Sourcing Event Lays Foundation for Procurement Transformation

Strategic sourcing is that part of the procurement function in which companies aim to continually improve pricing and contract terms for identified vendors and categories. It’s even more strategic when the savings from one sourcing initiative can be used to fund further savings. It’s effectively a double hit, and that’s exactly what happened for Highmark Health, who recently purchased Coupa Procurement.

I love this story because it shows just how fast and easy it is to do a sourcing event with modern cloud technology, and how getting some quick wins from sourcing events can be the cornerstone of a larger Source-to-Pay initiative. Sourcing is a great place to start, because it’s not as complex and doesn’t require as much preparation, collaboration and change management as a procurement transformation.

For Highmark, the third largest integrated healthcare system in the nation, the ultimate goal is to integrate sourcing and procurement, but Coupa’s sourcing module can stand alone. So, when they asked, “Hey, can we start using our sourcing software right away,” we said, “Yeah, why not?”

Procurement in flight

Highmark already had procurement of IT hardware in flight.  They planned to buy 12 different configurations of desktops, laptops and tablets. Four vendors had been identified, RFIs had gone out and they were ready to negotiate price.

Had they continued to do business as usual, the next step would be to take the Excel sheets from each vendor and compile them for line-by-line comparison. With multiple tabs each containing hundreds of line items, this would have been a cumbersome process.

Once the responses were compiled, the next step would have been to start price negotiations. The typical process is to bring each of the vendors in for conversations in which you try to get their best price. That’s usually followed by a lot of back and forth phone calls and emails pitting vendors against each other. It’s weeks of playing cat and mouse.

Instead of all that, we ran an electronic reverse auction. It’s a best practice to do this in two phases, with the first being a pre-bid phase to collect supplier information and make sure they’re bidding apples to apples. With the RFIs they had already collected, it was easy to import the information into the e-sourcing software.

In the software, everyone can see details for each line item, including price, and all that information rolls right into the auction. By doing this electronically, we were able to keep all four vendors engaged, which would have been challenging with email, phone calls and Excel. At some point Highmark probably would have to have dropped down to two vendors.

A discount offer

As often happens when a reverse auction is announced, the incumbent vendor offered a discount if Highmark would forego the auction. The answer to that question should almost always be no, because in most instances you can do better running the auction. That was the case here. Highmark declined to accept, and the auction was on.

We configured a 30-minute reverse auction with the four vendors, with three-minute overtime extensions. The way that works is that if someone is still bidding toward the end and they’ve taken over first place, the auction is extended another three minutes from that bid.

On the day of the auction we hunkered down in our respective war rooms, Highmark in Pennsylvania and the Coupa team in California. We’ve got a conference line open and we’re both watching the bid graphs on our big screens. Twenty-five minutes go by and not much happens. Then at 28 minutes, it’s action central and everyone’s bidding, we’re seeing some dramatic price drops and the countdown clock gets extended again and again.

The horse race is on

What makes running reverse auctions so fun is that it’s like watching a horse race. Vendors jockey for position up until the last minute. It might appear that they’ve dropped out of the race, but since you’re all in separate rooms, you never know until the clock stops if they’ve closed up their laptops and gone home or are just lying in wait to swoop in at the last minute.

It’s exciting for the buyer, because unlike a horse race, there’s no chance of losing money. No matter which vendor comes in first, the buyer always wins by saving money.

It’s tense for the vendors, a tension I can feel even through the message board. There are some panicked messages early on, and towards the end we had several vendors wanting to know, “Is this going to last forever?” I said, “It’s going to last until someone doesn’t bid for three minutes.”

One bidder dropped off at about 50 minutes and at 65 minutes the incumbent vendor dropped off, but not before they had come down even further from their original discount offer.

Close the event? No way!

The final two bidders both wanted the business badly and went on leapfrogging each other down in $3,000-5,000 increments for another twenty minutes. The way we had configured the auction, all they had to do was drop their price $1000 to make another bid, because some of the line items were fairly inexpensive to begin with. With bid drops getting smaller and smaller, someone from Highmark asked, “should we close the event?”

The answer to that question should also be no, even if you have people banging on the conference room door to get in. What meeting could they be having that could save $5,000 or more every couple of minutes?

We put the question to them that way, and they said, “Let it run.” We ended up running for a full 80 minutes, saving Highmark millions of dollars.

Besides the 80-minute auction, the total time invested was about 20 hours spent gathering data and running some test events. Highmark Health achieved more than 20% savings over what they paid previously for IT hardware. They’re already ready for their next reverse auction, and they’re well positioned for a successful procurement transformation.