Posts filed under 'Buying'
…the act of misleading consumers regarding the environmental practices of a company or the environmental benefits of a product or service…
Bandwagons are for jumping on.
And Green is playing loudly everywhere, especially in the facility services arena.
Greenwashing was inevitable. There’s always a population of businesses and individuals trying to capitalize on deception and misinformation.
Why? SourceWatch lists a number of reasons why companies greenwash, but the one they list I believe is the main driver is:
“…seeking to expand market share at the expense of those rivals not involved in greenwashing; this is especially attractive if little or no additional expenditure is required to change performance; alternatively, a company can engage in greenwashing in an attempt to narrow the perceived ‘green’ advantage of a rival…”
Not all green marketing claims are false. But add a healthy dose of cynicism and some investigation to the claims.
And it’s never black and white for those who are, and who aren’t greenwashing. There’s always a location on a sliding scale that gives a rationale for claiming Green.
Is it using a few Green Seal products? Or is it being certified ISO 14001:2004 at all a companies locations?
Who’s to say?
In the very near future Green will be a requirement, like following OSHA. Really, who markets their contract business is OSHA compliant. It’s a given, an expectation. So it will be with Green, evenutally.
But for now, here’s an excellent guide to greenwashing (it’s a large file, 2.82 mb) from Futerra Sustainability Communications. Though written for the U.K. it gives a great window into greenwashing.
Where have you seen greenwashing lately?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: environmental marketing, Green, Green cleaning, Greenwashing
July 12th, 2008
An interesting insight came out of our interviews with Procurement professionals (Procurement Talks: An Interview with Microsoft and Expedia’s interview to be published next week).
There’s not one style of procurement, but many. From traditional to progressive (my term for high-tech). And infinite hybrids in between. Procurement’s style leads them to operate differently.
And that matters if you’re trying to sell contract services to them.
Procurement’s style seems to be driven by the type of business their company is in. So, let’s look at the two end styles (you’re on your own for everything in between).
TRADITIONAL STYLE PROCUREMENT
A traditional procurement style buys products and services primarily for in-house operations. This style held the informational reins on the purchase, from specifications to sourcing/vetting vendors to bid/negotiation, even through to vendor performance and compliance.
The traditional style buying was done by people who really knew a great deal about what they were buying. This is the world of deep analysis and cost-basis pricing. And the recipients of their buys (business owners) lived and died by procurement’s acumen.
Today, this style lives in manufacturing and industrial businesses - with big spend, complex buys, long lead times, and often limited number of suppliers.
What This Means to Vendors (Contractors)
Contractors would do well to recognize this style of procurement and explore the following:
OPEN KIMONO
Consider presenting full disclosure pricing. Even if the bid doesn’t call for it. Why? Because this is how traditional procurement works. They seek to understand vendors’ cost basis and then back into a vendor’s pricing to see if it’s reasonable.
QUANTIFIED VALUE PROPOSITIONS
In proposals, send only well-defined, quantified value propositions. Tie the value of service into measurable business outcomes, showing clearly where and how it impacts their businesses’ bottom line.
LONG-TERM RELATIONSHIPS
Invest in long-term relationships for developing credibility and personal connections. Churn in procurement in these businesses tends to be more stable, so you’re likely to work with the same individuals for years.
PROGRESSIVE STYLE PROCUREMENT
Again, the term “progressive” is mine. This style is seen in high-tech businesses, particularly software and online services.
The progressive style outsources non-core services as well as buying products for in-house consumption. But here, unlike the traditional style, procurement isn’t the deep knowledge base for what they’re buying.
Progressive procurement doesn’t have time to gain the expertise of all their buys. They’re focusing on their core business buys. For everything else they’re spread thin. Often they rely on their business owners to identify preferred vendors to include on bid lists.
What This Means to Vendors (Contractors)
By understanding the progressive style, contractors can more successfully engage procurement. Consider:
HOMEWORK UP FRONT
Do a great deal of homework up front to know what’s important to them. Don’t waste their time being unprepared.
