It’s time for e-auctions and smart procurement to beat the current chaos
"CIOs should engage with their procurement colleagues to understand how they could benefit from more sophisticated IT purchasing..."
At a time of hugely disruptive macroeconomic phenomena and peak uncertainty, there are signs that organizations are recognizing it’s time to get their procurement in order and for e-auctions – online real-time buyer/seller negotiations – to step into the breach. While Procurement leads these activities, CIOs should be looking to engage with procurement to understand how e-auctions can benefit their purchasing requirements. According to our Global eAuctions Index, procuring IT equipment and some IT services is already high on the agenda of procurement teams around the world. In 2022, IT equipment had by far the biggest relative spend compared to other categories and services also featured in the top four.
Today, the CIO has the difficult challenge of driving efficiencies in IT spend while still delivering innovation, but this cannot be achieved just by outsourcing and chasing the lowest price. CIOs must instead, look at strategic sourcing and the fostering of sustainable relationships with vendors which will give them preferential, long-term business options. E-auctions can play a role in enabling more dynamic, agile relationships with vendors. This procurement method is already well established in buying IT equipment and some IT services where the specification is defined, but CIOs should talk to their procurement colleagues to explore how else they can utilize such auctions to drive innovation in vendor relationships.
See also: “The Commercial CIO" -- Christelle Heikkila on dealing with suppliers
Modern e-auctions offer the chance to restore order, remove wasteful one-to-one negotiating and give access to superior value and a breadth of offerings. The Hackett Group – a leading global strategy and operations consulting firm – has said that e-auctions lead to up to 2.7x savings, while e-sourcing generally leads to 30% faster cycle times.
Our annual report suggests that e-auctions are being viewed as an answer to bidding beyond the usual purchasing staples and are increasingly the way to procure everything from legal, clerical, and marketing services, to R&D and accounting. In our most recent 2022 results, IT and security services were the top ranked category with average savings of 5.28% and the procurement of IT equipment also made it into the top ten with average savings of 10.73%. It’s clear that e-auctions are taking a bigger bite, not just from the home turf of office supplies and consumables, but also from a far wider spectrum of services, where price is not the only concern and where competitive differentiation is key.
Perhaps spurred in part by the pandemic pushing us deeper into the digital realm, procurement is generally maturing. We see more lessons being absorbed and more specificity in demands with, for example, ESG being a far larger factor, in pre-auction credentials. There’s also greater use of standardized bidding templates and wider deployment of category knowledge specialists that can bring insights before the auction begins.
Into the data
OK, so let’s look at some numbers to delve into what’s going on.
- Procurement professionals saved an average 4.8% using e-auctions in 2002 versus 4.6% in 2021. These numbers are well down on previous years, before the current crises, when double-figure percentage savings were frequently achieved. Also, there was a clear dampening effect on e-auction usage when Russia invaded Ukraine. But there are signs of a bounce-back: in Q4 of 2022, average savings leapt to almost 6.9% and from just-in Q1 2023 figures, that number swells to 11.3%
- The sheer scale in manufacturing and outsourcing in the Greater China region make it a dominant e-auctions player with a 78% volume share but the UK, India and Mexico all posted strong e-auction volume usage in 2022. Overall, global volume of auctions was up 9.6% on the back of a banner year in 2021 when volumes grew by 75%
- Reverse auctions continue to account for the bulk of the market with 85% by volume, compared to 11% in Japanese auctions (price decreases at intervals), 3% in forward auctions (eBay-style highest bid wins), and 1% Dutch auctions (price increases at intervals)
- Services is (and remains) the number one auction category by volume. In IT procurement we are already seeing examples where more complex software purchasing is being explored. For example, procuring penetration testing software is possible as it has a highly defined use case. Where CIOs are looking to adopt larger, multi-year implementations of enterprise software this is more challenging as it involves both tangible and intangible metrics, but there are routes such as Dutch and Japanese auctions that can be explored.
Working with procurement on strategic purchases
It’s encouraging to see a general maturation of the market and some sort of positive reaction to macroeconomic impacts but there is a long way to go. For example, it’s disappointing that procurement leaders are still not getting behind alternative auction types such as Dutch and Japanese that can also deliver high value. CIOs should engage with their procurement colleagues to understand how they could benefit from more sophisticated IT purchasing. This requires more upfront research but, by doubling down on Japanese and Dutch auctions, bidders may find prizes far beyond the dominant reverse auction alternatives such as ‘cherry-pick’ auctions. However, mature sourcing organizations will tend to use a blend of the above on horses-for-courses basis.
It's also important to consider auctions as part of the broad procurement mix. The sourcing expert and author of A Practical Guide to E-Auctions for Procurement, Jacob Gorm Larsen, has proposed the notion of “negotiauctions”: a combination of traditional buyer/seller negotiating to build understanding and explore bilateral value, and the automation/volume advantages of auctions.
Larsen is surely correct. Organizations that may once have feared damaging trading relationships through extensive use of auctions should aim to enjoy a combination of traditional and digital relationships. CIOs should not see e-auctions as tactical approaches and they need not lead to a race to the bottom on price.
Procurement chiefs need to think about the present and the future too. AI, Machine Learning, chatbots and a more algorithmic approach to auctions could further remove friction but, like any advanced form of automation, they will also require guardrails in the form of human control and experience.
E-auctions continue to offer the velocity, choice, and speed to market that organizations need more than ever, so don’t relegate them to a niche. It’s time to explore how they can release not just cost savings, but access to much needed skills and a momentum that changes the dynamics of markets and which liberates CIOs to extend their remits and think more creatively about sourcing and partnering.
