In
the public sector, e-auctions have been the next big thing
in procurement for years. Following successful pilots at the
start of the decade, the government was keen to push adoption
of the technology, initially across central departments and
later in local councils, for which it launched the National
e-Procurement project (NePP).
Today, the NePP has disbanded, but the government’s
enthusiasm remains. Despite some clear reluctance on the part
of public bodies, in December treasury minister Angela Eagle
was again urging greater uptake. “I’m calling
upon all departments and agencies to look at how they might
use e-auctions as part of their procurement strategy,”
she said.
For anyone familiar with eBay, an e-auction is fairly easy
to understand. The two main differences to eBay are, first,
it’s a Dutch auction, so the lowest bid wins (although
it’s not actually that simple) and second, the auctions
are not open to everyone. Potential suppliers are identified
beforehand and invited to participate.
The attraction to government is fairly obvious: the auction
prompts suppliers to offer their lowest price in an effort
to win the business. That can mean considerable savings on
procurement. When the NHS ran its pilot project in 2003 for
a three-year, £1 million contract for tea, for instance,
it managed to cut the cost by 29 per cent, and last June the
largest ever e-auction in the UK public sector saw seven government
departments and the Metropolitan police save £100 million
on office supply costs.
“It’s a very high savings level,” says Gary
Robinson, head of the public sector division at Trading Partners,
which has run e-auctions for the NHS and the Ministry of Defence.
But it is not just the public sector that can benefit. The
private sector has long been familiar with e-auctions, and
charities can use them too. Cancer Research, which is developing
a strategy to enable it to manage and run its own auctions,
has already secured savings of more than £2.5 million
a year on office supplies with a series of auctions held by
e-procurement specialists Vendigital.
The opportunities, says Vendigital’s co-founder Adrian
Griffiths, are significant. “If a spend makes it worthwhile
going to get some prices from a few suppliers to see that
you’re paying the right sort of level, then it’s
probably worth running an online tender,” he says.
And now for the bad news
Of course, if it were that simple, there would be little
difficulty in persuading any organisation to sign up. Not
surprisingly, some say it isn’t.
For a start, the sort of savings – typically about
30 per cent – that are attributed to e-auctions are
far from certain.
As Martin Band, CEO of UKprocure, explains, the figure will
reflect existing practice. “It depends how rigorously
that item has been negotiated in the past,” he says.
“If you’re starting from a position where it
hasn’t been controlled and list prices have been accepted
then any auction can produce astounding results.”
Elsewhere, savings are likely to be more modest. Nevertheless,
he says, his company has done a number of auctions for the
NHS and the average saving on the previous best-negotiated
price remains 18 per cent.
A more serious problem, though, is that the set-up costs
are likely to preclude smaller groups.
There are different deals available, and organisations can
choose, for instance, to pay for a single auction, which
may cost just a few thousand pounds. Some, however, argue
that the auctions are unlikely to be worth it for tenders
under £200,000, and certainly a fully managed service,
which will include help sourcing and familiarising suppliers
with the service, is going to be expensive.
“You’re buying top price consultancy,”
warns Belinda Prince at Cancer Research UK. “Typically
these guys are going to charge you over £1,000 a day.”
Indeed, other than Prince’s charity, there has been
little uptake to date in the charity sector. This could
change in the future as charities find their way round the
problem of price (smaller local authorities, for instance,
are increasingly clubbing together to make their tenders
large enough for an e-auction). However, many charities
first experience of an e-auction may well not be as a buyer;
instead, they could find themselves bidding as suppliers.
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From back to front
When e-auctions were first developed, it was expected they
would be used to cut down on equipment and back office costs.
As the NePP’s chair Colin Whitehouse put it: “Every
pound you save through better procurement is a pound you
can spend on better front-line services.”
However, with time, the technology has proved capable of
handling more complex contracts.
Don Purchese is e-auction framework manager at OGCbuying.solutions,
an executive agency of the Office of Government Commerce
in the Treasury that helps public sector purchasers to get
best value from their procurement. As he explains, the possibilities
for e-auctions have grown considerably.
“There’s really no limit to what you can put
up to an auction,” he says. “The only criteria
is that there are enough suppliers out there for a competition;
that you have the specification right; and that the value
of the tender makes it worthwhile.
“The categories auctions are being used for expands
on a daily basis.” Increasingly it looks like they
will end up being used to actually contract some of those
front-line line services Whitehouse was talking about.
And it is from this point of view that the weaknesses critics
identify in e-auctions may prove more serious for charities.
The problem is that e-auctions could exacerbate the difficulties
already identified in the tendering process. “Everybody
you mention it to has anxieties,” says Robin Currie,
chief executive of Liverpool-based social services charity
PSS.
He believes that service quality is likely to suffer if
e-auctions become widespread. “There are lots of issues
in relation to tendering anyway in the care sector and this
just accentuates that,” he says. “By driving
down prices through a Dutch auction it contributes to a
race to the bottom.”
Currie reckons there is a place for e-auctions; just recently,
he says, he read about a local authority saving considerable
amounts on purchasing wheelie bins. But that’s where
he wants them to stay. “It encourages people to cut
standards,” he insists.
Nor is he alone in having reservations. Neil Thompson, business
development manager at e-procurement services provider Millstream,
says that a number of the purchasers he works with refuse
to use e-auctions on the basis that they have good relationships
with their suppliers, which could be harmed by pushing them
too far on price.
“By creating an auction, you’re essentially
squeezing the supplier down to the last possible base line
they can provide the service at,” he warns. “That
may bring a short-term gain, but in the long term you’re
diminishing the profit margin of your supplier, and there’s
a question as to how sustainable that is.”
However, supporters of e-auctions make three points in reply.
The first is that the e-auctions aren’t necessarily
won on price. Quality issues do come in to play before,
by specifying certain quality standards in the contract;
during, by weighting the auction to also include other factors
in the bid, such as service levels; and after, because,
unlike eBay, the best bid doesn’t always win –
the buyer retains the right to choose someone else.
“We’ve run many e-auctions in the last two years
and in my experience the council has never given the contract
to the lowest bid on price,” says Sam Austrin-Miner,
programme director for corporate procurement at Edinburgh
City Council, which has gone further than most in using
the e-auctions to contract care services. In fact, he says,
the council can ignore bids that seem too low to provide
a quality service.
Furthermore, suppliers are under no obligation to bid lower
than they can reasonably supply a decent service at.
“If they genuinely can’t compete, then they
have to walk away,” says Prince. Of course, charities
can have a poor record in doing so, but that’s not
really down to the auction process. “You can find
there’s not a lot of rigour in some charities’
calculations of their cost base,” notes Prince.
Finally, say the supporters, e-auctions have one major advantage:
they bring transparency to the tendering process.
The auction is just the final part of the process, and what
precedes it is arguably more important: the tender specification
is put up online for all the suppliers to see and they are
invited to ask questions. For buyers, this means they are
forced to accurately – and publicly – specify
their requirements so that suppliers can accurately work
out the price they can afford to bid. For suppliers, meanwhile,
there is certainty that they are all bidding to supply the
same service, and there is complete openness in the tendering
process.
“In an auction, a supplier can be sure it’s
competing openly with its market, offering a similar service
to the same specification,” says Robinson. “It’s
much more of a level playing field.”
When you put it that way, charities might find it hard to
argue against them.
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