Steven Zolman

Jul. 19,2011

For many years, so-called industry experts have advocated reverse auctions as a means to commoditize highly differentiated solutions like we often see in technology buying.  The thought is to document your requirements, build an ‘apples-to-apples’ comparison of multiple solutions, and reverse auction the buying process to get the best price.  Proponents suggest that these techniques will ‘devalue’ the differentiations of the competing solutions, and Clients will benefit from increased economic value at the point of purchase.

However, our research seems to contradict this so-called conventional wisdom.  As NET(net) has compared the results of Clients who have purchased through reverse auctions, we have found that the process of reverse auctions has actually increased Client costs, by 3-5% even when compared to unilateral supplier negotiations.  As NET(net) has discussed this with Suppliers, they have told us that they prefer the process of negotiations because it offers a greater ability to do solution engineering with the client, fostering an improved relationship, focused on value for the long term.  Often times, Suppliers are more inclined to give their best prices to the clients with which they partner most effectively and if clients can build a compelling business case that can convince a supplier to see the long- term benefits of a proposed solution, it often times gives the Supplier the ammunition they need to justify steeper discounts upfront.

Given the fact that your organization is more likely to move wallet and market share to preferred Suppliers who not only offer valuable solutions with balanced strategic and economic value, but those who also service and support their solutions effectively, it makes sense that an improved relationship through negotiations (as opposed to a procurement exercise of reverse auctioning) will improve overall supplier performance, fostering greater value.

Suppliers that are forced through procurement exercises like reverse auctions often view the relationship with the Client less favorably than those who instead choose to maintain relationships through discussions about business plans, technology roadmaps, and product needs.  Ultimately, the Supplier is looking for ways their products will help you satisfy your objectives, and they will be less likely to offer market best pricing concessions if the relationship seems less valuable to the Client.

Clients are advised that if they want to motivate their suppliers to provide best in class pricing, it’s better to start the relationship with a conversation about business requirements, technology roadmaps, and product needs.  If the Supplier views this as a discussion where they can highlight their capabilities and can differentiate themselves, as opposed to a competition where they have to compete on price and delivery alone, they’ll be more inclined to offer best in class pricing discounts in the hopes of establishing a repeatable revenue stream.

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