Industry watchers agree that business-oriented auctions are one of the hottest new online trends, drawing participation from small businesses and Fortune 500 companies alike. In fact, business-to-business online auctions handled $109 billion worth of transactions in 1999, and that number is expected to jump to $1.3 trillion by 2003, notes Forrester Research, a market research firm in Cambridge, Mass.

The rocketing interest, coupled with large transaction numbers, have analysts and user organizations putting their muscle, and their dollars, behind this burgeoning technology. Procurement people who have access to auction systems rave.

"It's a fantastic tool," says Michael McGaugh, senior market supply manager for The Dow Chemical Co., an $18 billion chemical giant in Midland, Mich., with 35,000 employees worldwide. "It allows us to diversify our supply base and create a dynamic marketplace for buying and selling. Now, I can reach a competitive market price very quickly and with much less effort than phoning around and taking bids manually. I can do it in a matter of hours instead of a matter of weeks."

Dow is a good example of why business-to-business auctions are becoming a hot avenue for buyers and sellers. As a seller, Dow uses auctions to meet new customers. As a buyer, it uses online auctions to find lower prices on the tons of raw materials and packaging the company needs to make and ship its products. McGaugh says he routinely saves 2% to 5% on purchases through online auctions and sometimes as much as 20%. That's because bidding pressure can drive down the costs of buying from new suppliers, particularly for commodities such as packaging, auctioneers contend.

"An oat company might have all these procedures in place to get the best price on oats, but it doesn't think about what it pays for industrial supplies. If it pays $200 million a year and can save just 10%, that's $20 million," says Paul Baier, CEO of PurchasingCenter.com, a six-month-old online auction company in Burlington, Mass.

It's no wonder that online auctions are quickly proving their value. As a sales system, they save time and money, bring in new customers and suppliers, and extend corporate reach from one end of the globe to the other. The business case can be so strong, in fact, that you'd be wise to begin experimenting with auction technology and investigating third-party hosted sites. If internal users haven't discovered auctions already, you could be the hero by bringing them into the company.

Still, as with any fledgling venture, you're likely to find the technology doesn't yet provide a perfectly paved road. Some vertical markets may not be ready. And you may have to improve infrastructure to do it in-house, or hire out.

Around the globe

Reaching new customers is one of the guiding reasons that John Deere Co. built an auction site, says Nancy Headley, operations manager for the farm equipment manufacturer in Lenexa, Kan. John Deere has been helping its 1,600 North American dealers auction off used equipment since last October. It's hosting a site (www.machinefinderauction.com) with IT help from OpenSite Technologies, an auction software vendor.

For some industries, auctions already have reached the must-do stage. If you're a network executive in those verticals, you should be examining auction technology and outsourcing options on the double - or you'll be letting competitors reap the cost and customer advantages. Such verticals include computers and electronics, chemicals and motor vehicles, says Keith Pitcher, president of ComAuction, a business-to-business auctioneer in Dowagiac, Mich. You can begin to get a feel for the process and how it will integrate into purchasing and sales systems by auctioning off used equipment. "Auctioning really comes into play for a unique piece of equipment or any type that may not have a standard, fixed price, such as specialized equipment or something that has been modified. If it's hard to get a book value for it, this is a good way to sell it," Pitcher says.

Along with chemicals, steel and electronics, any old items lying around the stockroom are fodder for online auction experimentation. You probably have some. Approximately $350 billion worth of unused assets are owned by American companies, according to the U.S. Department of Commerce.

By selling off the storeroom's assortment of oldies, you not only turn dust collectors into cash, but also gain a means to engage business-to-business auction technology, evaluate the security needed to allow purchasing agents to bid via your Internet connection and figure out how to integrate payment into your general ledger systems. And you do this without interrupting existing purchasing and sales systems.

Afterwards, you'll be in a stronger position to decide if you want to build an auction site, join one or wait.

Take it to the outsourcer

That thousandfold jump in sales is now forcing infrastructure upgrades, says David Olsen, chief technical officer at ComAuction. Olsen is currently operating ComAuction on two Sun Solaris servers running Oracle8. Next year, he plans to increase the number of servers and each one's capacity. While he hasn't chosen the new servers yet, he knows he'll have to move from his 100M bit/sec Hewlett-Packard ProCurve switch to a gigabit switch at the same time.

Upgrades such as this make outsourcing look like the best route for building private auction sites. This might go against your grain. E-commerce managers overwhelmingly reported that they prefer to rule over their own e-commerce systems, according to a survey of 100 Network World readers conducted for this issue. (See related story). Nevertheless, early adopters say that hiring consultants, working with a hosting firm or even joining an existing site and leaving the whole caboodle in someone else's hands is best.

"Going with a third party brings a level of integrity to it," Dow Chemical's McGaugh says. "The neutrality makes the sellers more comfortable. If I'm hosting the auction, suppliers may not be comfortable that I'm treating everyone fairly. They might think that I'm withholding information from some and giving it to others."

Dow buys 500 to 600 different products by doing its online auctions through ChemConnect, a 4-year-old San Francisco site that auctions chemicals online. And while the company's suppliers have the security of a third-party host, Dow has fewer nuts-and-bolts worries since ChemConnect handles all of the auctions' technical needs.

"I would assume with time we could build these systems, but it's not one of our core strengths," McGaugh says. "It makes sense to build a relationship with a third party that does have these strengths."

Even John Deere, which handles more online auctioning responsibilities than Dow, leans on OpenSite Technologies for hosting and management. Although John Deere may eventually take the site in-house, today it sends the auction information to OpenSite, and the vendor posts it online and handles most of the technical needs and problems.

"We just don't have the technical staff for it," John Deere's Headley says.

Third-party online auctioneers may also handle some of the logistical problems for your company. A buyer could ask the auction host to contact sellers and have them attend a private bidding in a secure part of the host's Web site. The seller could name the suppliers, or ask the host to find them. The host may even arrange for delivery, says Jay Hall, vice president of product management and a co-founder of ChemConnect.

"We're able to find buyers and suppliers in places in the world a company might not have had access to before," he says. "You start expanding your supply base and expanding your competition." With the Internet's extended market reach, the auction is one road that most businesses should plan on traveling soon. You should start looking for potholes in that road today.

Related links

E-commerce: Making an auction site successful
Even the most innate benefits won't stop your pet technology project from bombing if people don't use it. Early adopters say the danger with auction sites is even greater, because auctions aren't quite mainstream e-commerce yet.

E-commerce: Switching to dollars
Online auctions have become a great way to buy and sell used networking equipment.

The Auction Tribune
Auction news and auction related links.

Build an auction on your Web site with Bidland
Network World Fusion Focus, 11/10/99

FTC issues warning on fraudulent cyberauctions
Computerworld, 02/16/00.

Water Cooler: Getting in on the auction action
Web-based service for companies auctioning off stuff on multiple business-to-business e-commerce sites.
Network World, 11/29/99.

ChemConnect
Hosts millions of dollars of transactions for members from 4719 companies in over 100 countries.

OpenSite Technologies
Provider of online auction software.

ComAuction
Business to business auction site.

BizAuc.com
Auctions for manufacturers, distributors, resellers, retailers, importers and exporters.

Hybrid Liquidation Service
Hosts the first business to business liquidation auction.

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