YES

John Hatton
Commercial director
TradingPartners
A common misconception of e-auctions is that they are chiefly suited to the sourcing of material "products" and, preferably, commodities. While commodities undoubtedly lend themselves to sourcing via online bidding, there is now very clear evidence to indicate that e-auctions can, and do, produce excellent results in the purchasing of services. Indeed, it is in the area of services purchasing that the most explosive growth in the adoption of this process is being seen. So why are e-auctions becoming such a popular tool for the sourcing of these categories? First, every substantial business has a need to buy general services - from car fleet management to security to cleaning to office supplies. For some businesses these purchases are "core"; for the majority they are not considered strategic. The levels of spend are, however, often quite considerable. With any large spend, the supply base will be very keen to compete for business. Second, there is invariably considerable scope to improve the services procurement processes - and thereby to deliver surprisingly large savings. In my previous role as procurement director at Scottish Courage, direct procurement was initially far more sophisticated and controlled than was the case for indirects. This is true for many businesses. Third, the fact that the demand for purchased services is so broad has led to the development of significant supply base capability. In many services sectors, the supply base is still extremely fragmented. This invariably means that the supply market is highly competitive. A further essential ingredient is the fact that, with professional input, services requirements can be extremely well specified. Indeed, selecting online bidding for the negotiation phase of the tender exercise often drives greater clarity in specification. It is vital that suppliers participating in an e-auction are clear about what they are bidding to supply. With a commodity, specification is relatively straightforward, the only major differences often being packaging and delivery arrangements. But even purchases at the other end of the "complexity spectrum" can be well specified and successfully auctioned. Indeed, the specification can vary from bidder to bidder. For example, when Ford bids to supply a medium-sized car it is probably a Mondeo, whereas Vauxhall would offer a Vectra - each with a specification list pre-agreed with the buyer. Another charge sometimes levelled against e-auctions is that "they're all about price". This is not the case. Whether or not a tender project involves the use of e-auctions, an optimum result will only ever be delivered if non-price factors are given due consideration alongside the price elements. After an e-auction, the buyer is left with a series of written "best bids" from suppliers. In the vehicle example cited above, the buying company will be left with a decision probably based on weighted parameters, but within which price (or whole-life cost) has been determined via a highly rigorous process - the e-auction. In my experience as a client user of e-auctions it quickly became clear that, without unlimited resources, a traditional tender process could not possibly enable parties to make as many revisions during the negotiating process as they can within an e-auction. The process saves significant resources as well as driving a better deal. Finally, there is hard evidence. Thousands of separate projects have seen e-auctions deliver fantastic results in the sourcing of services. Not only have buyers been able to discover new suppliers and price levels, but it has opened the way for vastly improved levels of quality and service. NO

Bill Young
Managing director
Kestrel OPS
An e-auction is a good way to buy commodity goods and some commodity services. But it is an unsuitable way to buy a service that cannot be simply described and instantly delivered. Every problem can look like a nail when one is armed only with a hammer and it is not just complexity, but a series of factors, that limit its use. Other dimensions that make services less suitable for e-auctions include intellectual property and switching costs, as well as the fact that service contracts are not covered by any equivalent of the Sale of Goods Act or the concept of "fitness for purpose". Services frequently require ongoing definition and negotiation. Improved efficiency is often reasonably expected and buyer and seller have to achieve continued savings through some form of gain-share. This dimension of a purchase can be negotiated competitively but it seems hardly suited to the frenzy of an auction. Imagine, for instance, the purchase of a facilities management service in which the vendor must invest months trying to understand the local situation. Many will take a lot of time working to develop proposals. But this becomes more difficult to maintain if the final stage is a dog-eat-dog affair after the buyer has absorbed all of the supplied know-how. Opportunities for continuous collaboration on cost-reduction and benefits sharing are ruled out. The relationship between a vendor and customer goes through a power shift during a negotiation. The buyer's power is greatest at the start and declines as commitment increases. The e-auction delays this, until power shifts suddenly and completely. Some vendors are getting expert at exploiting this by bidding low to get the business and then cashing in through extortionate charges for changes. Better suppliers may even refuse to enter a tendering process that ends in a gladiatorial contest. The cost of preparing proposals and bids can be high. Risking everything in a sudden death may simply not be worth it. And those vendors that do take part and face the prospect of an e-auction at the end are likely to hold positions in reserve, protecting their information and their best-and-final-offer until the endgame. This may reduce the worth of any requests for information and requests for proposals that precede it. Competition is not always perfect, especially in services, and a bidding process can be more rigged than a wrestling match. In one case, a buyer of a temporary staff agency service went straight to auction on the total mark-up, missing the fact that local agencies had got used to margins for overheads and profit that were three times the norm. We should not lose sight of where most value is added in service buying. Research shows two-thirds of all potential savings come from persuading the internal client that a standard service will do the same job as the specified exclusive one. More than two-thirds of the remaining potential can be achieved through traditional means, without a real-time bidding process. Deskilling of purchasing, by going straight to auction, helps to leverage scarce resources but it also contributes to the exclusion of purchasing from the big decisions of the day. There are few examples of e-auctions for outsourcing HR or finance services and, unfortunately, not even many cases where purchasing is consulted about such strategic outsourcing. So let's use e-auctions fully and exhaustively for commodities; but without forgetting that our professional toolkit has much more in it than a hammer - even an auctioneer's hammer. What do you think? Is John Hatton right or do you agree with Bill Young? Send your views to [email protected] or write to Supply Management, Redactive Publishing Ltd, 1 Benjamin Street, London EC1M 5EA