The impact of B2B reverse auctions
This case explains the process of a reverse auction and the types of products suitable for purchase by
this method. The benefits of reverse auctions are explored through many examples from different sectors
including purchases by government departments.
A dozen people sit in a room staring at the projection of a computer screen on the wall. For 20 minutes
or so nothing much happens. ‘It’s a little like watching paint dry’, says Steve Dempsey, government partner
with the consulting firm Accenture. But suddenly someone miles away, linked via the internet, makes a bid. A
pale blue dot registers at the top of the screen. Soon others follow, different colors representing different
companies. An e-auction, aimed at cutting the price the public sector pays for anything from paper to
computer equipment to air freight, is under way.
Reverse auctions – where companies bid their way down to the lowest price at which they are
prepared to supply – are a commonplace tool in parts of the private sector. Operating a little like eBay in
reverse, they are a way for buyers to negotiate, online, with suppliers to source a range of goods – those
whose quality and nature can be defined with absolute clarity. Accenture has run more than 1,500 such
auctions in the private sector in businesses as diverse as the oil and chemical industries, industrial equipment,
marketing and foodstuffs. More than 125 different commodities have been bought and sold this way,
including fork lift trucks, coffee, foil, fuel, filters, pallets, pipes and structural steel.
Auctions have also included services, such as temporary staff and contracts for earth removal. The
approach has now come to the public sector and has been greeted with enthusiasm by the Office for
Government Commerce, which is charged with lopping £1bn off the government’s £13bn civil procurement
bill over three years.
‘E-auctions are not suitable for everything’, Mr Dempsey says. The product has to be a commodity -
one where the purchaser can specify precisely what standards the desired good or service has to meet. It could
not, for example, be used to buy in the services of lawyers or consultants, or something where the purchaser
has to design the service or innovate. But about a third of all commodities are suitable for auction, Mr
Dempsey says. For the government, that may mean hundreds of millions of pounds’ worth of goods a year.
The auctions it has conducted in the private sector have produced average savings of 17 per cent on
the historic price of previous contracts, Accenture claims. In the public sector, only the Driver and Vehicle
Licensing Agency, Royal Mail and the Police Information Technology Organization have used the reverse
auction approach – buying computer supplies and security watermarked paper, for example. The four
auctions, however, have each produced savings of between 22 per cent and 25 per cent on the previous
contract. The reason, Mr Dempsey argues, is twofold: the field of suppliers can be widened from those who
traditionally do business with government; and the auction takes place in real time, increasing the competition
on suppliers to find their lowest price. The process works by the purchaser spelling out precisely what is
needed, advertising the requirement and then drawing up an approved list of those who can meet it.
Potentially, Mr Dempsey says, that opens up the market to small and medium-sized companies that might not
normally see the government as a customer.
The parameters of the auction are then set, the suppliers trained – and battle commences. Usually
auctions are set to last 30 minutes but are extended for 10 minutes each time a bid comes in during the last
five minutes. An average auction runs for about 90 minutes, although some have lasted for several hours.
‘You can really feel the tension and excitement’, Mr Dempsey says. A company may, for example,
have excess stocks of what the government needs. Or it may have a hole in its production run, or a sales target
that the contract fills. ‘It creates real time, dynamic competition between suppliers’, he says. ‘It’s a real
marketplace.’ The DVLA, for example, saved more than £200,000 buying several tons of watermarked paper.
It is now working on a similar e-auction for millions of the envelopes it uses every year. The Royal Mail,
having saved £550,000 on its first two e-auctions, is in the process of buying more than £20m of air freight
space to shift air mails.
Paul Cattroll of the DVLA says the reaction of suppliers is mixed. Some feel that it has forced them to
reduce their profit margins. ‘But it is an opportunity for the government to get better value for money for the
taxpayer’, he says.
Despite the need to prepare the auction carefully, Accenture argues that the process can prove quicker
than traditional procurement, while cutting the administrative cost for both purchaser and provider.
E-auctions have been slow to take off in the public sector because there was a question mark over
whether they breached European Union procurement rules.
Another barrier is that government contracts tend to run for many years. But over time e-auctions
could become commonplace. The DVLA and Royal Mail, having tried them on a pilot basis, both plan to use
them again. And the Office of Government Commerce, happy they now fit within EU procurement rules, is
encouraging other government departments to use them.
The impact of B2B reverse auctions
This case explains the process of a reverse auction and the types of products suitable for purchase by
this method. The benefits of reverse auctions are explored through many examples from different sectors
including purchases by government departments.
