A client asked me a very timely question today – whether it’s acceptable for buyers to increase their use of reverse auctions in these economic times. Like many other organizations, our client is experiencing downward revenue pressure and would like to explore the possibility of responding by cost cutting. Throughout my career, I have had to answer this question. When, if ever, is it OK to push suppliers to help your organization cope with shrinking margins? The unspoken issue in this question is whether such behavior will cause suppliers harm by driving unsustainable margins, layoffs, bankruptcy, or worse. I advised our client to go ahead and increase their use of reverse auctions.
The thinking behind my answer is this: as buyers, we cannot be responsible for the decisions of our suppliers. We cannot check their bids and make sure that they are not too low. We cannot decide for them what the will or will not do to thrive. Our organizations’ customers are in the same boat. They do decide to renew a Gartner contract because they are worried about us or feel sorry for us. At the end of the day, our organizations are separate entities and our loyalty must lie with our stockholders and management. We must not refrain from competitive bidding because we are afraid our suppliers will do something foolish.
In fact, we as buyers owe our organizations our best effort to secure competitive costs. And so, we must rely on our suppliers to tell us when they can move and when they can’t. This doesn’t mean dictating to them that they will reduce their costs by 5% every year, whether they like it or not. It does mean going to market as appropriate and requiring suppliers to submit their best deals.
But a word of caution – reverse auctions can be misused. They are a powerful tool and in order to perform fairly, I advise a few basic guidelines:
- Do not invite any supplier to bid unless you are sincere that you would award them the business if they provide an attractive offer.
- Communicate throughout the process with prospective suppliers. Let them know how you will use reverse auction results and when you plan to award the business.
- Do not reverse auction your requirements if you do not intend to use price as a decision factor (not THE decision factor – A decision factor) in your award decision.
- Do not allow prospective suppliers to submit additional bids after the event is over. This smells like bad business – and makes it look like you used the auction to get your incumbent supplier to come down.
So go ahead, procurement, do your job and do it with your head held high! But above all, be fair and ethical.