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Effect of e-Auction or e-Negotiation on Buyers Time

A good negotiator can do just as well - True

There is no doubt that, given sufficient time, a skilled procurement professional can equal or better the results achievable through e-Negotiation. And therein lies the rub, time. It is common for procurement teams to prioritise work so that the strategically more important contracts are given more time and attention. It is estimated that up to a half of all contracts with a value of greater than $100,000 are not price negotiated. This is purely because of shortage of time and the resulting necessary prioritisation. The following actual example, witnessed at the close of an e-Negotiationis fairly representative:

Clock in office symbolizing the importance of saving time for business

Having just watched a 7 supplier, 40 minute auction achieve significant savings the excited CEO asked the buyer "How long would that negotiation have taken without an auction?"

Buyers reply: "It wouldn't have happened. I would only have had time to deal with the incumbent and maybe 1 or 2 others."

This scenario is not unusual and highlights the pragmatic approach that has to be taken by procurement professionals when allocating and prioritising their scarcest resource, time. But there is a downside. Shortage of time often results in a premature negotiation conclusion and a less than ideal breadth of suppliers. This in turn prevents the buyer from reaching the ultimate price achievable. One could argue that this is a hidden cost that the organisation pays for under-investment in the procurement function.

So whilst it is certainly true that experienced buyers are capable of matching or beating the results achievable through e-Negotiations, to the frustration of the committed buyer, it often fails to materialise due to limited time and other organisational pressures.

The more, the merrier

Take a look at this auction chart for an annual print contract:

Reverse Auction bid chart - Annual print contract

This is the bid chart as seen by the buyer. Each coloured line represents the live bids made by prospective suppliers. Suppliers (bidders) see only their current position in the bidding (1st, 2nd, 3rd etc).

The opening bids are on the left of the chart. This usually represents the quotations received as the result of a tender or some kind of request for quotation. This is the price the suppliers would ideally like to sell for.

In this auction, there are 16 prospective suppliers (their names are blurred for confidentiality reasons). Each of them has been pre-qualified as a viable supplier for this contract. However, you can't negotiate with them all, there just isn't time. You have to do some culling and make a shortlist of say 3 or 4. Your shortlisting criteria will probably be a combination of qualitative factors and their submitted quotations.

When seen in this light, the issue becomes clear. The culling process can result in the early removal of suppliers who just happened to 'guess wrong' when submitting their original quotation. An important part of the evaluation criteria, price, was based on the price the supplier would like to receive rather than the price they were willing to sell for. It is unlikely that red would have made it to the shortlist yet, by the end of the auction, they are in the leading cluster.

Whilst 16 is a large number of suppliers, even for an e-Negotiation(4-6 is typical), the price negotiation takes the same amount of time and effort as it would if there were only 3 or 4 suppliers. In this case it took about 1 hour to solicit more than 150 offers across 16 suppliers.

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