HYPER-SUCCINCT
Send only hyper-succinct snapshots presenting the vendor’s value proposition. Cut all smoke and mirrors. Include similar clients as references they can contact, and include specific dollar savings or improvements your reference will allow.
DEVELOP CREDIBILITY
Develop credibility with business owners around vendor’s expertise. In both interviews, procurement said their business owners found vendors who were speaking at trade shows and seminars, or publishing articles and blogs. These weren’t self-serving vendor promotions, but education for their clients’ (business owners) industry.
QUANTIFIED VALUE PROPOSITIONS
In proposals, send only well-defined, quantified value propositions (same as the traditional style)
EDUCATE WITHOUT PREACHING
Don’t assume procurement understands the vendor’s business. Procurement wants to know more, so they can buy a better deal. It’s in the vendor’s interests to be the one that helps them do that. But avoid preaching that wraps a vendor pitch in with the goods.
What style of procurement to you deal with?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: procurement, service contracts, value proposition
June 27th, 2008
Buyers want to succeed - sellers want the same. What’s in the way?
Understanding each other.
Sharing perspectives is a first step along the way to success. To that end I recently interviewed a Procurement Manager at Microsoft. And there’s another interview coming the end of this month with the Senior Director of Procurement at Expedia.
Having worked with contractors for many years, it was interesting to hear some of their commonly-held beliefs confirmed. However, a number of their beliefs were off the mark too.
From procurement’s side, both interviewees understood contractors pain in the process. But confirmed procurement’s role as helping their companies succeed - by buying the best value, at lowest cost.
Simple, Not Easy
These interviews provide great insight into the buyer’s mind from the procurement perspective. If contractors want to sell more, they’ll need to understand buyers very well.
Conversely, if buyers want more value from their spend, they’ll have to better understand what they’re buying. And how it helps their company succeed.
A few insights popped out during these interviews. Here are a few:
Procurement doesn’t buy low price only
Sellers (contractors) have heard this before but may believe it’s not true. Many believe buyers are lying to trick contractors out of profits.
I heard clearly in both interviews that price is rarely the only factor. And not always the most important. Despite contractors believing low price is the only consideration.
Procurement is more interested in how the purchase (contract service) can help their company. That was always the first consideration.
Contractors’ sour grapes may be more an indication of not knowing what’s important to procurement or the business owner.
Buyers want to understand what’s being purchased
This may seem obvious, but if sellers take it for granted they’ve missed the boat.
Procurement (and business owners who’ll manage the contracted service) don’t always know how their purchase will help their business succeed.
Or, they’re unable to articulate it. When that happens, buyers can only fall back on the lowest cost to their company as success defined.
Contractors can help buyers better understand the business impact of their services. Not more sales and marketing smoke self-congratulating the contractor.
Procurement does not manage vendors
Procurement does their bit up front. When the contract is finished it’s handed over to the business owner to manage the vendor. Procurement doesn’t have the expertise, or time, to oversee the service.
When the contract date comes up, procurement will follow it’s bid evaluation process, which may or may not include an RFP process or renegotiation. But it’s only the business owner’s feedback on whether the contractor delivered what was promised.
How well do you see the other side of buying and managing contract?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: procurement, facility services, vendor management
June 17th, 2008
You manage a budget. You rarely overspend, showing slight, but noticeable savings year after year. You’re a professional manager, say, a Business Owner of an outsourced service.
What if you could end the year with significant savings from budget (>10%) , would you?
Experienced managers typically don’t. And they have good reasons not to. In most organizations there’s a penalty for being too good at saving money.
Budget Remorse
You work hard and come in under budget. During budget season your manager and Finance say “Well, they obviously had too much money for what they needed. We’ll make their next year’s budget that lower amount”.
Save money one year, penalized with less spend the next.
