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The Live Negotiation Part 1: Should you run an auction?

In 2017, technology is King. Whether you're part of an in-house procurement team, or utilizing the services of a third-party procurement provider, the use of online sourcing tools has rapidly increased in an effort to streamline the strategic sourcing process. Bigger firms who maintain an in-house team have begun developing their own sourcing tools or licensing existing tools on the market, while smaller companies tend to seek out the services of third-party procurement providers who typically provide their proprietary sourcing software as part of their overall service offering.

Procurement professionals and suppliers alike tend to have mixed feelings on the use of these tools; specifically in terms of the value they provide when training and allocating resources have all been factored into the bottom line. While there are several benefits to utilizing a tool for RFPs and other static quotes, if a decision is made to forgo the technology in favor of using a more traditional approach, you can typically expect similar results.

That being said, one clear benefit to utilizing a sourcing tool is for the Live Auction (eAuction) feature many tools have, which cannot be manually replicated. The thought of running a live negotiation can seem daunting initially; it requires strategic and focused interaction with each participant and simultaneous ongoing dialogue with a group of attentive stakeholders. The pressure to identify high savings on screen is certainly prevalent, as the use of a live negotiation provides the live market insight that essentially negates the need for second and third round bid collection. Basically, what you see is what you get and sometimes what you get is far more than what you have anticipated. The same mechanism by which a live negotiation tends to yield best and final offer (BAFO) pricing is the very thing that drives such competitive pricing in the first place: the insight into the competition.

In a standard reverse auction, a bidder will typically have visibility to the best bid for each item on which they are quoting. Other times, they will be shown their ranking (usually as a quartile % to mask the actual number of participants), and in some live auctions, called Dutch or Blind auctions, the price reduces after a predetermined amount of time and the bidder must accept the price to continue. So how do you know when to run an auction for the category you are sourcing? To ensure a successful eAuction and produce a room of happy stakeholders, your category should meet the following criteria:

1. Competition and Market Availability  Are the items readily available within a wide network of suppliers who are willing and able to participate in an online auction? If so, this is a good start in making the decision to proceed with a live negotiation.

2. Specifications  Obtaining crystal clear specifications for the products and services being sourced is not always a reality, unfortunately. Though in a live negotiation, the expectation is that the bidders are competing on the exact same item. To ensure an apples-to-apples bid, you'll want to provide bidders will clearly defined specifications, either through product drawings or a scope of work.

3. Contract Value  Suppliers tend to be wary of online auctions. One way to entice them and ensure participation is with a significant amount of spend on the line. If the above criteria are met, then conducting your negotiations live can be a great way to get stakeholders excited and drive true dollar savings in real-time without the need for several RFP rounds.

While savings can never be guaranteed, creating a competitive environment where the supplier is able to glean real-time market insight, with the added pressure of the prospective customer watching tends to get them to sharpen their pencils in a way that a traditional RFP simply cannot do.

Next up: deciding the right strategy. In part two of this series we'll take a look at setting up your competitive bid event for success.

 

About the Author

Kristina Kaku is a Project Analyst at Source One Management Services, specializing in MRO, Transportation and Logistics, and Travel. Kaku is a trusted resource for helping companies achieve their cost reduction goals by executing customized strategic sourcing initiatives and conducting negotiations. Throughout her experience supporting dozens of sourcing projects, Kaku has not only helped clients achieve savings, but also improve efficiency through the use of procurement tools and supplier relationships by establishing transparent and best-in-class contracts.