Alan Buxton’s e-Sourcing Place

Today I’d like to introduce a guest poster. Andy Moorhouse is Lead Research Consultant with Huthwaite International, a sales performance consultancy, and has produced some (in my view) ground-breaking research on how suppliers should deal with procurement.  He recently shared with me some insights from his research on Combating Reverse Auctions that highlights strategies suppliers have used before, during and after a reverse auction. An extract of his work is below and should make interesting reading for suppliers and buyers alike:

 To further fuel the current reverse auction debate, I thought I would share some recent research findings.
 
As part of our wider research project on the ‘Best practice for dealing with procurement’, during Q3 and Q4 2007, Huthwaite International conducted in-depth interviews with 39 global and national sales leaders to learn about their reverse auction experiences.
 
Our research goal was to identify the successful strategies being used to combat reverse auctions and to help suppliers break through the commoditising effects of this technology.
 
We gleaned many valuable insights from the study, especially around the supplier’s misconceptions of how to approach and participate in reverse auctions (i.e. believing that you need to be the cheapest to secure the contract). Allow me to share an extract from our recent research:

Must you follow the rules?

When analysing the case studies, it was apparent that incumbent suppliers greatly enhance their chances of success by not following the rules set by procurement.
Before presenting the data, I must highlight the research limitations and state that the results only reflect the outcome of auctions in the private sector and that 80% of the participating suppliers have revenues of > $1 billion.
 
Please see the graph below and allow me to illustrate with some examples:

The strategies for not following the process include:

• Submitting a proposal but refusing to participate online
• Telling procurement you will only enter one bid online, which will be your ‘best and final’ offer
• Rejecting participation entirely.

The European VP of Strategic Accounts for a global logistics company explained their corporate policy of never participating in reverse auctions.  He explained, “We drew a line in the sand and told procurement; we won’t agree to the terms, we won’t access the system.”  

As the incumbent supplier, they have retained two multimillion $ accounts by insisting on meeting with procurement and delivering a proposal in person. One caveat: they have won no new business with this strategy.

We came across many examples of suppliers refusing to play by procurement’s rules during our research. Incredibly, the UK Sales Manager from a global chemical manufacturer explained that when they rejected participation, procurement entered their offline bid into the auction to maintain the perception of a healthy online event!
 
Finally, as suppliers learn the rules of engagement, they now understand that if there are only three real players, refusing to participate may be an effective strategy.

The Sales Director of a global steel tubing manufacturer explained, “When asked to participate we always refuse.” He went on to say, “Auctions in our industry normally fail as the major pipeline contractors cannot get 3 or 4 people together that will compete”

In summary, our research indicates that suppliers are playing the game but learning to bend the rules to their advantage. Remember 4 out of 5 incumbents who bent the rules, secured the contract. Our advice to incumbent suppliers is:

• Ensure you communicate your intentions and set expectations upfront
• Follow the process, but don’t follow it slavishly
• If there are only 3 real players, refusing to participate may be an effective strategy

The full research findings will be published on 2 March 2008, but if readers of ‘Where Next’ are keen to learn more, please let me know and I’ll post some additional insights.