As a result, you’re going to spend all you’ve got this year, so you’ll have the same amount next year. Public agencies (city, county, state and federal) have this down to a fine art.
It still takes skill to stay in budget, but the organization may not get the most value for their spend. And if its a very static, stable spend, the Business Owner can pretty much coast through the year. Again, thinking about some public agencies.
Sandbagging
Of course some Business Owners work to overstate their annual needs during budget season just to create a layer of fat.
Then during the year they generate enough savings to earn their personal bonuses and look good. But organizations miss out on the big wins of real cost savings, because they don’t reward them.
And their bosses, having done the same thing themselves, often catch the Business Owner’s sandbagging when budgets are created.
Not Cashing Out Savings
Savvy Business Owners work around budget remorse and sandbagging by getting more from their budgets. They’ll manage costs downwards and then take those savings from budget and invest them in improvement projects within that year.
One manager told me he looks at a 3-year improvement window and figures out how to get there. Then he takes his under-budget funds and invests them in projects towards that 3-year vision. He gives his organization more value for their budget, and he’s given himself an upwardly mobile career path.
The Variables
Inflation, cost of living, scope change, and industry economics are all variables that require massaging budget and spend to fit.
The above aren’t the only two budget/spend scenarios. As you know, life is about infinite variety. But it’s interesting to think that a management goal, saving costs, should have a built in constraint.
How do you get and give the most for your managed spend?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: budget, budgeting, cost savings, spend management
June 3rd, 2008
Wouldn’t it be great to ask world-class companies about outsourcing, contracting and buying?
Lucky you. Today’s blog gives you the opportunity to do that.
You can ask Microsoft, Yahoo and Expedia about governance, vendor selection, contract management, or procurement.
GUEST INTERVIEWEES
I’ll be interviewing several directors and managers at those companies for upcoming Revenue-IQ articles. You give me your questions, I’ll ask them.
- Senior Director, Strategic Sourcing & Procurement, Expedia Inc.
- Procurement Manager, Microsoft Corporation
- Director, Business & Asset Protection (security), Yahoo! Inc.
RUSH DEADLINE All right, not so rushed
There’s a time crunch for this.
Submit your questions by 1:00 p.m. EST /11:00 a.m. PST this Friday (5/23) here when you can.
HOW TO SUBMIT QUESTIONS
Figure out what you want to ask and post your questions as a comment online here.
See, if you want your questions asked you’ll have to post a comment to this blog. Which isn’t frightening, but probably not something you do often.
Click here for instructions how to.
Or, call me and I’ll walk you through the process over the phone. Ah hah, but here’s the hard part!
I’m not collecting your questions over the phone, or in email. They have to be submitted as comments to this post.
Consider it enforced learning. If you have a question you’d like asked, you’ll post it in a comment. Again, here’s how to.
Go on. Give it a try.
MISCELLANEOUS
Just to state the obvious, practical stuff:
- No guarantee that all questions submitted will be answered
- Questions will have to pass an appropriateness test (can’t ask “wrong” questions, i.e. where they live, what high-school did they go to, etc.)
That’s pretty much it.
~~~~~~
Chris Arlen
President, Service Performance
Technorati: contract management, Expedia, governance, Microsoft, outsourcing, procurement, vendor management, Yahoo
May 21st, 2008
In the last month I’ve heard 2 buying trends from a half dozen service contractors around the country.
These trends aren’t from a statistical survey, but from anecdotal evidence (which means people told me). I love that term: anecdotal evidence. First heard it in grad school. I toss it in to make business gossip seem academic and important. You ought to try it next time you get the chance.
Here are the trends, and they’re probably no surprise.
#1 - Procurement is Playing a Bigger Role
In the past procurement acted more as a gatekeeper. Now procurement is the primary decision maker selecting service contractors. Facility or departmental managers used to have that position. Not as much now.
This changes the way contractors must communicate value, position against competitors and sell their services.
