Auctions ‘slash prices and harm collaboration’

In the UK water industry, according to a recent poll, just one in three feel that internet reverse auctions are a good thing. Maureen Gaines reports on the newest way to win a contract.

Love them or hate them, internet reverse auctions (IRA) are here to stay. But how the water companies use them in terms of their supply chain and tendering procurement processes remains to be seen.

That was the message that came out loud and clear at the recent Internet Reverse Auction Conference, organised by British Water.

According to a straw poll taken among delegates at the start of the conference, only one in three felt that IRAs were a good thing. That view did not change when another poll taken at the end of the conference revealed a similar result.

One reason for this, according to one delegate, was that “people are afraid of them [auctions]”.

The delegate could be right as the conference heard from some speakers about how bad experience is giving auctions a bad name.

Then there is the sheer horror of actually participating in a reverse auction and seeing tens of thousands of pounds knocked off already very competitive bids to win contracts.

Steve Tansley, divisional director at Hydro International, told the conference that best practice should be in place where IRAs are concerned in order to have a process that “is fair for everyone”.

And he warned that suppliers bidding on reverse auctions should “have an absolute drop dead limit” otherwise they could prove costly – the auctions caused panic bidding created by their time constraints.

He believes the sole purpose of IRAs was to drive down prices. They also foster an adversarial approach to contract delivery, and reduced the appetite of collaborative objectives.

Speaking from experience, Tansley said that another area of concern is that, in order to put forward a very competitive bid, companies are getting their own suppliers to lower their prices. But these suppliers are then increasing prices for other orders to counteract their losses.

Scott Motley, partner at EC Harris, told delegates: “Bad experience is giving auctions a bad name.” But, he said, reverse auctions are now part of the negotiation process. “If companies specify well and there’s lots of dialogue in advance, then reverse auctions can work,” he said.

Motley added: “If companies specify well and there’s lots of dialogue in advance, reverse auctions can work. Getting the specifications right at the start is crucial.”

Emma Brooks, senior procurement specialist at the Chartered Institute of Purchasing and Supply, agreed. She said planning was vital as is allowing suppliers time to react to bids. “Price at the end of the day should not be the prime driver,” she said.

The conference heard from two water utilities about their experiences concerning e-auctions.

Larry Beard, director of purchasing and supply chain management Severn Trent Water (STW), said that there were several reasons for STW using this e-sourcing including streamlining current processes; reducing sourcing timescales by at least 50 days; improving relationships with key suppliers; and to create fair competition within the supply base.

Beard said that STW mainly used Ariba for its e-sourcing requirements. All tenders that were more than £75,000 go through Ariba, he said.

Nirmal Kotecha, head of supply chain management and alliance director at Anglian Water, agreed. He told the conference that Anglian Water “is experiencing more growth than any other utility, which has implications on the supply chain”.

His remit is to procure everything from basic essentials, such as office stationery, to “procuring and delivering civil structures and complex process plants”.

The conference heard that Anglian Water first used reverse auctions five years ago for landscape services. The utility spends tens of millions of pounds on electricity a year and has, until recently, used e-auctions to get the cost down.

But, while he is an advocate of IRAs for commodities such as office stationery, Kotecha does “not think they are viable” for capital projects or specialised services.

He questioned whether they will be in the future. According to Kotecha, the procurement challenge is greater than ever with shareholder priorities requiring more than just savings; regulatory and compliance constraints; rising pricing pressures; and significant pressure to deliver procurement value.

“Auctions alone will not help deliver these challenges,” he said.

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