electronic reverse auction and the public sector: factors of success; moshe e. shalev & stee...

JOURNAL OF PUBLIC PROCUREMENT, VOLUME 10, ISSUE 3, 428-452 FALL 2010

ELECTRONIC REVERSE AUCTIONS AND THE PUBLIC SECTOR: FACTORS OF SUCCESS

Moshe E. Shalev and Stee Asbjornsen*

ABSTRACT. Electronic reverse auctions (e-RAs) provide purchasers with an opportunity for greater savings, transparency and administrative benefits. This paper reviews the literature, identifying the factors relevant to public sector e-RA success, and then tests these factors through a statistical analysis of a large sample of e-RAs, with a view towards providing guidance to public sector purchasers looking to conduct e-RAs. Our research found no correlation between e-RA success and the number of bidders or auction volume, but did find correlation between e-RA success and (1) competition among suppliers, (2) purchase complexity, and (3) purchase specification. The number of bidders was found to be correlated with competition among suppliers, specification and complexity. Auction volume was found to be correlated with none of the factors. We discuss the possible explanations for our results and draw conclusions for public sector procurement managers to consider when deciding whether to conduct an e-RA for a particular purchase.

INTRODUCTION

Introduced during the 1990s, electronic reverse auctions (e-RAs) have grown popular in the business-to-business (B2B) and government procurement communities. The use of e-RAs has increased in both relative and absolute terms over time, and practitioners expect this trend to continue (Jap, 2002; Beall et al., 2003; Kaufmann & Carter, 2004; Schoenherr & Mabert, 2007).

Developed country governments, including Australia, Canada, France, Korea, Portugal, the United Kingdom and the United States, ------------------------------- * Moshe E. Shalev, LLM, MBA, and Stee Asbjornsen, BA, LLB, are the Contracts Officer, and an Associate Procurement Officer, respectively, United Nations Secretariat Procurement Division, New York.

Copyright © 2010 by PrAcademics Press

ELECTRONIC REVERSE AUCTIONS AND THE PUBLIC SECTOR: FACTORS OF SUCCESS 429

and many developing country governments such as Brazil, Chile, China, Colombia, Ecuador, Estonia, Panama, Paraguay and Peru, among others, as well as thousands of private sector organizations such as General Electric, BMW, Nestlé and Kimberly-Clarke, already make extensive use of e-RAs. For example, the United-Kingdom Office of Government Commerce [OGC] reported savings of £50 million in IT hardware e-RAs over four years, and anticipating total savings of £270 million through all e-RA purchases by the end of fiscal year 2011/2012 (OGC, 2010), while General Electric claimed to have saved $600 million, or 8% of their spending, through e-RAs in 2001 (Sawhney, 2003).

In an e-RA, suppliers compete dynamically online against each other to offer the lowest price, resulting in greater savings to the buyer. Since the entire process happens online, it is also often faster and more transparent than traditional procurement methods. However, not all e-RAs are successful in achieving savings for buyers, and suppliers have also complained that the e-RAs ignore product innovation and quality.

The existing literature on e-RAs focuses primarily on the private sector, and little research has been conducted on the factors that lead to successful e-RAs in the public sector. This is despite the fact that the public sector as a whole is the biggest single buyer in any country (Lindskog, 2008), and is estimated to constitute approximately 15% of worldwide GDP on average and about 20% in some OECD countries (Organisation for Economic Co-operation and Development, 2008). Wagner and Schwab (2004) noted that the majority of existing research is conceptual, prescriptive and descriptive in nature, and based on qualitative interviews and case studies. They also noted that even when surveys were conducted, the sample sizes were small. We have found that most papers that do focus on the factors that affect e-RAs success in the public sector rely primarily on surveys and case studies to support their conclusions.

Following a review of the literature, we identified three broad categories of factors that may affect the savings achieved by buyers, or the “success” of e-RAs. The first category of factors relates to market conditions: the number of bidders, the total auction volume and the competition among suppliers. The second category relates to the purchased product or service: its complexity, and how well it was

430 SHALEV & ASBJORNSEN

specified. The final category relates to factors that resulted from changing suppliers, including the break in trust with longstanding suppliers and switching costs.

