Publisher’s Note: Today we welcome our first “Monday First Thing” guest “contributor to the fold. And we couldn’t be more pleased than to start with Jacob Gorm Larsen, longtime “friend of the site,” and a onetime Keynote Speaker at our annual CPO Rising Summit. Jacob is also the director of digital procurement at Maersk Group and a real-life innovator in the procurement field.
By Jacob Gorm Larsen – Director of Digital Procurement, Maersk Group – Copenhagen, Denmark
Looking back on 2018, many procurement departments have experienced information overload with regard to concepts like Artificial Intelligence (AI), Big Data, Robotic Process Automation (RPA), and so on. This development often leaves procurement functions more confused regarding where to start with digital transformation and how to prioritize the opportunities that it brings.
To better understand these challenges and opportunities, it is worth taking a moment to reflect on eAuctions, the first “digital” solution that celebrates its 25th anniversary in 2019. After a quarter century of use, I believe we can learn a great deal from the impact eAuctions have had on the procurement discipline. In many ways eAuctions followed a traditional model for digital transformation – they were initially developed to make the sourcing process more efficient and, following the initial automation phase, new value propositions emerged as an outcome of the digitized process. I will return to this point later.
Today’s article is the first of a two-part series on the legacy of eAuctions. In Part One, I salute and recognize the eAuction concept and the many individuals that have contributed to its development during the last 25 years.
A Quarter Century of eAuctions
Since the introduction of eAuctions, many myths and opinions have been shared about the value add of digitizing negotiations for procurement organizations. Some people love it (I am one of them) while others flat out deny its value add to negotiation processes.
After facilitating thousands of eAuctions every year for more than a decade, across many different industries and geographies, I am fully convinced that organizations that adopt eAuctions realize substantial cost savings, a significantly improved data foundation on their negotiation processes, and significant process-related savings.
Over the years, usage has varied, usually driven by many factors including the economic climate. But, today, it is clear that eAuctions are widely-known and accepted as efficient and effective negotiation methods and that teh solution is adopted in varying degrees by most leading procurement organizations.
Despite the maturity and value add, I often still find myself in heated discussions around the value and feasibility of adopting eAuctions. Considering that the concept has been around for 25 years, I am often surprised by the change management efforts that are still required, the lack of knowledge about eAuctions, and the number of misconceptions that still exist. So, let me provide an overview of the history of eAuctions.
Tracing the Long Arc of eAuctions
In 1994, shortly after joining the purchasing department at GE, Glen Meakem heard a colleague talk about a supplier event at the Marriott in Pittsburgh. In one ballroom, suppliers reviewed parts that GE was interested in buying and in another, GE managers stood with flipcharts taking bids from suppliers. The suppliers were simply placing new and lower bids, and GE managers were writing their best prices on the flipchart. The GE managers were pleasantly surprised to see prices continue to drop, but the event was described as a chaotic cattle-market by suppliers, of which they did not appreciate being a part. The story gave Meakem an idea that would change his life and have a significant impact on the future of how leading purchasing functions approached commercial negotiations.
According to a Fortune article from 2000, Meakem pitched the idea to the management at GE proclaiming that “the idea will transform the global economy.” But, GE’s management team rejected Meakem’s idea of creating a company that could provide a platform for facilitating online reverse auctions. He decided to leave GE to start FreeMarkets Inc., which became the one of the first providers of online reverse auction services.
The first eAuction technologies in the marketplace offered a very basic version. In FreeMarkets’ case it offered an English-language only, online reverse-auction tool with limited configuration options that it managed on behalf of its customers. FreeMarkets designed a room for execution of eAuctions with a special section for spectators/customers, the auction administrator, isolated phone booths where bids from suppliers without internet access were recorded and submitted in the auction. Having toured it firsthand, I can tell you that it was a very impressive set-up.
FreeMarkets became very successful with customers such as GM, Heinz, and Shell to mention just a few, but soon faced fierce competition from competing start-ups. Even one of its early and large customers, GM, decided to copy the concept and hold online reverse auctions.
As the number of providers started growing, so did the development of the technology in both breadth and depth. Self-service became available along with new features, such as online tendering (E-RFX) leading up to the eAuction. Many providers also developed offerings within other procurement processes, such as contract management, spend visibility, and supplier performance management. Today in fact, many solutions are full suites offering online, end-to-end facilitation of the source-to-pay process. With the development of self-service solutions, the commercial model of the market also changed from a service business to a subscription model where users pay an annual license for access to the solution and the services revenues are secondary.
Many developments have also taken place on the auction engines since the technology was first introduced. Price is now but one of several parameters in today’s negotiations when leading companies run their eAuctions. Thus, compared to the simple, price-only interfaces of yesteryear, today’s sophisticated cost models that allow suppliers to bid on price plus other non-price components can be built into eAuction solutions to ensure a sophisticated negotiation based on total cost/value. Today’s advanced technologies can also offer multiple bidding formats.
The most advanced solutions can support combinatorial eAuctions, which allow for evaluating customized supplier bids in real-time based on preset scenarios and awarding principles. Unfortunately, very few procurement organizations today have the capabilities to take advantage of the opportunities created by these technologies. So even though the technology has matured, only a few organizations can take full advantage of the advancements of the technology.
The last chapter in the history book of eAuctions has not been written, and my expectation is that the next couple of years will provide a number of technological breakthroughs, as digital technologies like RPA and AI are added to eAuction solutions.
For example, on December 7, 2018, the first fully-automated sourcing robot was launched by Keelvar. One of the more innovative solutions in the market today, it is an achievement that brings forward interesting perspectives for the future. At the same time, one of the large consultancies has introduced a solution called “AI negotiation coach,” which helps sourcing practitioners choose the right negotiation format, auction strategy, and so on. This is a concept-turned-reality that points procurement and sourcing leaders in a very exciting direction as it can help us overcome some of the existing barriers to adoption, which is the ultimate key for success with eAuctions.
Adoption, Adoption, Adoption…
With the introduction of eAuctions, companies such a GlaxoSmithKline (pharma), Shell (oil and gas), Metro Group and Carrefour (retail) were among the early adopters. Adoption picked up rapidly and eAuctions were soon introduced beyond the first movers. Although initially skeptical, some of the companies that introduced eAuctions in the late 90’s saw its potential and gained strong momentum in their use. Expectations on usage grew fast in the early 2000’s with some studies suggesting that as much as 40-50% of enterprise spend could be negotiated through a reverse eAuction.
But something changed along the way, creating challenges and setbacks for the continued increase in adoption of eAuctions across industries and purchasing organizations. Today a few leading organizations apply eAuctions systematically and on a significant part of its spend; but they are nowhere near 40-50%. More companies apply eAuctions, but primarily on indirect, non-strategic categories comprising only a small part of the overall company spend. For many companies that implement eSourcing solutions, eAuctions are still considered an exotic tool that, if they are applied, are used just a few times per year, and almost as a gimmick.
The secret to success with eAuctions lies within its adoption, plain and simple. And it is also in this area where most lessons can be applied, now that a wealth of new digital solutions is in front of us. In Part Two of this article series, I will present key lessons that my colleagues and I have learned from driving eAuctions in a global company for more than a decade.
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