Many years ago I was invited by a friend at PwC to a demo of an innovation-in-enterprise purchasing technology. At the time, I was working with Robbie Williams to develop a new strategy and business model for music artists so the invitation wasn’t exactly ‘rock and roll’, but I decided to attend nonetheless. What I experienced that day was my first reverse auction.
What is a reverse auction? Simply put, it is the same as an auction except that rather than buyers bidding up the price on an item, vendors bid down the price. In a regular auction, the market value of an item is based on the highest price a bidder is willing to pay for it. In a reverse auction, the value is decided by the lowest price at which a vendor is willing to sell it.
When I recently received an invitation from a client to participate in an auction for market research services, on reading the small print I became aware that it was, in fact, a reverse auction. We had been selected among 20 or so companies to bid to become a preferred global partner for research services – but what was being auctioned was our rate card. The two companies with the lowest average rate cards would be chosen to join their panel of vendors.
I was intrigued enough to accept the invitation, however, it made me question whether reverse auctions actually work in the procurement of services. Sure, if buying a commodity – where the quality of the product is standardised – then a reverse auction simply identifies the most efficient vendor. If the vendor is efficient and has a high profit margin, then they can afford to sell their product for a lower price. Yet, services are different, right? Services are performed by experienced and expertly trained people, and the output or ‘product’ is not standard and, in the case of research, often unknown.
Services as commodities?
Everyone running a business knows the time vs. quality vs. cost equation where you can ‘pick any two’. For example, you can have it quickly for extra cost (Amazon) or finer quality at extra cost (wine) or slower for cheaper (postage).
So, which is the objective of procurement? My assumption is that the objective is to buy the best quality research for the best price, but, if so, does a reverse auction achieve it?
Research is not a commodity; done well, market research can result in insights that affect the entire business. It may uncover an insight that highlights a competitive advantage that far outweighs the cost of the research itself. Any company buying research services wants to make sure that it gets the most value, so the quality side of the equation is not a negotiable lever. Quality is defined in the scope of work used by vendors to derive a quotation.
This just leaves time and cost, which, in the case of services, are connected and form the basis of the quotation that vendors offer to their clients. In this case, the rate card and charge codes represent the cost side of the equation in the quote (time x rate card = charge). All the client needs to do is to decide whether they want to buy or not at this price.
Yet, what would happen if a vendor bids down its rate card in order to win the auction? In order to maintain its margins, the vendor would either use a less experienced (cheaper) resource and/or increase the time the resource takes to complete a given task.
In either case, the result is likely to be that the charge will stay the same but quality will reduce, as the tasks are performed by less experienced people. Isn’t this exactly the opposite of the objective?
I shall go into the reverse auction process with an open mind but I suspect I know how it will end. When agencies are compelled to race to the bottom with their rate cards, they are effectively being incentivised to design lower-quality projects and deliver more slowly – leading to shorter-term, more volatile relationships with the client.
When the ultimate objective is to deliver improved efficiency and better value for money, it will be interesting to see who the winners are in the end – if indeed, there are any winners at all.
The author: Martin Brass is managing director and co-founder of creative marketing consultancy Blue Latitude Health. He can be contacted at martin.brass@bluelatitude.com
