Why E-auctions Fail for International IT Hardware and Accessories Purchasing 

Reverse auctions in B2B purchasing are on the rise, there’s no denying that. 
There is an important role for reverse auctions for some products and circumstances, but not for IT hardware and accessories. 

There is an important role for reverse auctions for some products and circumstances, but not for IT hardware and accessories. 
Why not? 
We will get to that, but first let’s examine the current situation and reasons for the rise. 

The Rise of Reverse e-Auctions 
Award winning, and highly respected, Scout produced a whitepaper, Modern Reverse Auctions Are Simple, Fair, and Effective (2019) 
In it they claim: 

-Reverse auctions and the technologies that support them are not what they used to be and that the right technology can now power much more flexible, fair, beneficial relationship for all involved.  
-Reverse auctions impact the bottom line by increasing the efficiency and cost savings of procurement.  
-95% of procurement leaders age 30 to 44 use reverse auctions for a variety of reasons, namely cost savings, reduced negotiation times and price testing the market. 

However, in another Scout infographic they openly admit the main complaints: 

-They can be time consuming 
-Selection based on lowest price alone isn’t the best solution 
-Buyers don’t like them 
-You risk decreased quality 

Supply Chain Dive recently (2019) pointed out that in “Scout's global survey of 100 procurement professionals, 62% said they are "only good for certain scenarios." The report notes auctions work best in a buyer's market where suppliers will be naturally more willing to sell their services and compete. The report says firms should make sure they have "clearly defined specifications that don’t vary much between suppliers, such as certain commodities and simple services," as that will help weed out supplier bids that don't meet specifications.” 

The Reasons for The Rise 

Speed 
"A reverse auction takes about 10 to 15 minutes to set up and about 20 minutes to manage," Brish Bhan Vaidya, global sourcing leader at Uber, told Supply Chain Dive. "[Previously] negotiations could take one or two weeks to complete." 

Product Price 
Unquestionably a reverse auction appears to give the best possible price and according to Deloitte's Global Chief Procurement Officer Survey (2018) 78% of procurement leaders said their number one priority was to reduce costs. 
 
Access 
Reverse auctions draw more suppliers in. Newcomers have an opportunity to bid (and often bid at “too low” prices just to get a “foot in the door” and become a supplier for strategic reasons –but that’s another story). 

Market Efficiency 
This one is a clear benefit. The ability of a market to engage buyers and sellers in an open environment (or marketplace) provides critical indicators to the true value of a product or service. Online reverse auctions do that very effectively. (Markit does it even better though with real time price comparisons from 80%+ of the IT marketplace, try us.) 

It’s Digital 
Companies increasing want to move away from legacy systems for obvious and good reasons. Reverse auctions “tick the box” of digitalisation and innovation. This can appear to be very attractive step-in-the-right-direction. 
 
                                                                    But as with anything. Caveat Emptor. 
 
“Reverse auction works best for commodities which have attributes that are well definable, and price is the dominant portion of their values; in markets with high degree of competition and rivalry among suppliers, with excess capacity; and when the buyer-supplier relationship is characterized as transactional exchange.” 

When price is the dominant portion of value – that's the key statement. 

Not my words. These came from an academic study, Reverse Auctions: Benefits, Challenges, and Best Practices (2008)  
Whilst that paper is over 10 years old the finding is just as valid today.
 
In plainer English, as Giorgio Luciani, Markit’s Country Manager in Italy, interprets it so: 
“Reverse auctions are great if you want to buy screws, or maybe even software, but NOT for IT hardware and accessories. The IT hardware, accessories and consumables market is highly fragmented with an ever-expanding product range and ongoing price drops in every segment. These factors, and others, are not conducive to a reverse auction model for IT purchasing.” 
We have been tracking our clients’ IT spending patterns over the past 11 years (2007-2018). 

There were significant and continual product price decreases*, for example: 
-Laser printers –76% 
-LCD  Screens –58% 
-Desktops – 63%  
-Laptops –66% 
*Based on average invoiced prices. 

At the same time the distinct number of products ordered across a large sample of clients over the same period has increased by 540%. 
(IT accessories form a large part of the increase e.g. headsets.) 
 
Why are Reverse Auctions Bad for IT Buyers? 
 
They Threaten Strategic Relationships  
In order to maximize efficiency and effectiveness in the IT supply chain best practice involves a focus on strategic relationships and partnership with suppliers. An excessive focus on price moves both parties away from the close partnerships that traditionally work well for both buyers and sellers. 

Higher Total Cost of Purchase  
The time (time is money) needed to consider all the hidden non-price factors in the total cost of purchasing of IT accessories (SLAs, delivery speed and accuracy, quality of service (warranties and customer support in general), flexibility of supply etc.) is significant. Calculate the time involved in this due diligence process and the price becomes a secondary factor for most IT purchases. The learning process of adapting to a new supplier take time too. 

