organization and allow the organization to use reverse auctions for even lower dollar purchases where it makes sense.

Epiq offers full service reverse auction services to both the public and private sectors.

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