|6th October 2016
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.
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!
Everyone running a business knows the Time vs Quality vs Cost equation and this equation is true of service businesses too. “Pick any two”. You can have it quickly for extra cost (Amazon) or finer quality at extra cost (wine) or slower for cheaper (postage); you get the picture.
So which of these is the objective of procurement? And does a reverse auction achieve this objective? My assumption is that the objective is to buy the best quality research for the best price.
Research is not a commodity. In fact, if you do market research well, it can result in insights that can affect the entire business. Research may uncover an insight that highlights a competitive advantage that, commercially, far outweighs the cost of the research itself by a factor of N. Any company buying research services wants to make sure that they get the most ‘value’ and reuse of the research they can, so the Quality side of the equation is not a negotiable lever. The Quality is defined in the scope of work used by vendors to derive a quotation.
So that just leaves Time and Cost. In the case of services, Time and Cost are connected and form the basis of the quotation that vendors will offer to their clients. In this case, the rate card and charge codes represent the Cost side of the equation that makes up the quote.
So for any given task, Time (hr) X Rate Card (£/hr) = Charge. Add all the tasks together, and you end up with your Quote. All the client needs to do is to decide whether they want to buy or not at this price.
So what would happen if a vendor bids down their rate card in order to win the auction?
Surely the result will be that, in order to maintain their margins, they will either use a less experienced (cheaper) resource, and/or increase the amount of time that this resource will take to complete a given task.
And surely the result in either case is more likely to be that the Charge will stay the same and the Quality will be reduced as it is being performed by less experienced people. Isn’t this exactly the opposite of the objective being sought after?
I will be going into the reverse auction process with an open mind, but I suspect I know how it will end. When agencies are pushed to race to the bottom with their rate cards, they are effectively being incentivised to design lower quality projects and deliver more slowly – both of which lead to shorter term, more volatile relationships with the client. When the ultimate objective is to deliver improved efficiency and better value for money, it will be interesting to see who the winners are at the end – if indeed, there are any winners at all.
*A version of this article appeared in the September 2016 issue of PharmaTimes.
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