The purpose of this paper is to contribute a statistically-supported evaluation of these factors using a relatively large sample of e-RAs to determine which affect the success of public sector e-RAs. We then draw conclusions for public sector procurement managers to consider when deciding whether to conduct an e-RA for a particular purchase.

OVERVIEW

Electronic Reverse Auctions

While auctions provide suppliers the opportunity to find the best price among interested buyers, reverse auctions give buyers a chance to find the lowest-price supplier. In e-RAs, the buyer is able to gather all interested suppliers online, irrespective of their geographic location, at a relatively low cost (Jap, 2002). During the e-RA, suppliers submit multiple offers, usually as a response to competing suppliers’ offers, bidding down the price of a good or service to the lowest price they are willing to offer. By revealing the competing bids in real time to each participating supplier, e-RAs promote “information transparency”. This, coupled with the dynamic bidding process, improves the chances of reaching the fair market value of the purchase (Sashi & O'Leary, 2002; Mabert & Skeels, 2002; Smeltzer & Carr, 2003; Beall at al., 2003; Schoenherr & Mabert, 2007).

The Advantages of e-RAs

e-RAs are promoted as providing purchasers with a number of benefits. The foremost is that e-RAs often provide buyers with significant price reductions. Savings from e-RAs generally average 5% to 30% when compared with traditional bidding methods, with 15% being more typical (Sashi & O'Leary, 2002; Jap, 2002; Beall et al., 2003; Major, 2007), although exceptional savings as high as 90% have been achieved (Beall et al., 2003). However, more recently, Singer, Konstantinidis, Roubik, & Beffermann (2009) questioned these purportedly high savings rates, suggesting that savings of around 4% are more realistic.


Second, e-RAs provide a number of administrative benefits. They are quick; avoid the need for subsequent price negotiations; allow for easier information delivery through email and the Internet; and offer quicker procurement cycle times, thereby allowing for lower inventory levels (Mabert & Skeels, 2002; Jap, 2002; Smeltzer & Carr, 2003; Beall et al., 2003; NSW, 2006; Singer et al., 2009). Collectively, such benefits lead to better outcomes in less time, resulting in a more efficient procurement process for both suppliers and the buyer.

Third, e-RAs provide for enhanced transparency by disclosing all bids in real time and by reducing the need for person-to-person contacts among suppliers, and with buyers. The electronic record permits a comprehensive audit trail and compliance capabilities (Turley, 2002; Walker & Harland, 2008; Schapper, 2008; Alilovic, 2008). As transparency and compliance become increasingly important to public sector practitioners, these administrative benefits may become even more important than any cost savings achieved.

The Disadvantages of e-RAs

e-RAs, when conducted in their most basic form, restrict suppliers to compete on price alone. This threatened to damage longstanding supplier relationships and lead to reduced supplier innovation and quality, as anything above the minimum specifications was not rewarded by simple e-RA designs. By ignoring past supplier performance and loyalty, the introduction of e-RAs caused alarm among incumbent suppliers, leading some to refuse to participate in e-RA-based procurement exercises (Smeltzer & Carr, 2003; Emiliani & Stec, 2005). In a situation known as “winner’s curse”, some suppliers caught up in the auction environment bid below their costs in order to win (Sashi & O'Leary, 2002). Finally, researchers expressed concerns that e-RAs might be coercive and unethical (Emiliani & Stec, 2002; Carter et al., 2004).

LITERATURE REVIEW

The literature identified a wide range of potentially relevant factors which may affect the success of e-RAs in the private sector. The most commonly mentioned were (1) the number of bidders, (2) auction volume, (3) competition among suppliers, (4) purchase complexity, (5) purchase specification, (6) the importance of the supplier-buyer relationship, and (7) switching costs (Wagner &


Schwab, 2004; NSW, 2006; Crane, 2008; Gattiker, 2008). The first three factors addressed market conditions, and sought to measure how much interest suppliers had in competing to provide a product or service, including auction volume, the number of bidders and competition among suppliers. The following two factors consider the product or service in question: how complex the product or service is, and how well the buyer specified it. The final two factors relate to changing suppliers: the implications of potentially changing suppliers through an e-RA on the quality of the product and the purchase price, and the effect of the costs of switching to a new supplier.

