Many years ago I was invited by a friend, who was working at PWC at the
time, to a demo of an innovation in enterprise purchasing technology. I have to
be honest that at the time, Fred Bassett and I were working with
Robbie Williams and his managers developing a new strategy and business model
for music artists, so this invitation wasn’t exactly “rock and roll”.
Nonetheless, I decided to attend. What I experienced that day was a reverse
auction.
Fast forward 13 years. Blue Latitude Health is now a 70 person
company with global and regional clients from some of the largest companies
in the healthcare sector. These companies have developed very
sophisticated procurement departments whose role is to purchase products and
services in various categories at an optimal price.
An
invitation to race to the bottom
What is a reverse auction? Well, simply put, it is the
same as an auction except that, instead of a group of buyers bidding up the
price on an item, a group of vendors are bidding down the price. In a regular
auction, the market value of an item is based on the highest price that a
bidder is willing to pay for it. In a reverse auction, the value is decided by
the lowest price that a vendor is willing to sell it for.
Several weeks ago, I received an invitation from an agent of one of our
clients to participate in an auction for market research services. On reading
the small print I became aware that this was, in fact, a reverse auction. We
had been selected as one of 20 or so companies to bid to become a preferred
global partner for research services. What was being auctioned was our rate
card. The two companies with the lowest average rate cards would be chosen
to join their panel of vendors.
I was intrigued enough to accept the invitation and complete the
comprehensive RFI documentation that would qualify us in or out of the process.
However, it made me question whether a reverse auction would actually work for
the procurement of services at all. Sure, if you are buying a commodity, where
the quality of the product is standard (or within a range) then a reverse
auction will simply choose the most efficient vendor. If the vendor is
efficient and has a high profit margin, then they can afford to sell their
product for a lower price. But services are different, right? Services are
performed by people who are experienced and expertly trained and the output, or
‘product’, is not standard, and in the case of research, is often unknown!
![]()