BEEN THERE, USED THEM
When facility or departmental managers had decision clout they brought expert knowledge to that contract service. Hopefully, anyway.
This was important because experienced customers could distinguish between high quality and low cost service providers. And they’re opinions counted when important services where being contracted.
That’s changed. To some degree.
BATTEN DOWN THE HATCHES
Procurement’s increased power may come from a recession-frightened economy. Companies are squeezing more profit from existing business because they’re not sure how fast new business will come on.
That puts the emphasis on procurement to wrestle lower costs from suppliers. Contract services included.
CONTRACTORS’ CONCERNS
From the contractor’s perspective procurements’ bigger role comes with a number of concerns, such as:
- Price sensitive - focus on purchase only, misses the total cost over contract’s life
- Qualitative service not valued equally against low costs in bid evaluations
- Less understanding of service - doesn’t live with daily repercussions from selections
- Commodity mind set - reverse auction friendly, if it’s a commodity, why not?
- Want to believe low cost providers equal to high quality services - easily fits procurement’s immediate goals
- Less chance to sell to procurement - relationships are less important
#2 - Procurement Staff Churn Rate
Procurement suffers turnover like any other management position. Contractors are seeing more churn here than in recent years.
This means less experienced, new comers are in positions of increasing decision-making authority. And many without the business experience the position demands.
CONTRACTORS’ CONCERNS
Contractor concerns regarding these less experienced procurement managers include:
- Don’t understand the service they’re contracting out
- Unable to differentiate purchasing subtleties between services & products
- Hesitant to use contractors as learning resources - fear perceptions of favoritism
- Low job security means decisions fall heavily on low price - hard to get fired for spending less
- Low place on organizational totem pole tends to avoid choosing innovative contractors or services
What trends are you seeing in the buying of contract services?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: procurement, contractor selection, purchasing service contracts
April 22nd, 2008
Why would customers allow contractors to over promise in their bids and under deliver after receiving the contract?
Customers’ only tool to look into contractors’ future performance is the bid process. The goal of customers’ bid process is to select contractors with the best value.
The catch?
Value only matters if it’s received. That only happens after the decision. Over the lifetime of the contract. Too obvious, I’m sorry.
Customers run diligent RFP processes. They’ve selected the best-qualified contractor.
Now, satisfied they’ve done their job, they ignore the big part - getting what they paid for.
Vigilance after contract award is worth more to customers (and contractors) than RFP due diligence.
The Contractor’s Dilemma:
Some contractors make exaggerated claims. And take contracts away from contractors who reliably deliver.
The catch?
Contractors need to be selected before they can deliver. They must show well.
After All The Dogs and Ponies are Gone
Customers are left with the future delivery of proposal promises.
And during the RFP courtship, contractors’ promises all smell sweet.
Customers Must Validate After Contract Award
In many situations customers’ attention disappears after receiving the proposal valentine. Right after contract award.
“Good from far, far from good”. That’s how one contractor put it.
Meaning the choice of the “right” contractor can look good, if you don’t look too close. Or, look after the contract has been awarded.
If proposal promises aren’t validated after the contract is in place, what has the customer bought? A good show? But not the value the proposal promised.
Why Customers May Not Validate After Award
To be fair, many customers do pay attention. But many don’t. Here are several reasons why:
- Procurement typically drops out of the day-to-day oversight
- Customers want to get on with their real job, RFPs are temporary nuisances
- Customers don’t want to find out they’ve made the wrong choice
Customers Don’t Want to Find Out They’ve Made the Wrong Choice
Now there’s an unwelcome kettle of fish (and I’ve never seen a kettle of fish but I bet it’s unpleasant.)
Once it’s clear the contractor can’t deliver, or just plain deceived, customers are in a tight place.
It’s not an easy fix. Someone’s boss higher up is going to find out. And that’s uncomfortable. Not all customers have the intestinal fortitude to stand up and admit a huge mistake publicly. (Don’t know if I could either. Would like to think so, but not so sure.)