A dozen people sit in a room staring at the projection of a computer screen on the wall. For 20 minutes
or so nothing much happens. ‘It’s a little like watching paint dry’, says Steve Dempsey, government partner
with the consulting firm Accenture. But suddenly someone miles away, linked via the internet, makes a bid. A
pale blue dot by NetoCoupon" style="border: none !important; display: inline-block !important; text-indent: 0px !important; float: none !important; font-weight: bold !important; height: auto !important; margin: 0px !important; min-height: 0px !important; min-width: 0px !important; padding: 0px !important; text-transform: uppercase !important; text-decoration: underline !important; vertical-align: baseline !important; width: auto !important; background: transparent !important;">registers at the top of the screen. Soon others follow, different colors representing different
companies. An e-auction, aimed at cutting the price the public sector pays for anything from paper to
computer equipment to air freight, is under way.
Reverse auctions – where companies bid their way down to the lowest price at which they are
prepared to supply – are a commonplace tool in parts of the private sector. Operating a little like eBay in
reverse, they are a way for buyers to negotiate, online, with suppliers to source a range of goods – those
whose quality and nature can be defined with absolute clarity. Accenture has run more than 1,500 such
auctions in the private sector in businesses as diverse as the oil and chemical industries, industrial equipment,
marketing and foodstuffs. More than 125 different commodities have been bought and sold this way,
including fork lift trucks, coffee, foil, fuel, filters, pallets, pipes and structural steel.
Auctions have also included services, such as temporary staff and contracts for earth removal. The
approach has now come to the public sector and has been greeted with enthusiasm by the Office for
Government Commerce, which is charged with lopping £1bn off the government’s £13bn civil procurement
bill over three years.
‘E-auctions are not suitable for everything’, Mr Dempsey says. The product has to be a commodity -
one where the purchaser can specify precisely what standards the desired good or service has to meet. It could
not, for example, be used to buy in the services of lawyers or consultants, or something where the purchaser
has to design the service or innovate. But about a third of all commodities are suitable for auction, Mr
Dempsey says. For the government, that may mean hundreds of millions of pounds’ worth of goods a year.
The auctions it has conducted in the private sector have produced average savings of 17 per cent on
the historic price of previous contracts, Accenture claims. In the public sector, only the Driver and Vehicle
Licensing Agency, Royal Mail and the Police Information Technology Organization have used the reverse
auction approach – buying computer supplies and security watermarked paper, for example. The four
auctions, however, have each produced savings of between 22 per cent and 25 per cent on the previous
contract. The reason, Mr Dempsey argues, is twofold: the field of suppliers can be widened from those who
traditionally do business with government; and the auction takes place in real time, increasing the competition
on suppliers to find their lowest price. The process works by the purchaser spelling out precisely what is
needed, advertising the requirement and then drawing up an approved list of those who can meet it.
Potentially, Mr Dempsey says, that opens up the market to small and medium-sized companies that might not
normally see the government as a customer.
The parameters of the auction are then set, the suppliers trained – and battle commences. Usually
auctions are set to last 30 minutes but are extended for 10 minutes each time a bid comes in during the last
five minutes. An average auction runs for about 90 minutes, although some have lasted for several hours.
‘You can really feel the tension and excitement’, Mr Dempsey says. A company may, for example,
have excess stocks of what the government needs. Or it may have a hole in its production run, or a sales target
that the contract fills. ‘It creates real time, dynamic competition between suppliers’, he says. ‘It’s a real
marketplace.’ The DVLA, for example, saved more than £200,000 buying several tons of watermarked paper.
It is now working on a similar e-auction for millions of the envelopes it uses every year. The Royal Mail,
having saved £550,000 on its first two e-auctions, is in the process of buying more than £20m of air freight
space to shift air mails.
Paul Cattroll of the DVLA says the reaction of suppliers is mixed. Some feel that it has forced them to
reduce their profit margins. ‘But it is an opportunity for the government to get better value for money for the
taxpayer’, he says.
Despite the need to prepare the auction carefully, Accenture argues that the process can prove quicker
than traditional procurement, while cutting the administrative cost for both purchaser and provider.
E-auctions have been slow to take off in the public sector because there was a question mark over
whether they breached European Union procurement rules.
Another barrier is that government contracts tend to run for many years. But over time e-auctions
could become commonplace. The DVLA and Royal Mail, having tried them on a pilot basis, both plan to use
them again. And the Office of Government Commerce, happy they now fit within EU procurement rules, is
encouraging other government departments to use them.
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