Reverse Auction Abuses

In a recent Friday Rant entitled “Reverse Auctions Have Become the Aero-Bars of Sourcing”, SpendMatters’ Jason Busch describes the all too frequent abuse of Reverse Auctions.  He quotes David Clevenger, formerly of FreeMarkets, who notes that “the problem with reverse auctions may be the same as with any powerful weapon in the wrong hands”.  A knife can be used for murder or for life-saving surgery.

I believe there are at least two factors that contribute to abuse.  I recall Stephen Covey’s leadership example which describes the importance of both skill and integrity.  A skilled surgeon lacking integrity might perform an unnecessary operation.  (Think Michael Jackson’s repeated cosmetic surgeries.)  An unskilled surgeon with integrity would botch the job.   You need both skill and integrity!

Clevenger describes abuses such as pre and post bid negotiations and the inclusion of unqualified competitors to drive market behavior.  I would add to the list Phantom Bids (i.e. no intention of moving business but merely driving the incumbent’s pricing down via a competitive exercise).  Note that none of these tactics rely on Reverse Auctions.  They can all be wielded with equal abuse using a paper sealed bid.  These are issues of integrity that soil Sourcing’s reputation regardless of the medium.  In this instance, Reverse Auctions merely automate an unethical practice.

Skill is a different issue.  As a former eSourcing trainer, I was often frustrated at companies’ unwillingness to provide adequate training.  There are a number of important differences with the eSourcing process and tactics.  Our company always recommended both training and mentoring as buyers geared up.  I must respectfully disagree with Jason regarding software vendor responsibility.  We didn’t tell unskilled buyers to “go tear it up”!  Conversely, we often argued strongly in favor of a thorough implementation process.  Unfortunately there were far too many shortcuts with the ultimate outcome being, among other things, unintended supplier abuses.

Anyone employing Reverse Auctions must have both skill and integrity or there will be abuse.  However, we shouldn’t blame the tool.  Neither we nor suppliers should generalize that reverse auctions are bad.  It is correct that Reverse Auctions in the hands of buyers who are unskilled or who lack integrity are bad.

However, not all sourcing professionals lack skill and/or integrity.  I am not denying abuse.  But I’m concerned that suppliers’ claims become another excuse to resist a legitimate tool that, when used properly, helps buyers achieve best value.  Let’s not abandon a fair and effective tool because of the abuse of some.

4 Responses to Reverse Auction Abuses

  1. It is legitimate to blame the tool when it can so easily be abused by buyers and market makers. Any tool, used correctly or not, that simply extends long-established zero-sum power-based bargaining routines between buyers and sellers – well known to be a worst practice in supply chain management – is fundamentally flawed.

  2. Still beating this drum? Reverse auctions are such a fraction of the functionality available in an eSourcing tool, its hard to listen to you continually bash the industry with the same message. Every vendor I can think of promotes disciplined management of the technology, offers highly valuable support and services, and has numerous levels of functionality that assist buyers with the entire spectrum of supply management. eSourcing vendors committed to this principle years ago and the proof is in the development advancements since 2003.

    Suppliers continue to participate and buyers generally use auctions on a very small percentage of the overall spend. Its merely one instrument in the tool kit that under resourced purchasing departments rely on to obtain their savings goals.

  3. The abuse by bidders is also quite common, particularly in Reverse Auctions in which one or more suppliers know the buyer is unlikely to switch vendors. The primary ways we see bidder abuse are here:

  4. I agree with David Bush (comment above) reverse auctions are a fraction of the functionality available from e-sourcing vendors. But some users get carried away with the application of e-auctions – using them too widely and in wholly inappropriate circumstances. This opens the door to abuse.
    Some guidance can be found in “E-auctions: when (not) to use them… and dirty tactics to look out for!”

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