Why is Admitting a Wrong Choice So Hard?
MONEY
Money has been spent on the bid process. The customer doesn’t want to be seen as wasteful.
FOCUS
Customers have directed their company’s focus onto this particular service during the bid process. That’s a distraction for many. Customers don’t want that cloud hanging over them - if they’ve done it for nothing.
CAREER
Customers are personally on the line for this contractor. They chose them. Customers don’t want to admit mistakes in their judgment. A mistake of this magnitude is like committing career seppuku.
Real World Example
I was told this story by a few of the sub contractors involved.
Several years ago one of the top facility management companies in the country won a long sought after contract for a Fortune 10 client’s world campus. Worth tens of millions per year.
Unfortunately, they’d under priced their bid by at least 15 full time equivalents (FTEs). These were their managers, not subs. These were the people who were going to deliver world class results to exceed world class expectations. (The mistake was discovered shortly after start of service. Isn’t that always the time?)
Now, they could’ve gone back to their (new) customer, admitted their error, and asked for the proper funding.
But as you’ve correctly guessed, they didn’t. What they did was put all the contracts they were managing out to bid and squeezed for cost reductions. To make room for their bidding error. (By the way, they didn’t reduce their fee.)
Sub contractors who had diligently worked to deliver world class service had to slash and burn prices to keep their contracts.
Did all this create improvements for the Fortune 10 customer? (I don’t think so.)
The customer contacts who had chosen the contractor were aware of the problem. They were complicit in the agreement to not formally disclose the bidding error to procurement.
There was a lot of skin in this game. For the customers and contractor. Too much to be seen as wrong.
Here’s How Customers Can Increase Vigilance
There are two opportunities to check that customers will receive what they’re promised. (I’ve reversed the order of how these occur, it’s more interesting this way isn’t it?)
- Validate After Award
- Vigilance in RFP Bid Process
Validate After Award
Auditing seems obvious.
However, it’s the first thing that melts away when everything seems fine. (Remember pre-Enron/WorldCom oversight?)
Auditing needs to address both contract compliance and service performance.
Contract compliance may include LEED or ISO proposal promises. Auditing these is straightforward as criteria exist.
Service performance (like the sound of that name) auditing can be done in business review or joint committee meetings. Whatever formal customer/contractor meetings that review mutually agreed upon data.
Set KPIs (key performance indicators) before service start and have contractors collect and report their performance in review meetings.
Who’s Doing the Validating?
The best scenario is to include three different parties in the auditing process:
- Customer representative
- Contractor representative
- Outside consultant (LEED, ISO, or other 3rd party service consultant)
If only contractor representatives perform the audits, they may be viewed, rightly or wrongly, as foxes guarding the henhouse. Even if it’s an executive from the contractor’s corporate office.
If only customer representatives audit, you can hear contractors pulling out their hair. Especially if there’s a performance based portion of their contract.
Bringing an outside consultant adds a common, external assessment. Makes for better relationships. Also adds costs and may not be appropriate for smaller contracts.
Vigilance in RFP Bid Process
How can customers determine what they’ll get before the contractor has started?
Ask for it. Ask for site-specific detail. Specifically.
Part of any customer’s RFP should be a request for a contractor’s detailed plan of what they’ll be doing. A specific plan showing who’s doing what, where, when, how, and even why. Specificity is critical.
If contractors are promising LEED acceleration, they should state how they’ll do that, when they’ll get it done, milestones, progress reporting, etc.
Contractors must provide this detail so customers can audit after the contract has been awarded.
Funny. Requesting specific action plans and items is absent in almost all customer RFPs. Many customers seem more interested in knowing how many offices, employees and revenue a contractor has. Rather than clearly and explicitly seeing what that contractor will do for them at their sites.
RFP References Give Limited, If Any, Insight
Customers, don’t count on contractors’ references for proof they’ll deliver.
