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e-Negotiations Explained

or...e-Negotiations '101'

In this section you will gain an understanding of how e-Negotiations (reverse auctions without a live award) work and some guidance on when to use them and when not to.

A common misunderstanding is that e-Negotiations are used as a stand alone procurement tool. This is rarely possible or even desirable. e-Negotiations are used in conjunction with a fully specified set of qualitative criteria and come in towards the end of the procurement process. If a tender is weighted 70% qualitative, 30% price, the e-Negotiation simply and very efficiently negotiates the price component with those suppliers who have met the qualitative bar. Following the e-Negotiation, the qualitative results and final pricing are combined for each supplier to determine the best value for money submission.

The bid chart

The screen shown below is the buyers bid chart. This is not visible to suppliers. This chart is the focus of every e-Negotiation. The chart builds dynamically, from left to right, as the auction progresses.

e-Negotiations come in a number of varieties. This one is a 'positional' e-Negotiation. That is, the supplier is only aware of their position - 1st, 2nd, 3rd etc. Another common type is a price auction where suppliers can also see the value of the leading bid. Many variations on these themes exist in order to enable optimisation of the outcome for the buying organisation.

A typical e-Auction bid chart

Each coloured line represents a supplier and their bidding history. It declines in steps as suppliers steadily lower their prices as they hunt for the leading position. As described above, each of the participating suppliers has been prequalified using some kind of tender process.

Duration and extensions

You will also notice the grey bands on the right. This is the extension phase. During this phase, any new leading bid will automatically extend the auction for a pre-determined time, usually 3 to 5 minutes. This allows competing suppliers time to respond to the new leading bid. The auction will keep extending until all bidding is exhausted. This is the same as the "going, going, gone" period in a traditional auction. If you are familiar with eBay or other dead stop auctions, you will be aware of the concept of 'sniping'. This is where experienced bidders hold their bids until the last few seconds of the auction with the intention of preventing a responding bid. In a high value tender situation a dead stop would mean that the best price may not have been reached because the bidding has not been exhausted and suppliers have strong grounds for complaint if they still have better pricing to offer.

A typical e-Negotiation will run for 30 minutes to an hour. This is because longer periods usually provide no additional benefit. Where e-Negotiations run over a period of days , the action tends to take place in the last 30 minutes and particularly in the extension periods.

What the suppliers see

The suppliers screen is designed to be very simple. This is to make it easy to learn and use and to reduce the possibility of making an error. The only things the supplier can do is adjust and submit their bid using the bid buttons. They are unable to see how many other suppliers are participating or their identities. The information visible to them includes a line or table showing the items they are bidding on, the time remaining and their current position (1st, 2nd, 3rd etc). If it is a price auction they will also see the value of the leading bid but not the identity of the bidder.

Prudent use

e-Negotiations are not suitable for everything. However, there is a common misconception that e-Negotiations are only suitable for commodities. Whilst they are certainly suitable for commodities (given an unconstrained market) the more accurate and useful definition of suitability is goods or services that can be clearly specified. This means that a wide array of goods and services can be, and have been, successfully negotiated through e-Negotiation. In fact the birth of reverse auctions, by GE in 1994, was for the manufacture and supply of engineered parts from GE's fully specified drawings. The ARCUS e-Auction system has successfully auctioned items such as MRI Scanners. Neither of these examples can be considered commodities but they are both clearly specifiable.

Further examples of the variety of goods and services that have been successfully negotiated through e-Negotiation are shown in the Industries and Examples sections of this site.

The 3 questions

In order to consider a contract for e-Negotiation the following 3 questions must be satisfied:

  • Can the goods or services be clearly specified?
  • Is there adequate competition and an unconstrained market?
  • Is the value of the contract high enough to justify an e-Negotiation?

Adequate competition refers to both the quantity of suitably qualified suppliers and the nature of the competition between them. So how many is enough? Some excellent results have been achieved in 2 supplier auctions but it must be very obvious that they are genuinely and strongly competitive with each other. Usually auctions are run with 3-6 suppliers. A general rule of thumb is "the more, the merrier".

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