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Reverse Auctions: Bad Press Continues

June 3, 2009

The Times newspaper carried a scathing attack on Reverse Auctions in its June 1st edition. In an article entitled Elderly Left At Risk By NHS Bidding Wars, it implied that a relentless search for savings is resulting in dramatic shortfalls in service.

This accusation is of course not new. In previous blogs – such as ‘E-Sourcing – Does It Destroy Value?’ – I have highlighted the concerns felt by many about this ‘de-humanizing’ tool.  But as advocates of the technology suggest, it is not the tool that is wrong, but rather the way that it is used.

The Times article once more raises the challenge of ensuring that organizations operate with appropriately balanced goals and objectives. There are three key areas that need to be addressed.

First, if Procurement value is measured primarily on the basis of savings at the time of contract award, it is unreasonable to blame them if other business objectives are ignored.

Second, even if Procurement goals are broadened, it will take time for behaviors to change. Many times there is a lack of investment in skills analysis and training to ensure that staff are equipped with the wider skills required by a broader value delivery mission. This includes the need to maintain involvement – and accountability for results – throughout the relationship life-cycle. If they felt the pain of failure, they would be more interested in ensuring that it was avoided.

Third, I see the big problem with reverse auctions as being a failure to understand the fundamental difference between product acquisition and services acquisition. Products are tangible and their performance is simpler to understand and measure. Services require a much more sensitive understanding of the values and requirements of the users of that service. The need for greater dialogue between providers and users, the need for Procurement to be far more adept at collecting and documenting the scope and goals are two obvious differences.

Each year, IACCM collects data on the ‘most frequently negotiated terms and conditions’. Our members recognize that there are big problems today. Internal organization and measurements cause many Procurement, Legal and Contract Management groups to act more as arm’s-length auditors and risk managers than as efective consultants in aligning user needs with supplier capabilities. That results in a focus on terms that allocate risks and drive down acquisition costs, rather than on terms that generate value or encourage collaboration. Public sector procurement rules are especially damaging in this regard (as an IACCM survey in 2008 indicated).

Our research tells us that we know things must change – because the alternative is a continuation of failed relationships and negative headlines. IACCM has developed a clear “Agenda For Change”, highlighting the good practices that will ensure steady improvement. The big challenge is not reverse auctions or the automation of relationship processes; it is the failure by organizational leadership to drive the changes needed to adjust to a services-led, networked world.

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