9 Steps to a Successful Reverse Auction
In my last couple of posts, I’ve shared the stories of two companies that achieved eye-opening results running reverse auctions through Coupa’s Sourcing Quick Start program. A reverse auction is like a standard auction (also called a forward auction) except instead of several buyers submitting increasingly higher bids to one seller, several sellers submit increasingly low bids to one buyer. Running a reverse auction saves buyers time and money by engaging all potential suppliers simultaneously in a fast-paced, highly-structured contest for your business. Reverse auctions should be a key piece of any sourcing program. Here are some ways to implement one of the best strategic sourcing best practices: running an effective reverse auction.
1. Study the marketplace
The first thing to do is determine whether a reverse auction is the right approach for whatever it is you’re sourcing. There are two factors to consider: The marketplace and your place in it.
Study the marketplace for the item or service you’re looking to buy. Is it a buyer’s market or a seller’s market? Let’s say for example you’re a retailer sourcing toys. You’ll probably be engaged primarily with overseas manufacturers. In a seller’s market, many of these manufacturers will already be busy — maybe because it’s June and they’re already at capacity with holiday orders. If yours is a smaller order — you need 500 toys and they’re used to making them by the thousands — your business may not be compelling to them. In that case, a reverse auction may not draw enough competitors to be productive, or what competitors there are may not be motivated to give you a great price.
Or maybe it’s a buyer’s market: Maybe there are just a huge number of suppliers in the category and it’s extremely competitive. Current events may also come into play. For example, if a big retailer just cancelled a huge order, suppliers might be scrambling to replace that work. In a buyer’s market suppliers will be eager to have your business, even if it’s a smaller order, so conditions are favorable for a reverse auction. Do your research ahead of time so that when you enter the arena, you now have market trends working in your favor.
2. Be specific
The second thing you want to do is nail down a very specific definition of what you’re looking for. If you tell 10 different suppliers you need 1,000 mouse pads, you might get 10 different proposals based on which mouse pad the suppliers think you’ll like best. This might be a good idea if you’re not quite sure what you’re looking for, but for running a reverse auction, you want all your suppliers on the same page so you can make an apples-to-apples comparison. That means telling them you need exactly 1,000 8 inch by 8 inch black neoprene mouse pads with gel wrist rests and the company logo screen printed at the top in PMS # 298c.
3. Set supplier expectations
It depends on the category you’re sourcing, but in most categories you’ll likely be talking to a mix of suppliers who’ve been around the block and know what to expect and some who aren’t as familiar with reverse auctions. Maybe the only thing they’ve heard is, “You don't want to participate because all it does is drive your price down,” which, admittedly, it does. But there are also benefits for suppliers.
Head off concerns about participating by being up front and transparent with your suppliers from the get-go. Call them up and say, “As part of this process, we’ll be evaluating price by using a reverse auction.” Also, price may not be the sole factor determining who wins your business. If that’s the case, make this clear too and explain what all of the deciding factors will be.
4. Resist temptation to skip the auction
Often the incumbent supplier or suppliers you’ve done business with in the past will say, “Hey, there’s no need to go through with this auction. We can give you a 10% discount right now.” While this can be a tempting offer, it usually means they think the auction will drive the price even lower. If you’re dealing with a big area of spend and the additional savings from a few extra discount percentage points could really help your bottom line, it’s probably worth your time to go through with the auction.
5. Sell the benefits
Reverse auctions do hold some benefits for the suppliers, so be sure to point that out. For one thing, it’s a great way for them to see how competitive the rest of the market is and get a feel for everyone’s lowest price point.
The reverse auction format also levels the playing field. Every supplier has probably had an experience of putting a lot of work into a proposal, only to lose unfairly — at least from their perspective. In an electronic reverse auction (which is the only kind you should be running), all the potential suppliers will be working with the same information. Instead of the buyer fielding supplier questions individually offline, every question will be posted and answered publicly. This gives everyone an equal chance to evaluate and respond to all the available information.
6. Do a pre-bid
A pre-bid is a good way to get suppliers warmed up for the show, as well as figure out if your specs need further clarification.