References are helpful, but not conclusive. As you know contractors’ references are their golden customers. Legitimately these are customer evangelists. Every contractors’ dream. Cynically, reference customers can be swayed with gifts. Either way, contractors references can only be expected to praise lavishly.
The same is true for lost-customer references. They’re those 3- 5 accounts contractors have lost and are selected for their innocuous terminations. “Really, Ms. Customer, we lost that contract because the customer went out of business. No reflection on us. We were golden”.
How are you vigilant after contract award?
And how are you diligent during RFP bids?
~~~~~~
Chris Arlen
President, Service Performance
Technorati:More blogs about
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, Due Diligence, RFPs
February 19th, 2008
Is our economy in recession? Have we been, or will we? What’s a recession? Are these too many questions?
Even if you may not be seeing recession’s effects locally, customers are hearing the pronouncements in newspapers, radio and TV. We are, or will be, in recession.
How does recession affect customers and contractors?
Recession Makes Customers Reluctant
First, on a business level, customers worry if their customers will keep buying at expected rates and quantity. Second, on a personal level, they worry if their plants or offices will be closed and if they’ll lose their jobs.
The fear of the unknown may manifest itself as a CEO’s “freeze everything” memo, or individual decisions at departmental levels. However it shows up, the anxiety is present.
While these worries alone won’t stop customers buying contract services, it may alter when and how they buy.
Customers’ Altered Buying Behavior
Recession reluctance may cause customers to:
AGGRESSIVELY REDUCE COSTS
Some customers may go out to bid specifically to lower contract pricing. Even before their current contracts expire.
Do customers need a pretext to put a contract out to bid in the middle of its term? Nope.
With more price sensitive customers, value may not be as valuable as value once was. It may cause a 6 to 12 month downward spiral where lowest-cost, low-value contractors gain lots of new business. Only to lose it again when customers get fed up and fire them for poor service. And/or the economy looks rosy enough to rehire their preferred contractors.
Customers low price hunting may increase the number of contracts out to bid. However, contractors had better have a sharp pricing pencil to participate.
HAND OVER DECISIONS TO PURCHASING
Recessionary fears may drive executives to mandate cost savings immediately. These initiatives typically fall on the Purchasing (Procurement) department.
Even though Purchasing is involved in bidding service contracts, their role and authority in contractor selection has increased noticeably.
And the knowledgeable end-users (facility and property managers) aren’t as influential as they once were.
As a result of Purchasing’s greater impact, bids may start to skew more towards “lowest cost” rather than the more intelligent “lowest qualified cost”.
DECIDE NOT TO DECIDE
For customers with bids already in progress, they may choose not to pull the trigger to change contractors. The fear of a worsening economy may cause them to prefer the known situation. Again, it’s the Lucifer they’re familiar with.
This behavior frustrates contractors who have already invested in those bid processes - but causes incumbents to breathe easier.
STAY PUT
For customers who aren’t required to go out to bid, they may choose not to. Better the devil (or contractor) they know, rather than stirring up an already uncertain future. Incumbent contractors love this.
DELAY
For customers with upcoming contract expirations, they may choose to delay scheduled bids if possible.
Caution may drive them to see which way the wind blows with their own business first. They want their focus on the health of their core business before distractions from bidding out contracts.
Again, incumbent contractors love this.
The Secret to Overcoming Recession Reluctance
By the way, this secret works for “normal” economic times as well as recessions.
Here it is:
Show customers how their service issues directly impact their business.
Another way of saying it is: Connect the dots between customers’ service pains and poor business performance.
This shows customers that letting a janitorial or security issue continue can hurt their (fill in the blank):
- Revenue
- Profitability
- Brand Reputation
- Customer Retention and/or Acquisition
- Safety
- Regulatory Compliance
- Etc. the list goes on
An Example
Customers may mention the service issue of “poor training” with contract employees (that’d be your competitors’ employees, right?). Recession reluctance may keep customers from doing something about this, like going to bid.
