No, I’m not. And.. YES! We did it! Let’s do it again for you, my dear blog readers!
E-auction for companies surplus cash to bank deposit
Just as an intermezzo between blogs on negotiation. the e-auction is also the “technological advanced” as well as damn difficult way to negotiate. With a blue chip, business innovative company, we successfully finished an e-auction. The subject of the e-auction was a short-term cash, which the company deposited to bank as a cash surplus within the active management of working capital requirements.
First thing first… What is an E-auction?
The e-auction is a modern, e- type of business negotiation between auctioneer (the company) and bidders (suppliers). It takes place on a technologically advanced platform simulating a wide electronic marketplace.
It’s becoming an inseparable part of the everyday procurement process while connecting three most important documents of that process – (internal) request for procurement, order on basis of negotiated contract and the bill to be paid for the service provided from the supplier.
Types of auction
In a classic auction, buyers compete by bidding the prices to buy offered item, which is a subject of the auction. As the opposite to the ordinary - forward auction - where supplier sells to several bidders (buyers), the company in procurement uses a reverse auction, where they collect offers to buy from several suppliers, trying to get the item for the lowest price possible. In business most often the e-auctions are performed between companies (B2B), more seldom to customers (B2C) or between customers alone (C2C).
Why e-auction?
E-auction results of reference (source: www)
- Typical savings in procurement e-auctions range from 10 to 40%
- Siemens in 4 years increased procurement through e-auctions more than ten-fold, over 5,5 billion €
- Telefonica shortened time of procurement cycle by 50% and decreased costs in the process by 27%
- Royal Dutch Shell uses reverse e-auctions from 2011. Today over 100 e-auctions is executed monthly
- All Fortune 500 companies perform e-auctions!
Limitation of the e-auctions
Beside the impersonal approach to negotiation, where it is not necessary for you even to meet the supplier at all, several other, more IQ limitations may occur:
- possibility of fraud, although high transparency and audit trail
- limited participation of suppliers
- security of data transmitted over the e-medias
- auction software was costly, but these days you can repay the investment within few auctions
- long cycle time of preparation, but short and repeatable execution
- equipment for buyers is becoming more and more universal and undemanding for use
- dismissive attitude of those performing the negotiation, because they have to learn something new
- fear of change as constant worm in our heads
There are also some myths accompanying the e-auction…
Do you use E-auction? (Efficioconsulting, 2011)
“Only” 9 steps to perform a successful e-auction…
1) Select right item for the e-auction.
Everything that is billed to you can be auctioned! It’s a bit easier to perform the reverse auction on tangible items (material, equipment, products, …) than services. But it is not seldom to auction even lawyer services, if you define the user requirements right and respectively include the specifics of the selected auction item.
Some auction software come with possibility to use simple approaches and analyze your procurement portfolio to suppliers/items. Intention is to find out the most appropriate item to auction, either as regards suitableness of the item specifics, or taking into consideration higher priorities due to economic criteria (i.e. ABC method for finding items where most of the effect is gained using the least effort.
2) Define requirements and goals.
Define user requirements by defining the quality and functionality of products or SLA for services. Use appropriate criteria and assign right weights to assure effective selection of bids and efficient flow of the auction process.
Do not underestimate the fact that also in e-auctioning using right negotiation strategy and tactics is important. It has slightly different approach but still influences the negotiation process in a great manner.
3) Train and prepare the participants.
E-auctioning is relatively new approach. Therefore, there is a high probability that participants on either side of negotiation “computer screen” do not possess sufficient knowledge as well as experience with e-auctioning. While the last comes with the millage over years of repeated negotiation, we cannot afford to let the participants to participate in auction without sufficient knowledge – it would cause errors and bad mood. Both leads to aversion to e-auctions finding many more arguments against than in favor. Train your staff! Hit the road, visit several suppliers and explain the process. Higher your negotiation power the more success you’ll have in attracting their attention and convincing them.
4) Publish and invite potential suppliers.
Scan the competences of potential suppliers! Especially since the e-auctioning allows you to invite long-distance cross-border potential suppliers, prevent of giving non-arguable advantage to prices (best bid) neglecting capabilities to perform (price-performance). Draw a transitional matrix (we will discuss it in one of our next blogs) and map your supplier in it, discovering its ability to adapt to your present requirements and future developments.
Be fair to all bidders. Remember? Keep “you face”!
5) Prepare documentation.
Good documentation is vital – remember, personal contact in e-auctioning is very limited. Therefore, there is little room to correct a mistake during the ongoing on-line bidding process. Use all RFx steps if necessary, but be consistent in building the best tender documentation ever and avoid potential costly misunderstanding and/or disqualification of your credibility.
6) Review and exclude non-compliant bids.
Based on documents and your requirements, you receive bids prior the execution of on-line bidding. Analyze them in detail, allow bidders to supplement them (if allowed). But, above all, enter the bidding with equal quality of documentation for all bidders.
7) Perform the e-auction.
Do it!
8) Monitor the e-auction.
Act according the e-auction process to run it efficiently – react in case if needed. Use mail, phone – adapt newly emerged situations, prevent the incidents.
9) Select the winner and close the dealThe process should propose to you the winner with best offer according to your requirements and goals reflected in the documentation. Some electronic “paperwork” is needed to close the deal.
Execute the procurement and enjoy the relationship.
How to auction the surplus money with banks?
Auctioning the company surplus cash to be transferred to the bank deposits is rarely used approach. Even though you can perform the e-auction on services, most banks belong to even more specific species - conservative, with complex authorization system, escalating seniority, more rigid as you are – arising from relatively high regulated environment. Therefore, they are less inclined to changes, to business innovations. These could be their great excuse to avoid e-auctioning, if there would not be little bit specific in their business – they are using e-auctioning every day! In trading interest rates and currencies, securities and commodities. Over Bloomberg, Reuters, …
For that, breaking ice while inviting the banks to cooperate in e-auctions is obvious. And, after extensive explanation of the reverse e-auction, all banks that considered themselves to be true partners in management of the company’s working capital (do you remember last blog where we talked building the partnership negotiation?), participated in a constructive way!
In the process, basically, we followed all the above steps carefully, giving especial attention to:
- selecting straightforward product –short-time deposit, a transaction that is performed in a classical way almost daily
- training the staff on both sides to assure readiness of the bank staff and routine on side of the financial department of the company
- assuring enough participants – I suggest over 5 banks, because, by default, they will not response all and you need at least three or four of them
- monitoring the execution of the auction – nevertheless, it was the first time for the company, for the banks in the country, and most probably in the region, too.
- do the follow-up after closing the deal. Find www (what went wrong) and especially what went wow – to avoid the first and to reinforce the last. And remember – the bank should be your trustworthy partner that should follow you in good and less favorable (economic) conditions. And as such, if they have not participated in the auction (remember, today the banks liquidity is extensive, they do not necessarily need costly deposits), perhaps you should revise also the “cookies”, such as payment transactions over banks, fees and commissions, the prices of loans, … Because… Within negotiation - use your bargaining power to stabilize your supply chain – also for supplying money – especially since you rely on your partner in optimizing your working capital.
Were we successful?
Be the judge! The baseline interest rate received and used in the past actually was improved by almost 30 bp. I should not give you exact numbers on better results, not to reveal the interest rate of the company – but let’s say, that they nicely fit in range of the above stated “e-auction results of reference”. By taking into account same transactions in next 12 months, the result is repaying all the TCO costs of e-auction (of course, incl. depreciation of the SW) for several times.
Well done! With great team and capable decision makers. And, last, but not least – with affirmative support of the management board. Along with collaboration of the (partner) banks!
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