You drive to an art auction and sit in a room with other potential buyers — bidding for the same piece of art. Going, going, gone! The highest bidder wins. Concept moves on-line: Ebay. Anyone with a computer and Internet access anywhere in the world can take part in an Ebay auction. Take the Ebay concept one step further and reverse it. The buyer is the one who needs a product or service and runs the auction on-line from his or her office; the seller has the product or service the buyer wants and is ready to bid for the project, also in the comfort of an office while competing against other suppliers real time. The lowest bid wins, but not always. Quality counts, too.
Savvy businesses are discovering the benefits of “e-auctions” or “reverse auctions.” Buyers can save significant time and money by using e-auction tools. Sellers can tailor their bids to the bidding progress. Before entering into a reverse auction, suppliers need to do their homework, though, so they can quickly adjust their bid and know when to stop in order to still make a comfortable profit.

Typical auction
A typical auction may run for 30 minutes. Interestingly, most of the activity will occur in the last few minutes; comically, one could sleep through the first 20-25 minutes and still come out in the lead with a strategic low bid. Bidding tends to be slow in the early part of the auction; at crunch time, the auction is extremely lively. Should someone sneak in a low bid at the 29-minute mark, an extension of a few additional minutes is added to allow the other suppliers (bidders) time to counter offer. Extensions continue until there is no more counter offering and time runs out.

Who Uses Reverse Auctions?
Surprise! Users span across private, public and non-profit companies. Although e-auctions began in the mid 1990s, more than $150 billion has been procured via on-line events. The most likely and unlikely buyers are using reverse auctions: the U.S. Army, U.S. Marine Corps, Air Force and Navy. The first reverse auction was held in May 2000, attracting such Fortune 500 companies as GE, United Technologies, Volkswagon and Novartis; financial, pharmaceutical, industrial and consumer package goods firms — even the state of Minnesota! (Minnesota was in fact one of the first states to use the tool).

History of Reverse Auctions
First Generation: In the mid 1990s there were only a few new businesses that sold reverse auction services. These businesses offered full-service — providing consultants who took the procurement tool out of the buyer’s hand. The concept was to leverage the Internet and the procurement process — linking buyers and sellers, while driving negotiations in an open, real-time environment. Few tools have demonstrated and delivered the dramatic results of reverse auctions. An example of a key pioneer in the first generation was General Electric. GE has held at least 6,000 auctions to date with 30% of $45 billion spent attributable to e-auctions. Volkswagen has run reverse auctions of over $5.5 billion during the past five years. First Generation spending levels needed to be significant to justify the cost of running a reverse auction.

Second Generation: As more companies entered with new product offerings, most of the trepidation and problems were worked out. Businesses can hold a reverse auction themselves now by running user-friendly software with a modest level of training. As the
e-auction software providers fight for positioning in the marketplace, the once $25,000 fee per auction has dropped to $10,000 and $5,000. It’s expected to fall even further — to $1,000 and possibly even less. Products purchased range from messenger services to hotel rooms to snow removal and more.

Integrity is Key
The key to running an auction is integrity. The identities of participating suppliers must be protected at all costs. In one reverse auction for monitors, laptops and PCs, the suppliers were informed up front who was participating, but the biddings were blinded so that no one knew which supplier was the lowest. There are many options and ways that one can run a reverse auction. Rules of engagement for each auction should be communicated up front to the suppliers and agreed upon by all parties.

For more details contact Ms. Shafir, who is in what used to be called purchasing but now is termed “strategic sourcing” at Novartis, 973.781.8149.

--Sheri Sharif