Auctions have been around for centuries. Seller with goods/services wanted an efficient way to sell those goods/services to buyers who wanted those goods/services. Over the years, various auction formats were devised and executed, including the most well-known format, the reverse auction. Rather than having one seller with many buyers, a reverse auction involved one buyer with many sellers. Sellers placed decreasing bids on a set of goods or services and followed the same set of rules.

Reverse auctions are getting real time through e-Auction and organizations increasingly leveraging e-Auction in ITO/BPO/Digital supplier selection process. In this post, I am sharing the following points captured from earlier experiences on e-Auction lessons learned and best practices.

I. Auction Event in Outsourcing Lifecycle :

• Auction event is conducted during the course of RFP / Pursuit process in lieu of a traditional protracted negotiation process, enable Clients to baseline and benchmark suppliers cost
• Auction event allow the suppliers to (1) understand where their pricing is within the market as compared to their peers; (2) sharpen pricing toward providing the best value proposal; and (3) increase the chances to become a preferred supplier
• The auction is not a “winner-take-all” event and in general it is only a refinement of the pricing of proposals
• Recent experiences indicates that Auction Event is conducted online

II. Auction Process:

• Mock Auction: This step allows suppliers to get acquaintance with the auction rules & toolset
• Live Auction: Actual online bidding event
• Post Auction: The next step after live auction is either of two potential scenarios

§ Suppliers are not expected to submit any pricing forms post auction if the bid points are the rate cards or discrete/granular price points that will enable Client teams 1) to compare apples-to-apples 2) compute the base outsource cost

§ If one or more of the bid points are blended rates, role wise rate card considered to arrive at the blended rates is expected to be submitted post auction

III. Auction Bid Points: Few common bid points that are part of reverse auction are

• Blended Rates: For Managed Services scope OR location-wise across skills OR Effort based scope
• Resource Rate Card: Location-wise (Onsite/Offshore/Near-shore) rates by skill & experience band
• Transition Cost: To cover total cost of transition and on-boarding
• Volume Discount: Discounts offered based on committed annualized revenue OR effort volumes
• Tenure Discount: Defined in bands & based on the committed duration of a resource in engagement
• Pass-through Charges: Bid point for Link (one-time & recurring), Software, Tools etc. cost

IV. Auction Rules & Mechanics:

• Initial bids placed are either be equal to RFP submitted values OR allowed to start with any value
• “Lots” or auction events are defined for each of the applicable bid points above. Lots are defined by location in case of multi-geographic deals.
• Lot closing is staggered and timing for each lot close is published (ex: 15 to 20 minutes) in advance
• Each Lot last for a defined/specified duration, with extensions of durations if a bid is received towards end of bidding duration (as pre-defined) of the Lot.
• Suppliers are allowed to bid in USD and/or respective local currencies, but there is a high possibility that bids are evaluated in USD’s if the deal is multi-geographical involving USA
• A bid must be lower than the previous bid placed by, at minimum, the bid decrement. Bid decrements are defined as % reduction or $ reductions.
• Suppliers know their respective rakings real-time after each bid is submitted. In general, the details of competitor names and competitor bid values are not disclosed/displayed

V. Supplier Selection:

• The auction is not a “winner-take-all” event and in general it is only a refinement and of the pricing of proposals
• Suppliers selection is based on rank in reverse auction and combining it with the qualitative evaluations based on service/breadth of capabilities, innovation, investments etc.
• Auction is in lieu of a traditional protracted negotiation and hence post auction selection leads to noncommercial negotiations for the contract closure

VI. Best Practices:

• Alignment and availability of Bidder Management and decision makers for real time decisions during auction
• Build scenarios for bid points based on decrement guidance and have pre-approved (profitability) scenario for rock-bottom price
• Need not to aim for consistent good rank on all bid points, but the reprioritization of strategically important bid points helps for internal preparedness and last minute decisions
• Have all stakeholders join over web-ex for auction with one assigned owner to enter bid points
• Before auction make sure to confirm Client’s terms & conditions, get it internally vetted, have approval from Bidder business, finance, & legal and communicate to client on key assumptions

Recommended Reading

A Practical Guide to E-auctions for Procurement: How to Maximize Impact with e-Sourcing and e-Negotiation 

A Practical Guide to E-Auctions for Procurement provides guidance to procurement professionals on how to realize the potential of e-auctions. Now is the time to optimize your e-negotiation strategy using key insights from the author Jacob Gorm Larsen, who is responsible for one of the most successful and award-winning e-sourcing programs in the world.