Reverse Auctions: Efficient, Collaborative and Easy to Use
Modern reverse auctions are a far cry from those of the past. They no longer represent a cutthroat race to the bottom bid, but rather a transparent, collaborative relationship between buyers and suppliers.
The application of reverse auctions goes back to the 1990s. Back then, in the early days of its use, reverse auctions were seen as:
- Complicated to use
- Focused on optimising costs
- Race to the lowest bid with no regard to other important factors
- High potential to harm existing supplier relationships
But in today’s fast-moving market, procurement teams need better, more interactive online tools to source effectively, and drive participation with geographically dispersed suppliers.
Today’s reverse auction technology:
- Enables flexibility
- Empowers suppliers to compete in a fair, transparent way
- Creates live, collaborative negotiations
- Highlights the value of incumbent suppliers and challengers alike
- Improves speed and visibility of the market
At their most efficient, reverse auctions accelerate procurement processes and purchasing decisions. Reverse auctions provide a live market for suppliers to post their best pricing, so it’s easy to see why business and procurement leaders would find reverse auctions appealing. What is often overlooked however, is the benefit to suppliers and the compelling reasons they should participate in reverse auctions.
The New Age of Reverse Auction Technologies Is Here...
Today, procurement teams are no longer forced to use inflexible auction functionalities that are bundled with broad and expensive enterprise solutions. Instead, new cloud-based platforms are allowing procurement teams to take a fit-for-purpose approach, leading to more flexible and efficient set of tools that enable them to easily meet current business practice needs.
With a new age, comes a new type of professional who operates in a fast moving, interactive online business world. Research has found that internationally, a significant proportion of procurement professionals aged 30-44 are using reverse auctions to some degree. Millennials and younger GenXers live in a virtual world, and as such, are reconsidering the procurement process. This new wave of buying professional is more likely to embrace streamlined processes and to engage with friends and business networks virtually.
... Making a Greater Strategic Business Impact ...
However, reverse auctions are not one size fits all. Reverse auctions are an important tool in your business’s toolkit. Buyers need to be strategic about when to use them, and when to use other negotiation tactics and processes. Reverse auctions can streamline the purchasing of low-cost, low-risk goods and services, which will enable procurement teams to focus more of their time to higher value-add, strategic initiatives.
It is key to understand when to use a reverse auction and when to use other procurement – especially at the product/category or supplier relationship level. Reverse auctions are useful, for example, in a buyer’s market to source commodities, simple services, and other items that are easily substituted. The terms of the reverse auction will also need to cater to the specific requirements of the product or service being negotiated.
... With Supplier Partners Playing a Key Role
Procurement teams have enormous incentives to help suppliers understand the value of becoming more strategic partners and participating in reverse auctions. Why? PwC reports active supplier relationship management (SRM) is correlated with increased market share, faster reactions to market changes, and shorter fulfilment cycles. Suppliers may be wary of reverse auctions, but the perception that buyers are willing to sacrifice quality for price, or that they intend to force suppliers’ hands into accepting rock-bottom prices, is misplaced. Taking a “lowest bidder wins” approach could be a severe tactical error for buyers, possibly leading to a situation where a supplier wins with a very low price but can’t actually handle the job.
Suppliers who proactively engage in reverse auctions can also benefit from:
- the chance to compete transparently against competitors with more finely tuned control.
- being in the driver’s seat as they can choose when to pull out of an auction
- always knowing where they stand compared to the other suppliers
- getting increased exposure and being connected to more buyers than they might otherwise – potentially from all over the world.
Key take-outs about reverse auctions
Modern reverse auctions are a transparent, collaborative relationship between buyers and suppliers.
Be strategic about the products and services you use reverse auctions for: Use reverse auctions in a buyer’s market to source commodities, simple services, and other items with a low cost of changing.
Collaboration and transparency benefits suppliers: Two keys factors that contribute to a successful reverse auction. These can only be achieved by running the auction through technology that supports it.
Today's reverse auctions support professionals to work remotely. The new age of reverse auctions supports the way that professionals are increasingly choosing to work.