Going once, going twice

FOR MOST COMPANIES, material and service sourcing still represent the lion's share of their total expenditures. That explains why so many companies continue to invest in supply-chain technologies, despite the fact that funding remains an obstacle in the current economic climate.

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The b-to-b e-marketplace, once seen as the savior of the New Economy, has more recently tumbled to a less desirable role as an incomplete, cost-prohibitive failure. But the dream isn't over yet. Private marketplaces are making a resurgence, and alternative approaches, such as reverse auctions, are proving their worth at reducing expenses.

In a reverse auction, a buyer posts a request and suppliers bid for the job. The buyer gets to choose from multiple offers, and because the process is typically browser-based, setup costs and training are minimal for both parties.

But reverse auctioning has drawn sharp criticism for its tendency to strip the buyer-supplier relationship of many value-added benefits available through direct negotiation, such as (for buyers) price discounts on multiple contracts or (for sellers) extra credit for providing timely, high-quality service. That's why reverse auctions are best suited for circumstances in which the product is reasonably commodified, meaning that one vendor is as good as the next.

In response, many e-marketplace auction houses have begun offering bidding criteria more complex than mere price comparisons, thus enabling buyers to more accurately gauge a bid's true value.

Reports have also abounded of new suppliers purposely underbidding projects to win business, even at a loss, in hopes of garnering future contracts. Of course, that strategy was ill-conceived right from the start, since winning an initial bid doesn't necessarily guarantee anything the next time a buyer puts out a reverse-auction request.

Buyers have learned that reverse auctioning itself is not the pitfall. Rather, a buyer must consider which contracts to put out to auction and identify the ones that best serve supply-chain value by building solid vendor relationships.

Depending on your long-term demands and in-house expertise, you have the option of building your own auction or hiring a firm to host it. Several private marketplace platforms, such as the one from Moai Technologies, provide good auction and e-negotiation tools for the long haul. But if you don't plan to incorporate auctions into the day-to-day operations of your business -- or if you're simply not prepared for the up-front costs and ongoing IT investment -- you can always outsource to a hosted auction service through a company such as GE Global Exchange Services (GXS) or Accenture. That way, you can launch your auction in a fraction of the time and realize faster ROI through per-event and subscription-based pricing.

The chilly economic climate may be forcing your company into conservative spending habits, but that shouldn't preclude you from exercising some nontraditional innovation. If used judiciously, strategic e-sourcing can give your company a distinct competitive advantage: E-auctions reduce sourcing overhead and improve profitability without much up-front investment. So even if b-to-b auctions have gotten a black eye recently, the idea behind them remains as valid as ever.

Is your company currently employing auction-based sourcing? What services are you evaluating? Write to me at james_borck@infoworld.com.