Market Factors

As with any auction, favorable market conditions improve the likelihood of auction success. The number of bidders participating in e-RAs was identified as a crude indicator of supplier interest. Auction volume is thought to be an important means to attract suppliers to participate in e-RAs and to allow suppliers to accept lower margins based on higher total profit potential. Competition among suppliers is a measure of how strongly participating suppliers are competing with each other to win the e-RA in the product-particular market.

Number of Bidders

The literature on e-RAs emphasizes the importance of the number of bidders in ensuring that the lowest possible prices are achieved. In a sealed-bid auction, each supplier has only a single opportunity to bid. The difference when using e-RAs is that bidders dynamically drive the bid price lower only when beaten by another bidder. Consequently, there must be at least two suppliers, and preferably more, to achieve savings.

Singer et al. (2009) found that e-RAs with only one supplier lead to detrimental outcomes, that those with two suppliers had mixed outcomes, and that most of e-RA savings can be attributed to attracting more bidders. The literature also provides examples of successful e-RAs with only two suppliers (Turley, 2002). However, in such cases there is a risk that anonymity will be lost, and that suppliers will be able to identify each other (Beall et al., 2003; Yukins & Wallace, 2005). This may also create a greater risk of collusion, whereby suppliers may agree not to compete and divide the auctions among themselves (NSW, 2006).


Most researchers have suggested that at least three to five viable suppliers are necessary for an effective e-RA (Mabert & Skeels, 2002; Beall et al., 2003; Kaufmann & Carter, 2004; Schoenherr & Mabert, 2007; Major, 2007). More generally, there is widespread support in the literature (De Boer, Harink, & Heijboer, 2002; Jap, 2002; Mabert & Skeels, 2002; Sashi & O'Leary, 2002; Crane, 2008) that “[f]irms should not conduct e-RAs with only few suppliers” (Wagner & Schwab, 2004, p. 23) and that “[g]enerally, the more participants, the more competitive the bidding” (Mabert & Skeels, 2002, p. 76). Singer, et al. (2009) found clear evidence that an increase in the number of bidders led to greater e-RA savings.

While there is widespread support for having high numbers of bidders, Wagner & Schwab (2004) found no correlation between the number of bidders and the success of the e-RA, although they did find a strong correlation between the number of bidders and competition among suppliers, and so recommended that the number of bidders be considered.

Auction Volume

In order to compensate for lower prices and lower margins, suppliers seek higher volumes to maintain or increase the total revenue. Buyers, in turn, benefit from the lower transaction costs and economies of scale that result from larger volumes (Smeltzer & Carr, 2003; Beall et al., 2003; Carter et al., 2004; Kaufmann & Carter, 2004). As well, buyers will seek to offset the additional e-RA costs, normally resulting from third-party e-RA service-provider fees. This cost depends on the scope of the service to be provided by the third party provider, and may range between 0.25%-5% of procurement volume, occasionally subject to minimum and maximum amounts (Mabert & Skeels, 2002; Turley, 2002).

In part as a result, numerous studies have indicated that the procurement volume must be sufficiently high to provide sufficient profits to attract enough suppliers, and provide buyers with enough savings to cover their additional costs (Jap, 2002; Sashi & O’Leary, 2002; De-Boer et al., 2002; Beall et al., 2003; Kaufmann & Carter, 2004). The Australian government of New South Wales [NSW] recommended to public procurement buyers that “[g]enerally, the higher the volume of the procurement, the greater the potential for realizing savings” (NSW, 2006, p. 5).


