Going, Going... Gone
- Published: May 01, 2003, By Jan Stoddard, Raine Consulting
These days converters are challenged by new e-procurement strategies—e.g., reverse auctions—as buyers try to drive down costs and manage their suppliers.
In 2002, 93% of US companies witnessed some of their business flow over the Internet. Nearly a quarter of these companies pushed most of their on-line trade through e-marketplaces. By 2004, 7% of the goods and services bought by large companies around the world will be acquired through a downward auction, which equates to a projected $1 trillion in auctions—$611 billion US and $409 billion internationally. While projections of auction transactions and adoption rates vary, more companies are adopting auction strategies. One such company is Quaker Oats, which claims to have saved $8.5 million since 1997.
Reverse Auctions’ Research
Reverse auctions represent the process of “selling in reverse.” The two parties, buyer and seller, reverse positions: It’s the buyer who drives the event, in effect “selling” their next year’s forecasted requirements to the bidder (or bidders) most able to meet the buyer’s terms and conditions. The price starts high and moves downward.
In managing an auction scenario, it’s necessary to understand how reverse auctions work (both the technology and the process) and also to know the perceived added value from the buyer’s perspective. Raine Consulting recently completed a white paper entitled Strategies for Surviving Reverse Auctions for the e-Business Council of Printing Industries of America (PIA). Raine conducted an e-survey with 50-plus key purchasing and supply-chain managers from Fortune 1000 companies that represented an economic cross-section. In addition, converters, packagers, and printers from throughout the US were surveyed for the supplier’s perspective and experience.
Interviews with both buyers and converters indicate the move to using reverse auctions is, at times, a “top-down” directive, with little or no input from the buying organization. Senior executives want to capitalize on the promised savings in the 20%–25% range (non-published numbers are more impressive, reaching more than 50% in some cases) across all spend categories, both direct and indirect. Other results from the e-survey include:
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The most frequently purchased types of products (80% of the respondents) were printed marketing materials (flyers, brochures, etc.) and packaging. This was followed by low-complexity products, such as one-to-two ink color products, business stationery, and forms. What proved interesting from survey results is that even the more complex printed products, such as direct mail and annual reports, still were being offered via reverse auction.
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“What types of technology are you using to purchase via reverse auctions?” When Raine asked participants this question, the answers were quite varied. Less than 15% of those responding indicated using a large auction provider such as FreeMarkets, eBreviate, or ProcureNet. Approximately another 25% indicated they were utilizing a “more print- or packaging-centric” provider such as Transora, Noosh, Servador, or they still were working with these suppliers to find a solution. More than 30% of the respondents indicated they were working with e-procurement or ERP providers (such as Ariba) to build print-specific interfaces. Another 20-plus percent were working from in-house, “home-grown” applications. The remaining 10% were buyers that wanted their technology source to remain confidential, seeing this as a competitive advantage or adherence to corporate policy.
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The survey also asked buyers: “What benefits have you received from reverse auctions, or what benefits do you anticipate?” None of the respondents indicated they expected a significant cost savings (in excess of 50%). Most of the respondents were looking for some cost reduction (up to 25%) as well for the opportunity to reduce time and cost in their own purchasing operations.
The Two-Minute Free Fall
One supplier describes his first reverse auction experience as “like jumping out of a plane without a parachute and knowing you are going to hit the ground in just a few minutes.” In his case, within just two minutes of the bidding, the pricing for a color brochure had plummeted below what he had determined was the cost of the materials—with no markup. Other suppliers echoed these same feelings.
Despite this frightening “free fall” reality, it seems reverse auctions and e-procurement strategies aren’t going to disappear. Hopefully, they will become a meaningful tool that takes into account all of the cost variables—consultative selling, complex process management for data and content, quality and delivery requirements, and the other “value-add” services—that too often aren’t quantified.
Many of the converters and printers Raine interviewed are creating proactive company strategies for dealing with reverse auctions. Other companies are identifying the “niches of print products” that require more consultative selling, unique knowledge, and experience. For example, personalized direct mail requires both detailed planning and flawless execution to move a customer from raw data to print to meeting USPS requirements.
Still others are focusing internally to determine what they can “productize”—based on a combination of material, equipment, and employee configurations—so they can go out and seek work aggressively in the auction marketplace.
The Bottom Line
If you have any customers within the Fortune 2000, or if you do work for a local or regional office of a large company, your chances are one in four the customer will be using reverse auctions in 2003. However, as the auction technology continues to be more accessible and better designed for small- and medium-sized companies, even your large, local customers may consider it by 2005.
In the recent McKinsey article, Fight for Your Price, their client experience showed the supplier sales reps and managers often have only a vague understanding of their customers’ economics. This makes them vulnerable to competitors, auctions, and professional outsourcing organizations.
The converting industry has been devastated with price decreases, so one of your best weapons to maintain profitability is to know your customers’ economics. Spend time consolidating vast amounts of information on only your best customers, and then turn economic and customer data into specific pricing strategies and sales contract negotiations.
For a copy of the latest PIA-commissioned study titled Strategies for Survival of Reverse Auctions, please visit raineconsulting.com.
YOUR BEST DEFENSE IS OFFENSE
To survive and even succeed in reverse auctions, you must:
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Know as much or more about the auction process than the buyer. This means the auction supplier, their technology, and auction process. It is critical to PRACTICE it before any event.
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Be prepared. Have your own team of experts and all information ready (acceptable pricing, competitive landscape, importance of that customer).
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Have your logistics covered (right room, right equipment).
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Plan your game. Set your strategy. Stick with your game plan.
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Continue to sell on a tried-and-true consultative level. People eventually buy from people.
© Raine Consulting
Supplier Info
FreeMarkets Inc., Pittsburgh, PA; 412/434-0500; 888/434-0500; freemarkets.com
eBreviate, A.T. Kearney Procurement Solutions Inc., San Francisco, CA; 415/912-5200; 888/eBreviate; ebreviate.com
ProcureNet Inc., Great River, NY; 631/859-6000; procurenet.com
Transora, Chicago, IL; 312/463-4000; 877/872-5984; transora.com.
Noosh Inc., Santa Clara, CA; 408/617-6000; 888/286-6674; noosh.com
Servador Inc., New York, NY; 212/791-6300; servador.com
Ariba, Sunnyvale, CA; 650/390-1000; 866/77ARIBA; ariba.com
Jan Stoddard is director of business optimization at Raine Consulting Inc., Glen Ellyn, IL. She has in-depth knowledge of both buy-side and supply-side perspectives derived from 19 years of print media experience. Her current focus includes e-procurement, creating “lean” operations, and implementing project management practices in print media companies. Contact her at This email address is being protected from spambots. You need JavaScript enabled to view it..
