Reducing tech expenses can increase EBITDA, fund projects and avoid layoffs.

These are uncertain financial times for many enterprises. Economic indicators are mixed and inflation has driven up costs, while high interest rates have created the toughest environment in decades for securing outside funding. Many finance leaders are being asked to prepare for the worst by trimming budgets and reducing headcount.

What can finance leaders do in response? They can pressure their suppliers, solicit bids or go through an RFP process. Alternatively, finance leaders can use a highly effective tactic known as a procurement reverse-auction, or e-auction, to drive down contract costs. In a procurement auction, suppliers are invited to bid online to provide a service, with each subsequent bid representing a lower cost and/or a commitment of additional services. Our data shows that firms can lower their telecommunications, cloud and data services and other IT expenses by more than 40% through this process, and can generate more than two times the savings compared to traditional direct negotiation with suppliers. 

What makes the reverse-auction such a successful technique? Human beings are hard-wired to compete. Reverse-auctions create a competitive market environment among suppliers as they vie to win an enterprise’s business. While the auction is “live,” competing suppliers get real-time feedback on how they rank each time a new bid is entered, triggering them to respond with a lower bid of their own. A standard two-week auction involving a handful of suppliers often produces hundreds of bids, typically concluding in a frenzy, with dozens of bids entered in the final hours.

Online reverse-auctions are not a new technique, and the technology is readily available. The first online reverse-auction for procurement was conducted in 1995 for Netscape. Reverse-auction functionality is now built into every major Procure To Pay Suite, and there are several pureplay SaaS auction tools on the market, yet it is still uncommon to find procurement professionals with deep online reverse-auction experience. To help you maximize the effectiveness of reverse-auctions, here are four tips.

TIP 1: Get your data in order.

An essential starting point for any procurement auction is to perform a high-level analysis of your current spend. Get your contracts and ERP data collected and up to date. It is often at this very preliminary stage that the process gets bogged down. A high-level analysis of the data allows you to set a baseline, identify the technology categories that represent the biggest opportunities, and develop an accurate prediction of the savings that can be achieved. With a prediction of the savings, it will be easier to push through any internal obstacles or resistance.

TIP 2: Expertise matters. 

Having access to an e-auction platform is not enough to drive optimal results. Experience with e-auctions and experience with the dozens of product categories represented among the enterprise’s technology expenses is critical to maximizing the effectiveness of your e-auction. If your in-house procurement team doesn’t have extensive e-auction experience, don’t worry; there are third-party experts who can be brought in to run the process from end to end.

A reverse-auction expert should also possess deep knowledge of vendors and categories, supplier licensing models, market prices and discounting tendencies. With experience, a reverse-auction expert can create a high-level assessment that predicts with 95% accuracy the value and savings that can be generated from the reverse-auction. Each tech category should be run as a separate auction, and the auctions should be prioritized and roadmapped.

TIP 3: Be thoughtful about introducing competition.

One of the most important steps of running a successful procurement auction is determining which suppliers will compete for the business. This can be surprisingly complex. There may be dozens of suppliers in any given tech category, but only a handful of them may be a good fit for delivering the service per the business’s specifications. 

Work with IT and end-user stakeholders to develop a list of requirements that can include technical, service, compliance, integration and implementation capabilities. Prescreen the contending suppliers and score them based on their fit for these requirements. Bad fit suppliers should not be invited to take part in the auction — the last thing you want to do is declare a winner and then find out they can’t really deliver what you need. During this vetting process, buyers sometimes find that their incumbent vendor is not actually the best fit for their requirements.

TIP 4: The lowest price doesn’t always win.

When the auction is complete, it’s not necessarily the lowest bidder that wins. A range of scenarios should be considered that balance price and non-price factors. Businesses should look for the right supplier at the right price, not necessarily the absolute lowest price. Usually, the winner is selected from the lowest one-third of the final bids, which still delivers significant savings over the incumbent contract.

Also, switching vendors can be disruptive. It’s best to try to quantify the cost of that change if possible. Sometimes a scenario that delivers lesser savings in favor of reduced disruption is the final best outcome. Even when an incumbent supplier is retained, the competitive nature of the auction process will still drive the price down toward the true market value, delivering significant savings to the bottom line.

Benefits of Reverse Auctions

Cost savings is the most obvious benefit of using reverse-auctions, but there are other benefits as well. Reverse-auctions fit into vendor-reduction initiatives designed to reduce the overall complexity of the enterprise’s supply chain. The most important benefit is what the organization does with the cost savings. Once operating capital has been harvested from an enterprise’s technology expenses, it can be used to increase EBITDA and enterprise value, invest in growth projects, fend off cuts to budgets and headcount, and set a company on a growth trajectory while competitors are going into hibernation.

About Blake Wetzel

Blake Wetzel began his career as an FP&A executive with Qwest Communications/CenturyLink. He is now CEO of AuctionIQ (AIQ), a recognized leader in procurement consulting and e-auctions. Blake Wetzel LinkedIn