Tim Norris (South Africa) - Are You Using Reverse Auctions?

• 2

• Posted by Tim Norris

• Company T Norris & Associates

• on March 23 2012

Increasingly, when looking at all the necessary business activities in an organization, procurement provides the greatest opportunity to improve processes, increase productivity and reduce costs in the supply chain. The increased emphasis on sourcing today across all organizations is driven by two factors. These are the heightened reliance of most large organizations on contracted services and outsourcing, as well as the fact that procurement, operating at the edge of the organization, is increasingly understood to be vital to organizational success. How well procurement is executed is now understood to provide an opportunity for firms to contribute to a position of competitive advantage by reducing the price and the transaction costs associated with purchasing goods and services. Indeed, across the world of both corporate and governmental procurement, the practice of purchasing has moved from a localized, operational activity to one that is more consolidated and strategic in nature.

So, where do reverse auctions “fit” into an organization’s procurement strategy today? Reverse auctions (eRAs) have become a “best practice” for procurement across the corporate landscape. And they have become so not as a way to squeeze suppliers to reduce costs, but more so as a way to automate the negotiation process. Indeed, analysts have noted that among Fortune 500 companies, almost all private sector firms of this size employ Reverse Auctioning today to some extent. And from a global perspective, the same is true for the worldwide list of Fortune 1000 companies. Take for instance Royal Dutch Shell, the global group of energy and petrochemical giant - Shell has used reverse auctions for procurement since 2001 and today conducts over a hundred reverse auctions a month. Similarly, Anglo American's Head Office in the UK uses reverse auctions in its global procurement. Looking ahead, it has been projected someday soon as much as half of all corporate procurement could be conducted through reverse auctions.

While eRA use has been exploding across the private sector around the world, the procurement method still has a bit of a “taboo” factor. Indeed, competitive bidding is a subject that many executives still today shy away from for a variety of reasons, not the least of which is often a fear – or better yet a realization – that the practice is a “game changer” in the marketplace. Still, the value propositions for reverse auctions are quite clear. For buyers, reverse auctioning enables organizations to transparently reap savings in both cost and procurement time, while also and expanding the pool of eligible suppliers – and thereby increasing competition and reducing the possibility of corrupt practices. For suppliers, reverse auctions offer the prospect for reduced operating, selling and customer acquisition costs through an improved and expedited bidding process. Moreover, reverse auctions also afford vendors improved access to new markets and new competition, while also working to ensure a more level playing field in which small businesses can effectively compete.

Governments around the world are discovering both their purchasing power and the power of reverse auctioning. One realization is that in almost every country, the public sector, taken as a whole, constitutes the largest organization of any kind in the nation buying goods and services. Over the past decade, there has been a new emphasis on the strategic nature of procurement across all organizations as a source of cost savings and even strategic advantage. And certainly, part of the reason why we are seeing the push for procurement reform and efficiencies is the simple fact that these are certainly difficult times in the public sector world today.

All over Africa and South Africa, government officials are being accused of corruption, stealing and 'tender-prenurship', giving family and friends preference in the procurement and tender processes. Reverse auctions provide the simple and effective means to remove that 'black hole effect' where a tender is submitted into a box and the suppliers have no idea what criteria have been used to adjudicate their tenders or how they compare with their competitors. Reverse auctions allow transparent and immediate feedback to the suppliers on how well they fared against their competitors, the winning price is known to all participants and it would take a very brave corrupt official at any level to try to explain later why they did not take the lowest price, a price already known to all participants. For the first time, suppliers to government and departments can see, and challenge, the resulting tender award on the basis of a known lowest price if necessary. Corruption, and the temptation to be corrupt, will be reduced dramatically using a simple tool - the Reverse Auction.

Today at all levels all around the globe, government executives are being challenged each and every day to do more with less. Budgets are being tightened, positions are being eliminated (or simply not filled), and yet, across the board, agencies and their personnel are being tasked with bigger and more important missions than ever before. And so, the reverse auction model is taking hold across the public sector, as governments around the world, both in the developed world and in developing nations, are fast discovering the power of competitive bidding to bring about procurement reform and savings

By Tim Norris, Managing Director, T Norris & Associates