The secret is to let them know that:
1) Poor training may lead to –>
2) Contract employees interacting with customers inappropriately (did someone say obnoxiously?) that may lead to –>
3) Representing your customer to their customers in a poor light that leads to –>
4) Tearing down your customer’s brand reputation that leads to –>
5) Lower customer revenues and profits. End of story.
In this conversation, customers can no longer pretend poor training is acceptable. Not when it takes money off the bottom line, devalues their company’s worth, and generally stinks.
This “connect the dots between service issues and business impacts” is the real deal. It’s a great motivator for customer action.
Avoid the Appearance of Blame
There’s a caveat of course. No one likes having their “problems” jammed in their face. However, if the troubles aren’t discussed, nothing happens. So, contractors must exercise sensitivity. They must not blame customers for their failures, or discuss them in terms of failures. Because aren’t all failures really learning opportunities. Some larger than others.
True Differentiation
And here’s the best part. Other contractors aren’t making these connections. They’re busy explaining how they’ll reduce turnover or missed trashcans, or non-scheduled guard overtime. But they’re not making the connection between service issues and how it impacts customers’ business.
How do you overcome customers’ reluctance to act?
~~~~~~
Chris Arlen
President, Service Performance
Technorati: buying, selling
February 14th, 2008
You know what a reverse auction is. Leaving the light, moving into the darkness, and finally oblivion. From a contractor’s perspective anyway.
I don’t like reverse auctions. They’ve been called zero-sum, power-based bargaining. Meaning customers have all the power, and through coercion, extract savings from contractors’ profits. Not my idea of a partnership.
Did You Know?
Reverse Auction Defined
Wikipedia defines reverse auction as a b2b procurement tool where “…sellers compete to obtain business.”
Reverse auction is found 407,000 times on Google. And a lot of those are about sellers’ (contractors) bad experiences. Here’s what I’ve learned from you and Google .
At one time reverse auctions were thought to cover 10-50% of corporate purchases. However, over the years that’s shrunk down to 1-5% of total spend, because reverse auctions didn’t live up to the hype.
My guess is reverse auctions are held for about 1-2% of facility service contracts (security, janitorial, grounds, etc).
Reverse auctions seem to be used on large volume, facility service contracts rather than small ones. Probably because of the reverse auctions’ expense.
Also, reverse auctions are held primarily by customers who produce products. Maybe it’s their “economies of scale” mindset. They know it works for tangible things - they think it should work equally well for services. Bid out a large dollar contract and they’ll get huge savings, right?
No one’s told them the larger the contract - the smaller the contractor margin.
Sad Story Both Ways
One facility contractor told me he was in a reverse auction against only one other bidder. He suspected it was the customer using the reverse auction to drive down his incumbent price.
Don’t laugh. It happens. Here’s a few other areas where customers get sideways with reverse auctions:
- Not intending to switch contractors, just checking market pricing
- Intentionally including unqualified contractors to drive pricing down
- Providing incomplete or inaccurate specifications
Don’t get me wrong. There are unethical contractors out there too. And they’ll do dumb or ignorant things in reverse auctions, such as:
- Bidding without intending to honor their pricing
- Knowing they can’t meet contract terms & conditions, but bidding anyway
- Buying business at low pricing, then charging high prices for “extras” and/or renegotiating scope after the auction
Over the years, unethical, and illegal, behavior has happened so often that voluntary guidelines and codes of conduct have been developed. For customers (buyers) and contractors (sellers). In industries such as the U.S. auto industry, Canadian general contractors, and British aerospace companies.
However, voluntary codes are ineffective and reverse auction abuse remains common.
Success Stories Sell
You’ll come across stories from reverse auction providers touting millions they’ve saved customers, see Ariba. That’s what sells their next job.
Customers also praise reverse auctions, see U.S. State Department.
