What do selling departments think of all of this? Have they already done something to adapt to this new selling environment?
Huthwaite International conducted a global research study to identify the successful auction strategies and define a best practice approach for supplier participation. Their conclusions are the result of 39 in-depth interviews with global and national sales leaders from across Europe, the USA and Australia, d50 per cent of participating organisations have annual revenues greater than $5 billion and all examples were taken from private sector.
Huthwaite International’s research confirmed the fact that, from the supplier’s point of view , being invited to a bid is not always good news. The incumbent supplier might be at risk when a bid is launched. When the bid covers the products or services already provided by the supplier, the bid might actually be bad news. The study showed that only in 54.2% of the cases, the incumbent suppliers were successful in securing the contract.
Researchers also identified five common traps sales professionals fall into when participating to reverse auctions:
1. Strictly following procurement’s rules
2. Believing the lowest bidder wins
3. Believing the specification is accurate
4. Thinking the auction is the end of the buying process
5. Not taking a strategic approach to planning
Trap one: Strictly following procurement’s rules
Many of the invitations to bids include an entire chapter on the procedure to be followed. As a result, inexperienced sellers feel compelled to blindly follow the process. Indeed, an analysis of the case studies highlights that incumbents who followed the process strictly have reason to be pessimistic, as they were only successful in retaining the contract 41% of the time.
However, the research uncovered that incumbent suppliers can greatly enhance their chances of success by not following the auction rules set by procurement. Huthwaite uncovered three strategies commonly used when not obeying the rules – all of them sending the message of a powerful position and helping the supplier avoid the lowest price war.
The one bringing the best results is to make only one offer – best and final (and labeled as such) – online. This way the supplier asserts a position and keeps it until the end of the process letting the other participants to fight each other. As Huthwaite International’s research shows, this strategy brought success in securing the contract in 93.3% of the cases.
The next strategy in terms of effectiveness consists of making only one offer – best and final (and labeled as such) – offline. The supplier announces the intention of not participating to the electronic bid, but presents a proposal – hard copy and in person – to the client. As the study results shows, this strategy was successful for 85.7% of the suppliers using it.
The third strategy is to refuse participation. This is a quite risky one as only 28.6% of the suppliers using it managed to secure the contract. When the product or service was identified by the procurement as being a commodity, the supplier is easy to replace and this strategy fails. On the contrary, when solutions that make the object of the bid are rather unique and there is a small number of suppliers, one refuse might generate a bottleneck in the process and as a consequence the strategy is a success.
The solution is to follow the process but not slavishly and, when playing out of the rules, to communicate your intentions and set expectations upfront. If you decide to participate, a single powerful bid can be most effective. However, if there are only three bidders, refusing to participate might be effective, too.
Trap two: believing the lowest bidder wins
The lowest bidder wins – that is what procurement wants bidders to believe. It helps in getting lower prices as it encourages the bidding wars. The research showed that actually the lowest bidder doesn’t always win. In fact, in 92,3% of the cases the incumbent suppliers retained the business without being the cheapest.
There are many explanations for that:
1. being the cheapest sometimes means offering low quality;
2. sometimes the bid is put in place only to get lower prices from all the participants – the solution is chosen on technical criteria;
3. sometimes the technical evaluators have a lot to say and the procurement has to obey their decisions.
Trap three: believing the specification is accurate
53 per cent of reverse auction specifications analyzed during the Huthwaite International’s research contained ambiguous specifications that were open to interpretation by competing suppliers. This means every supplier might answer the requirement according to his/ her own understanding of the specifications, unless specifications are not clarified. If the suppliers have different interpretations of the requirements, the client will not compare like for like, and of course the most sophisticated solutions will be disadvantaged by their prices.
Trap four: thinking the auction is the end of the buying process
Only one in ten incumbent suppliers are informed, pre-auction, that post-auction negotiation is going to happen. Meanwhile, 88 per cent of incumbent suppliers are involved in further post-auction negotiations.
This shows that the auction is not the end of the buying process, but procurement is not always open about it. This a frequent trick used in negotiations (not only in auctions) – one of the parties let the other believe that they are having the final discussion and later (when the other has nothing left to give) announces that there is one more step: a discussion with a manager.
There are some clues that should suggest to the suppliers that further negotiations will follow: (1) the client reserves the right to award the contract to any participant; (2) procurement won’t commit on a day for the contract award; (3) during the auction, values of the other bids are not visible for the supplier. When seeing these clues, the bidder should prepare for further negotiations.
Trap five: not taking a strategic approach to planning
Both successful and unsuccessful participants spend significant man-hours (typically between 22-27 hours) on cost modeling calculations to identify a walk away price, in order to prepare for an auction.
Critically however, the average time spent planning a bidding strategy by successful bidders was 9.2 hours - three times that of their unsuccessful counterparts. Successful selling organizations plan also fallback options and bidding scenarios. They go beyond the usual cost modeling.
The numbers and insights of this article are based on the Huthwaite International study (2008-2009). Trend Consult is the exclusive partner in Romania of Huthwaite International.
