The Evolution of Reverse Auctions

By Brian Miller, VP of Managed Services, Proactis

When astronaut John Glenn was asked about his 1962 space mission, he often said, “As I hurtled through space, one thought kept crossing my mind — every part of this rocket was supplied by the lowest bidder.” Common sense tells us that the cheapest option isn’t always the best choice. But in the early days of eSourcing, online reverse auctions  only returned price data. With no other value data available, Procurement teams were often locked into awarding contracts based on the lowest price.

Fast forward to the present and fortunately, reverse auctions have evolved.

The beginning of eProcurement
Through one of the first online eSourcing platforms, buyers could post a request for bids, suppliers responded with their quotes, and the buyer would then award the contract based on price, regardless of quality. This often left Procurement teams dissatisfied and devalued the supplier relationship.

This can be thought of as the “stone age” of reverse auctions. The bidding platforms weren’t very user-friendly and they were expensive to use. They didn’t allow suppliers to communicate their full value proposition, leaving the buyer blindsided.

Procurement professionals felt pressured to go with the lowest bid, and this funneled suppliers into a race to the bottom, which not only hurt their margins but led to inferior products and services. It also had the potential to harm buyer supplier relationships.

As a result, the reputation of reverse auctions was progressing in a downward spiral. They were thought of as a way for buyers to flex their muscle and get the rock bottom (or even below rock bottom) price.

Despite the past, reverse auction have drastically shifted and are now a strategic part of the procurement process.

Early Reverse Auction advancements
The development of more user-friendly tools improved the reverse auction process. Reverse auctions started gaining ground thanks to advances in technology and the learnings from procurement and supplier relationships. The procurement process became more transparent and collaborative and included greater feature functionality.

Procurement professionals noticed increased visibility not only in price but the supplier's entire offering. Suppliers could see if they were the lowest bidder and could adjust their bids to be the lowest price if that was part of their strategy. It also led to greater collaboration between buyers and suppliers.

The latest eProcurement technology
Reverse auctions are now an integral part of the purchasing process. The modern reverse auction is a fair and effective way to evaluate suppliers with full transparency. According to a study at the University of Arkansas' Information Technology Research Institute, over $400 billion of goods and services are procured using reverse auctions in the United States alone.

Because of the success and how they are performed today, reverse auctions have some clear advantages.
  • Reduced time needed for research. Suppliers can make clear the best features of their product or service in the bid, volume discounts, rebates and incentives. You can then make informed decisions about which is the best solution that fits the needs of your business.
  • Immediate price discovery. Since suppliers compete for your business, it takes the legwork out of finding information and pricing. If you're looking for a new product or service and don't have any historical data on it, you have immediate access to price, quality, and different options.
  • More efficient procurement process. Auctions have an end date, so the procurement process can happen in days, not months. The lengthy time of back and forth emails between tons of different suppliers is eliminated - providing complete visibility for suppliers and an expedited process for buyers.
  • Increased competition. You now have more options. Remember the suppliers that are always asking for a chance at your business, but you don't have time to vet? This not only gives them a chance to win your business but gives you better insight to the market rather than continuing to run with the status quo.
  • Better-informed decisions. You can make better decisions that go well beyond price to consider additional factors such as supplier innovations, service levels, quality, delivery, support, the value of the relationship and more.
eProcurement tools are now offered in software-as-a-service (SaaS) subscriptions or as a Managed Service, offering Procurement teams more flexibility.
  • Simpler intuitive interfaces.
  • Dedicated Account Executives to help execute bids.
  • Automated processes.
  • Customizable dashboards.
  • Real-time collaboration.
  • Ability to take complex, high volume categories to bid.
  • Transparent and fair processes.
  • Auditability and documentation.
The newest reverse auction processes streamline corporate buying, giving you both savings and reduced supplier risk.