Risk 
Often to win, a supplier must cut their margin to the bone leaving little wiggle room for unpredictable situations or high levels of customer service threatening painful cost further down the line if problems arise with supply or product quality. 
In order to win the bid, a supplier must lower its margin to a bare minimum. With such a low margin, there is no room for any adjusting and adapting to unforeseen situations. Also working with a new low-cost supplier has a learning curve and the time needed for that pushes up the total cost of purchase. 

Damage to Your Own Supply Chain 
Even if you make product price savings on your first e-auction experience ultimately a stable price level or trend will emerge. Significant cuts are not sustainable because market inefficiencies will ultimately fade away. As a result, some excellent suppliers (quality/service/price combination) will fail in the marketplace or be “consumed”. This reduced the supplier pool. Clearly this would lead to less competition and a strengthened position for suppliers, not buyers. 

Maverick Spending Increases 
Since the IT category is very fragmented, it’s impossible to apportion e-auctions to a significant percentage of your annual spend. It might work well for a large order of laptops, but what about for smaller volumes of accessories or consumables, especially spread over different country markets? The result is that the long tail gets spent through local unauthorised suppliers with unknown SLAs and service quality etc. The pure cost of these accessories is likely to be significantly higher than optimum. And so. the massive long tail cost losses (in time and money) outweigh the immediate price cut benefits occasionally found in e-auctions. 
Read more about maverick spending in IT purchasing.

No Guarantee of “Best Price” 
One would assume that an e-auction would provide the best market price, but the reality is often different, especially in the IT sector. The fact is that vendors often single out a preferred reseller and give them a lower price (higher potential margin). This preferred reseller may be the incumbent or a new supplier who has made the pitch.....specifically and most important point related to the IT channel: if the auction is among resellers and related to a very specific product of a very specific brand, this is what happens (we verified it in Italy): the brand knows it’s not being challenged, so they apply a higher margin than they would do if they were compared to other brands. Then the brand usually gives a special price only to one of the resellers competing in the auction (the favourite one, the one who suggested the brand to the customer, etc) and the reseller knows it has the best price, so the reseller can apply a higher margin than they would do in a normal quote comparison. 
With IT accessories, usually e-auctions are used to fix prices for future orders. When a future order is actually placed, the prices will already be out-dated and probably actual market prices will be lower. 

Hidden Costs 
Hidden costs are usually a big part of total cost of purchasing of IT accessories: SLAs, delivery times, quality of service (warranties), etc. 
The whole full quantity purchased by auction will be probably be split in different orders, so the auction  can’t include exact delivery costs, so that suppliers may simply “cheat” by offering a very low price per unit and then take the profit from delivery costs (especially true for products with low price per unit). 
The whole e-auction procedure requires extra time investments both to the customer and to the supplier and for smaller revenue lines (e.g. IT accessories), it has a big impact on the total cost of purchasing, both for the buyer and for the supplier. Even if the buyer manages to do the e-auction efficiently (like in a semi-automated way), there’s no way for a supplier to win the auction price-wise while not investing a lot of time in it. So eventually the supplier will have to find a way to cover the cost of the time spent in the extra work of the auction. 
 
Why are They Bad for IT Suppliers? 
Buyers Acting Opportunistically 
Some suppliers feel the process is exploitative and unfair, so they avoid such events. These negative impressions can contribute to a loss of trust in the buyer, which can risk the long-term relationship. In some cases, participating in e-auctions “with negative feelings” can reduce the supplier’s non-price performance.  

Risk of New Entrants 
New entrants may not fully understand the customer’s needs and may bid an unrealistically low price to win. A price they regret. 

Reducing IT Products to Commodity Status 
Often a reverse auction does not allow a supplier to show their distinct advantages in terms of SLAs, delivery speed and accuracy, data transparency and so on so their service can appear to have no value and the product is seen as a commodity. 
 
 
                                                                         So, What’s the Solution? 

IT procurement and purchasing leaders in international companies want trusted, reliable, stable suppliers who can provide lower prices, wide market access, huge product choice, online/digital solutions that integrate with their in-house systems and let’s not forget international coverage, centralised purchasing, data transparency and fast accurate deliveries. 
They “want it all”, and rightly so. That’s how they will succeed. 
A dream perhaps for many product categories but not for IT. 

That’s what we do at Markit, since 2003, help companies succeed by reducing the total cost of their IT purchasing in 33 countries, for 20+% of the Global Forbes 2000. 

Time to talk perhaps? 
 
 
For further reading you might also enjoy this piece highlighting some of the pros and cons of reverse auctions in general and the very real threat to good supplier relationships.  
Are Reverse Auctions a Threat to Good Supplier Relationships?