by Catherine Simpson, Exec. Director – Fort Worth

Women’s Business Center and Tom Pryor, CEO – ICMS

A few months ago, Congresswoman Kay Granger held two Power Breakfasts with some of the members of the Fort Worth Women’s Business Center’s Advisory Council. She asked these business owners what some of the issues were that they were facing. One of those issues seemed to stand out, reverse auctions. Congresswoman Granger had her staff immediately research the topic. In the meantime, one of the Business Assistance Center’s Board of Director’s has done his own sleuthing and I asked him to share with you what he has found. Below are Tom Pryor, CEO of ICMS, findings:

Thanks to eBay, auctions have become a popular form of commerce. For decades auctions were limited to estate sales, wholesaling of cars and courthouse step foreclosure sales. Widespread use of the Internet and the popularity of eBay have increased the acceptance and use of auctions.

On eBay, people and companies post items for sale. The first person seeing and wanting the item places a bid. If another person wants the item, they must offer a higher bid. Seller and buyers keep watch on the item’s price until the auction ends at a pre-defined date and time. Internet auctions have become an efficient, effective form of commerce.

A new form of auction is growing in popularity. It’s called a reverse auction. As its name implies, bids go down instead of up. There is one buyer and lots of bidders, each trying to win the buyer with a lower price.

Reverse auctions began to achieve fame when General Electric claimed $600 million savings in 2001, a net savings of 8 percent. Reverse auctions in the government sector (e.g., GSA, DoD) and amongst big box retailers (e.g., Home Depot, Target) have resulted in savings of 12 to 48 percent.

Reverse auctions offer other benefits. They’re visible. Nothing is hidden. Bids are displayed on the PC screen of both buyer and bidders. And because the price goes down, reverse auctions encourage management teams to become more knowledgeable about their costs and waste.

Reverse auction savings are compelling but there are pitfalls. Fort Worth contractors Edith Stanfield of S&J Electrical and Fran Loyd of Woodrose Company both feel reverse auctions inflict damage to the buyer-contractor relationship and place small contractors at a cost disadvantage. Loyd says, “Large general contractors can spread the cost of business insurance across a larger base of revenue than a small contractor.”

Others share Stanfield and Loyd’s opinions, including the Associated General Contractors, American Subcontractors Association plus David Stec and Bob Emiliani of the Center for Lean Business Management. In a paper published in 2002, Stec and Emiliani argued that online reverse auctions rarely deliver savings that are as great as advertised by auction service providers, stating “reverse auctions are toxic for buyer-supplier relationships.”

Actions can be taken to make reverse auctions less toxic for all parties involved:

• Follow the Golden Rule… Buyer and bidder should treat each other as they would want to be treated.
• Add time, quality and integrity… Bidders should add to the reverse auction equation numerical values on each bidders track record for meeting deadlines, delivering quality and business practice integrity.
• Spread the pain… Most bidders shoulder all the responsibility of responding to the reverse auction. To lower stress and encourage teamwork, bidders should expand participation in the reverse auction to their subcontractors and raw material suppliers.

I have known Tom Pryor for a long time. His company, ICMS, goes into businesses large and small to help them put value into each activity – otherwise known as activity-based management. He and I have discussed how activities like reverse auctions can give, especially small businesses, a false sense of success. Is it really great to win a bid when you later find out you have lost money? If you have not put a price on yours and employees time that is not an unrealistic situation. It is easy to keep bidding lower and lower just as it is with eBay to bid higher and higher. You get into a competitors mode and forget to set a minimum or maximum bid and it may be days later that you realize you really didn’t need that item or that you will lose money in getting the contract.

I wish I could tell you that I don’t understand this personally, but I have had to make myself stay off eBay the last six months, cause I found I am more competitive than I realized. My advice to you if you are a company that really wants to help support small business, you may want to reconsider doing reverse auctions. If you are a small business, I suggest you attend the Entrepreneur Expo, March 12 and learn how to manage your business effectively and efficiently so that you don’t get stung by the auction bee.