It’s understandable. Customers have already spent money on the reverse auction’s pilot program. Their professional credibility is on the line and it must be protected. Kind of like “I chose this; therefore I’ll find the short-term evidence to prove I’m right. I’ll ignore long-term results because they don’t support my position”.
Why Net Savings are Misleading
Net savings are held up at the end of an auction as proof of success.
The formal measurement is Purchase Price Variation (PPV). For facility service contracts it’s the difference between the customer’s last purchased price and the lowest, winning bid price.
Why Gross Savings aren’t Shown
What’s not shown in net savings are costs associated with delivery, quality or implementation.
Why? Because those costs aren’t available at the end of the auction. Only when customers take delivery.
And for facility service contracts, implementation happens over months and years.
Even when it occurs, it’s difficult to quantify facility services’ impact on most customers’ businesses.
Does anyone measure customers’ productivity when employees work in a dirty office? Or how much free overtime customers lose when employees don’t feel safe working after hours?
It’s easier with manufacturing and production lines. The line stops. It costs the customer. That’s the performance penalty the facility service contractor may have to pay. Same in a cleanroom environment. Contaminated product, contractors pay.
Those are the implementation costs that affect gross savings. But they don’t show up in net savings at the end of the auction.
Why Reverse Auctions Don’t Work for Facility Service Contracts
- Focus is on price - not reducing cost, problem solving, or service delivery
- Damages supplier (contractor) relationships
- May encourage imprudent bidding (not you of course)
- Focuses people on short-term, instead of long-term results
- Promotes customers’ zero-sum, power-based bargaining
- Difficult to define service intangibles in specifications
- Supplier relationship crucial to delivery of service value
What Can You Do About Reverse Auctions?
1) Work to Avoid Reverse Auctions
>>> Educate Customers
- Help them understand why reverse auctions don’t work for facility services
- Send them a link to this blog posting & see links at end of this post
- Try this pre-auction decision analysis tool, it’s a downloadable Excel file from Lee S. Crane. a buyer with the U.S. Postal Service
>>> Build Stronger Relationships
- First, understand how your service impacts customers’ businesses
- Then strengthen what you do to better serve customers’ business needs
>>> Continually Increase Value
- Bake more value into your basic offering
- Not as an add-on service - but as an integrated solution so customers can’t deconstruct it
- You’ll be increasing your service above perceived commodity status
2) Boycott Reverse Auctions
Why not? The Cabletelevision Advertising Bureau is boycotting online auctions.
They say selling advertising is not a commodity. They’re putting together custom packages and providing added-value.
So instead of selling price alone in an online auction, their members are boycotting the eBay developed auction.
3) Participate in Reverse Auctions
Your choice. There’s a lot of research and info on games theory. Couple of interesting things were:
- Winner’s Curse - which says the winning bidder will tend to overpay for actual value - for reverse auctions it means contractors have to figure out how to deliver service at their winning bid pricing. Yikes!
- Entrapment Game - really interesting exercise showing illogical, but typical auction behavior
Information Links
- Dr. M.L. “Bob” Emiliani, website with numerous articles,
“REVERSE AUCTIONS, A Ten Year Research Project Investigating the
Effectiveness of B2B Reverse Auctions“
- AGC of America: Reverse Auctions Resource Center white paper
- US Army Corp of Engineers on Reverse Auctions
- Mohanbir Sawhney, “Reverse Auctions Cutting Costs“, June 01,
2003, CIO.com
- Karen Prema, “SRM + E-AUCTIONS: Tools in the toolbox“,
Purchasing, April 6, 2006
- David Hubler, “Reverse auctions become a diplomatic tool:
State Department stretches its budget with online buys“, Federal
Computer Week, Aug. 14, 2006
- Ariba success stories on their web site
How Are You Handling Reverse Auctions?
~~~~~~
Chris Arlen
President & Senior Consultant / Service Performance
http://www.serviceperformance.com/
Technorati tags: reverse auctions, pricing, facility services
April 10th, 2007
