Friday, August 19, 2011

Reverse Auctions

How do reverse auctions tie to contract negotiations? I’ll explain that below.

I’m no expert on reverse auctions so I thought I would post a link to a white paper that SAP posted on their site about reverse auction best practices. They took ten different characteristics of a purchase and then use those to identify the best approach for those characteristics. They describe three different approaches. 1) Using an RFP only, 2) Using a combination RFP and Reverse Auction, and 3) using a Reverse Auction only. Interesting reading:,8,0,125431477,792731079,1313678540,Reverse Auctions SAP,39849994,9029345105&gclid=CJOImvaJ2aoCFQiR5god90kQ9g

To get to my point about how reverse auctions are tied to contract negotiations, the simple answer is that if all you focus on with reverse auctions is price, there is no tie. However if you do a reverse auction where you take into account any differences in life cycle costs, terms or risks the supplier isn’t assuming versus the competition, you now have additional costs in the discussion. Make it clear that they have to overcome those added costs to still be in the race. The message is clear, either adjust their terms so there isn’t a cost or risk differential or they will need to make additional price reductions to offset those costs and risks and stay in the running. If their positions on terms and risks are something that you will never agree to give up for a lower price, let them know that. They are losing the race because of their position on terms and risks versus the competition.That can’t be offset with further price reductions. The only way they can stay in the game is changing their position.

A friend referred to this as his horse race tactic. If you ever have been to a race you know that the announcer is frequently announcing where each stands at certain mileposts. What he would do is make the same announcements so during the process each supplier knew whether they were ahead or behind. While he didn’t share the actual differences, he would be telling the suppliers where they needed to improve to be in the running.