Bidding down

Online technique for purchasing IT goods and services saves companies time and money.

Network executives working with so-called reverse auctions for IT purchases are coming to a surprising conclusion about the benefits of this online purchasing method. “It’s not just about dollars,” says Don Stevenson, who oversaw a recent online reverse auction for CMS Energy, a large utility company in Jackson, Mich.

CMS has found that reverse auctions not only lower prices for standard, commodity-like products, but also encourage manufacturers and service providers to embrace innovation. The innovations can include repackaging their offerings, improving customer service and adopting new quality-of-service standards.

In a traditional auction, buyers compete to bid up the price of an object they want from the seller. In a reverse auction, sellers bid the price down to win a contract with the buyer. Putting the process online lets you incorporate secure Web sites, add applications to track and rank the sellers’ bids, and end up with a bid that’s detailed enough to form the basis of final contract negotiations.

Reverse auctions have reduced prices paid for goods and services by an average of 15% compared with traditional paper bids, according to a 2003 study by nonprofit group CAPS Research.

The study, “The Role of Reverse Auctions in Strategic Sourcing,” also found that the online process cut errors by 30% to 60%, and in a few cases shortened the time spent on the overall process by up to 90%. According to the report, construction giant Bechtel, which now has a staff of more than 300 for reverse auctions, has reduced contract negotiations from weeks to hours. But Bechtel notes that successful reverse auctions require more discipline in internal work processes and a better understanding of competitive markets than sealed paper bids.

Reverse auctions are one technique companies can use to make their supplier relationships more efficient, says Stewart Beall, director of executive projects at CAPS Research. Beall, a former chief purchasing officer, says reverse auctions seem to be part of a trend to use Web-based applications to change paper-based sourcing processes into more efficient, streamlined “e-sourcing.”

You can see that trend at CMS. The utility’s purchasing department started using reverse auctions a few years ago, for everything from cleaning rags to front-end loaders, says Stevenson, who is network technologies manager at CMS. “There was quite a range of success stories,” he says. “Incumbents were reducing prices, and new companies were breaking into our supply chain.”

The network group’s first step, not yet a full reverse auction, was to use an electronic procurement system to take bids for the entire network infrastructure at the new CMS headquarters. The utility turned to Enporion, an e-marketplace created for and by electrical and gas utilities. Rather than sending out and receiving reams of paper, Enporion e-mailed Microsoft Word documents and Excel spreadsheets to buyers, who electronically returned bid proposals.

Last year, CMS took the next step, opting to rebid all its vital voice and data services through a reverse-auction service from Applied Research Technologies. Other options for conducting online auctions include investing in third-party and internal software applications. GlaxoSmithKline, based in the U.K., held 90 reverse auctions in 2002 – 20 were done via third-party service provider FreeMarkets and 70 by the pharmaceutical firm’s internal staff, according to the CAPS study.

At CMS, the entire process, from preliminary planning to final contract negotiations, has taken almost a year. “We had to decide what we wanted, and then after we got [the online bids], we had to evaluate the results,” Stevenson says. “We had very high [requirements] for things like reliability and like safety, for example.”

As part of the process, Applied Research Technologies recommended best practices and outlined what pricing and QoS terms CMS could expect in each area. For example, Applied Research Technologies suggested that CMS pool its cellular voice minutes so if one person in the company didn’t use all his allotted minutes in a month, he would become available to someone else in the company.

One advantage of CMS’s Web-based auction is how visible it made the bidding process to all parties, according to Stevenson. Vendors submitted their bids in electronic form, either via EDI formats or via a CD-ROM. Next, an Applied Research Technologies program analyzed the submission and compared it automatically with the requirements in the RFP. Algorithms scored different elements in the bid, and the ranking was then published to a Web site where it could be seen, and compared with the other bids. Vendors began changing their bids to improve their score.

CMS currently is negotiating final terms with selected vendors, so Stevenson won’t be specific about results. “We were very pleased,” he says. “We’re in a far better situation [for telecom] than we were before.” Among other benefits, the auction yielded some attractive cellular pooling plans.

The return on investment is manifest, and it’s not limited to the “per-widget cost savings,” Stevenson says. ROI in such contracts means putting a value on things like a contract’s “terms and conditions,” or on having an “out-clause” to exit a service that isn’t paying off for the utility.

“We’ll keep using this,” Stevenson says.