Instead of just saying, “Hey, you're invited to an auction and it takes place on this date,” let suppliers know there are two stages to the auction: pre-bid and actual auction. It’s similar to potential buyers being invited to view the items in a forward auction ahead of time. During the pre-bid stage for a reverse auction, you ask all the suppliers to download the information, ask their questions, and submit an initial quote. Suppliers can get all their questions answered, and the buyer can review all the responses and make sure they're comparing apples to apples.
There’s almost always something that comes up in the pre-bid that needs to be tweaked to ensure a smooth reverse auction, so don’t skip this step.
For example, in the IT hardware event I wrote about, our buyer requested proposals for a 90-day service agreement for one particular piece of hardware. During the pre-bid phase, we received a few numbers that looked ridiculously low — too good to be true. It turned out a few of the suppliers had submitted bids for a 30-day service agreement, because that’s their standard policy. If we’d gone into the auction without catching that, it would’ve thrown everything off and we’d have had to scrap the whole thing. But because we implemented a pre-bid phase, we caught it in advance and got everyone back on track.
7. Go over logistics
Once you have the suppliers you’re interested in on board and have completed the pre-bid, prepare them for what to expect logistically during the auction event. Most reverse auctions I’ve seen are half an hour long, but most of the action takes place at the end. So why not have a 15-minute auction? You want to make sure that everyone has time to get connected to the internet, log in, and find their way around. A great way to get your bidders up to speed on all that ahead of time is via webinar, where they can all watch a demonstration and ask questions. Alternatively, pre-record a training session walking them through how to navigate the auction and send them all links. Still, people might forget some of the process or have technical difficulties on auction day, so allow time for that.
Additionally, suggest that suppliers have multiple computers running during the auction itself — imagine having Windows crash in the middle of a heated bidding war. They’ll also want to get management involved ahead of time so they’re not scrambling to figure out the best price they can offer in the last few minutes of the auction. And let everyone know the auction may not end in 30 minutes.
8. Allow for last-minute extensions
That brings me to another critical best practice: extending the auction. If you’ve ever shopped on eBay, you’re probably familiar with the practice of sniping, in which you get your high bid in at the last possible second so no one has a chance to outbid you. It’s a crafty way for a buyer to win the auction, but setting a hard time stop in a reverse auction means leaving money on the table. Why end your event seconds after the final bid when there may be suppliers willing to go even lower than the current low bid?
That’s why I recommend auto-extending the auction for a preset time after the final bid. Say a bid comes in during the last few minutes of a 30-minute auction. Using a tool like Coupa Sourcing, you can auto-extend the action another five minutes. If a bid comes in during that five minutes, there’s another five-minute extension. All the suppliers can see the clock has reset and, they have another five minutes to figure out if they want to improve their bid. The auction doesn’t end until the action truly dies down and all your suppliers have gone as low as they’re willing to go.
9. Award the business to a participant
Holding a reverse auction does not commit you to awarding the business, but you should only do it with that intention in mind. Vendors spend a lot of time preparing and participating, and if you’re not actually awarding business then they won’t continue to participate. If you're going to run a reverse auction you have to award the business to someone in the reverse auction. It doesn't have to be the first place supplier, but it has to be someone in the reverse auction. You definitely shouldn’t award to a supplier outside the reverse auction, because then you've just told everybody that these things don't matter. If you are holding the auction just to gain intelligence, at least be up front about it so vendors can decide if they want to participate in that exercise.
Well-run reverse auctions provide opportunity for suppliers and empower buyers by drawing suppliers into a forum where they have to put their best foot forward. Using Coupa Sourcing, I’ve worked with firms that were shocked to save 15, 20, even 30% on contracts through reverse auctions. Previously they were used to getting modest scheduled savings with their existing suppliers: “Ok, this year we can give you 5%, next year, 2%,” and so on. Why settle for that? Go out and test the market. If you haven’t tried a reverse auction, you’ll find it’s actually a lot of fun, and the results can be quite surprising.