Reverse Auctions and the Staffing Industry

Fri, Oct 07, 2011 @ 12:58 PM / by ATR International

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I read an article recently on the benefits of e-auctions, otherwise known as reverse auctions, and it really got me thinking. It was written by a procurement professional and urged suppliers like me to embrace the e-auction process as the way of the future; not only inevitable but beneficial to both buyer and supplier alike. My initial reaction was as the author predicted it might be for a staffing firm owner, anxiety and distrust, although I would prefer to classify my emotions as passion and great concern. Regardless, I definitely have a strong opinion on the topic, but not because I am confused or skeptical about the process, as suggested. It is precisely because I understand and have participated in e-auctions, that I don’t think they work well in the contingent workforce space, and don’t really benefit either the buyer or the supplier. Too often, I think the results sacrifice quality for price. Putting my passion and opinions to good use, I decided to write this week’s post on the topic.

I started by researching e-auctions to learn more about them. In a traditional auction, bidders increase their bids with the highest bid purchasing the object. In a reverse auction, the “object” is the opportunity to sell your product to the client and each bidder bids down until no one is willing to offer their product at a lower price. The concept has been around for thousands of years according to some, and has both consumer and business applications; Priceline is an example of a consumer reverse auction. They’ve been active as a business tool for at least the past twenty years. With recent advances in technology they’ve become significantly more sophisticated and user friendly. As their power and usefulness has grown, e-auctions have rightfully received renewed attention, and calls for their use to cut costs, especially in government procurement, have grown steadily louder. Their application in private sector procurement programs has been growing as well. The results in the government sector seem very promising, as a 2010 survey at the Customs and Border Protection (CBP) bureau demonstrates. The survey reports cost savings, but just as, if not more importantly, it reports significant time savings: “The hidden value from most reverse auctions may not be the savings in money but the savings in time,” said David Wyld, Professor of Management at Southeastern Louisiana University and author of the study. “Online reverse auctions offer a simple tool for government buyers to clear their desks of simple purchases for commodities and basic services, so they can focus their time and energy on more complicated purchases, direct interaction with their customers and sellers, and other value-added efforts.”

As a taxpayer and a businessman, I am all in favor of efforts to save, but I also want to ensure that the product works and is a good value for the money. The light bulbs in town hall have to work, not just be inexpensive! I understand that e-auctions effectively provide a very competitive pricing environment which often results in significant cost savings. The study reports they also seem to reduce the overall time spent on the bidding process, a significant benefit since neither buyer nor seller enjoys the RFP process. Finally, work is often awarded much more quickly, another big improvement over current government practices. So, why am I not convinced that it’s the right thing for the staffing industry? First because of the CBP study itself, which says e-auctions are best suited to “simple purchases of commoditized and basic services.” Contingent workers may sometimes provide what might be categorized as basic services but not usually, and certainly not in the IT sector, where companies demand highly skilled and experienced contractors. It seems to me that managing their CW program might be one of the “complicated purchases” that managers will have more time to focus on by using e-auctions in more suitable areas.

Second, when it comes to buying services using e-auctions, there is far from a consensus on their suitability, let alone their inevitability. The administrator of the Office of Federal Procurement Policy at the Office of Management and Budget recommends not using reverse auctions to procure services, and while there are those advising otherwise for both the government and private sectors, I found many recommendations that companies consider carefully where and when to use reverse auctions. This piece from Epiq Consulting seemed balanced and representative of what others also had to say. Reverse auctions are not a one size fits all approach and they produce the best results and savings under certain conditions (e.g., simple product specifications, consistent similar quality across all suppliers, short term contracts) and with certain products (e.g., raw materials, capital equipment, processed goods). Most do not recommend using them when there are long-term, strategic relationships involved.

Learning all this about e-auctions was pivotal to understanding the genesis of my own opinion. If you apply a process designed to work best in one situation to another where conditions are different, it should not be surprising if the results are less than wonderful. ATR’s reverse auction experiences generally ended when the bids quickly dropped to levels that had me shaking my head wondering how people could possibly meet their promises. What it costs to hire a top notch software engineer today may not be the same six months from now and a process that encourages low prices as the priority may lead to serious problems down the road. Locked into unsustainable pricing structures, staffing firms may not be able to deliver the talent you need or will attract only less or under qualified candidates. Even in today’s challenging job market, there are workers with highly desirable skills and experience that command top salaries and job categories that have remained difficult to fully staff throughout the recession. And I believe that this will be the case even more so as the economic recovery takes hold, particularly in the technology sector.

The argument that e-auctions commoditize people is often scoffed at but it has real merit. I don’t believe for a minute that procurement managers or other CW buyers view human beings as impersonally as they do staples or rock salt. But no matter how much you respect and value people, if you try to price them like a commodity, you run into problems. People are an unpredictable “product.” They have personalities and negotiating power and in-demand skills that rock salt does not. It can be difficult to predict and promise long term labor costs, especially in a fluctuating economy. Labor costs are only part of the equation; the time and effort to find the right candidate increases when talent is scarce and all other associated costs increase as well. The author rightly cautions firms not to retract pricing after participation but it seems to me that the process makes it all too easy for this to happen. My concern is that smart, reputable firms drop out early or don’t participate at all because they know the true costs and are quickly out bid. But what are the results in the long term? Are clients getting the same quality? How often does retraction and renegotiation take place? There is always a bit of tension between buyers and sellers over price – it is the nature of the transaction. But the idea that staffing firms, or almost any business these days, enjoy significant profit margins is misguided. Our goal at ATR is to provide quality workforce solutions at a fair price for the value received and I do my firm, our contractors and our clients a disservice if I compromise on price to win the e-auction to a point that doesn’t allow me to operate successfully.

I also find the impersonality of the process and the way it removes human interaction actually a little unsettling. I can see where you may not need, nor have the time, to have a strong personal business relationship with all your vendors but one of the keys to success in getting the best contingent workers at the best possible prices is working with suppliers that understand your business and your unique requirements and preferences. Anything that devalues and precludes the relationship is a concern to me. I know that vendor selection and contract negotiations can be challenging but replacing conversations with a computer program seems almost rude and even cowardly. I hope that my relationships with my customers are good enough that we can have honest business discussions to arrive at a fair price for all without having to resort to gimmicks.

Perhaps not surprisingly, I found service providers and suppliers, both in staffing and other industries, who echoed my concerns and shared some of my experiences with e-auctions. These two articles were notable examples:

Article 1

Article 2

Some were quite vehement in their call to “avoid reverse auctions at all costs,” while others offered advice on how to participate successfully, but it was difficult to find any confessing they were real fans or saw much benefit for anyone in the process. My relatively brief survey of available information showed me that the jury is still out on the wholesale success of the e-auction process especially as it pertains to procuring services. Many of the promoters of e-auctions, and the results themselves, suggest that they are not right for every purchase.

I’ve been in the staffing business for over 25 years and I pride myself on being open to new trends and committed to business process improvements, implemented internally or in conjunction with my clients. I’m simply not convinced that this is a good one for any of us. I’m concerned that in the rush to save money, quality will be brushed aside. I would love to hear from others in the industry, and not just other suppliers, on their experiences with reverse auctions, perhaps especially if they’ve been positive. I’m open to changing my mind; I just haven’t been convinced yet.

Jerry Brenholz
President and CEO
ATR International

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Topics: JerryBrenholz, temporary staffing, staffing industry, procurement, reverse auctions, VMS

ATR International

Written by ATR International

Founded in 1988 in response to the burgeoning demand for temporary personnel, ATR International has been providing our clients with IT consultants and enterprise-wide staffing services for over 25 years.

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