Reverse e-auctions, where vendors bid live online to undercut one another for a specified contract, are all the rage in procurement and are even spreading to buying services such as corporate travel. When one looks at the claimed success stories, it is easy to understand why.
Two companies that have used the process to put their travel management contract out to tender are Novo Nordisk of Denmark and the UK do-it-yourself retail chain Focus Wickes. The pair say they cut their travel agency fees by between 60% and 62% respectively, and sped up the tendering process significantly. Novo Nordisk has also used reverse e-auctions to contract rates with hotels and meeting venues.
But the adoption of the process for travel has its critics, principally among suppliers. Tony McGetrick, sales director for BTI UK, the UK’s largest travel management company, believes the complexity of specifying what one wants from a travel management company makes an e-auction too inflexible as a tool for negotiation. “It is not in the clients’ interests,” he says. There are too many variables in the service.”
Mark Flower, sales and marketing director for the Sheraton Skyline hotel near Heathrow Airport, is another sceptic. He says e-auctions are too fixated on price, and that buying hotel rooms is not the same as buying pencils. The latter is a done deal for a guaranteed quantity. When companies contract for 1,000 room nights in a hotel, they don’t necessarily deliver the volume of business to which they have committed. But he has other gripes as well. Flower has also found himself bidding his five-star property in e-auctions against hotels that are only three star. “The buyers have not done their homework,” he says.
He also thinks it could prove a passing fad. “When they started a few years ago, there was a mild panic and they did drive down rates,” Flower says. “Since then, hoteliers have become more astute and, after handling quite a lot of these two years ago, I have only seen one in the past 12 months. Some big hotel groups won’t participate in e-auctions at all.”
John Hatton, commercial director for Trading Partners, one of the biggest e-auction organisers in the world, says: “Travel is one of our best categories. It is not in the interest of suppliers to encourage participation because they have to lower their prices.
“Some hotel companies will say it is their policy not to participate, but when we tell them how many room nights are up for grabs, they ask for the ‘invitation to tender’. Besides, if one chain won’t participate, another will.”
Jens Liltorp, travel manager for Novo Nordisk, says he has conducted surveys among suppliers and they seem satisfied with the process. Liltorp, however, understands some of the criticism. He agrees that suppliers need to be matched with comparable competitors. When he contracted hotel rates for Copenhagen, Liltorp held separate auctions for three-, four- and five-star hotels. He left out those near airports because he regarded them as a different competitive set.
Similarly, Liltorp agrees that buyers need to maintain credibility by meeting the targets for volume or market share set by the supplier. “It is important to do what you promised,” he says.
The underlying point is that a reverse auction is not a shortcut to gouging large discounts out of suppliers. Instead, it should be seen as an extra tool to sharpen a travel programme that is already well-honed with an effective travel policy and good use of management information. Suppliers agreed to give Novo Nordisk good prices because its travel department has a proven track record of delivering on the deal.
Liltorp also finds that e-auctions improve the professionalism of his negotiations by streamlining the process. Nigel Stewart, head of group procurement for Focus Wickes, agrees. “Buying travel is no different from buying anything else,” he says. “It is not about the commodity; it’s about the process and the result. An e-auction generally takes 90 minutes with multiple suppliers, rather than negotiating over many days with many calls and meetings.”
So, fittingly, e-auctions produce an additional benefit in that they cut the amount of travel required for procurement. The Environment Agency recently trumpeted this practice as an eco-friendly argument for why it embraced online buying, contributing to a total saving of more than £1m in nine months. Saving money and saving the planet – that can’t be all bad.