Despite this, the literature cites examples of smaller auctions that did attract suppliers. For example, the United States Department of Defense (DoD) was able to attract bids for auctions of only $10,000 (Turley, 2002). Yet, Turley then cites the DoD as suggesting a minimum auction volume of $500,000 for a successful e-RA. The Office for Government Commerce of the United Kingdom has suggested £80,000 as a minimum amount (OGC, 2005), while Beall et al., (2003) found that even $1,000,000 is too low for an e-RA to succeed. However, Schoenherr & Mabert (2008) noted that while the auction volume should be high enough to enhance the e-RA’s success and to attract more suppliers, it should not be so high as to strain suppliers’ capabilities and eliminate small and medium businesses, which comprise a significant proportion of suppliers in most markets.

Competition among Suppliers

While the number of bidders measures how many suppliers are participating, competition among suppliers attempts to measure the degree to which the suppliers are competing with each other. It stands to reason that a large number of bidders is of no benefit if only one of them is willing to make concessions to win the bid, while the others are unwilling to reduce their prices. Similarly, a few fiercely competitive bidders may result in great savings.

There is wide agreement in the literature on the importance of competition to e-RA success (Beall et al., 2003; NSW, 2006; Major, 2007; Crane, 2008). Jap (2002, p. 515) notes that “competition among suppliers forms the bedrock of successful reverse auctions”, while Wagner & Schwab (2004, p. 22) went so far as to say that “one can summarize the findings of our study as: ‘all that counts is competition’. The importance that a competitive situation exists can never be over-emphasized.”

Purchase Complexity and Specification

Although e-RAs may be used to purchase anything, they are normally recommended only for simple purchases, such as commodities. Since e-RAs do not permit subsequent rounds of negotiation to address any issues that may arise, it becomes crucial that the purchase be very well specified before the auction. The difficulty of accurately specifying complex purchases leads some researchers to recommend only simple purchases for e-RAs.


Purchase Complexity

Simple e-RAs restrict suppliers to compete on the price alone. Where other factors such as intangible concerns or non-price factors are involved, direct negotiations with suppliers are thought to be necessary to discuss all aspects of the purchase. It has therefore been argued that e-RAs are best suited for simple purchases or commodities, where the only differentiating factor is price (Jap, 2002; Beall et al., 2003; Yukins & Wallace, 2005; NSW, 2006). Schoenherr and Mabert (2008) also found that increased complexity in purchases appeared to reduce success.

In addition, since simple e-RAs focus primarily on price competition and fail to consider product quality or innovation, suppliers may end up focusing on price to the exclusion of other considerations, leading to decreased product quality and fewer product innovations. This leads some observers to suggest that e-RAs should be limited to standardized or commoditized purchases (Smeltzer & Carr, 2003).

As there are often more suppliers for simple, commoditized goods, some researchers have recommended that e-RAs be limited to such goods, as the larger number of bidders would likely result in increased competition and hence greater price savings (Beall et al., 2003; Wagner & Schwab, 2004). Schoenherr and Mabert (2008) found that the greater the complexity, the fewer bidders participated.

Furthermore, suppliers of complex goods are often also strategic suppliers and have longstanding relationships with the buyer, which the buyer is reluctant to risk. Smeltzer and Carr (2003) noted that, as a result, buyers often fear destroying such suppliers’ trust, making complex product or service procurement through e-RA too risky, although they called for further research in this area.

While there are a number of arguments in favor of using only simple products, some researchers noted that complexity may not affect e-RA success. Wagner and Schwab (2004) found no correlation between complexity and e-RA success, although they noted that in all of the e-RAs surveyed the complexity was “rather low”. Moreover, others observed that simple products may have lower margins, particularly when they have been commoditized and a large number of suppliers are in the market. In contrast, complex products tend to have higher margins, and as a result offer greater


potential savings (Smeltzer & Carr, 2003; Beall et al., 2003; Kaufmann & Carter, 2004).

In order to use e-RAs for complex goods and services and give some comfort to suppliers, some observers have suggested a “two-stage” solution. The first stage involves a technical evaluation, producing a technical score. The second stage involves obtaining a score based on the relative bid price through an e-RA. The technical score can either be integrated dynamically into the e-RA by automatically modifying the bid rank in real time, or combined with the bid scores of each vendor after the e-RA is completed (Turley, 2002; SAP, 2006; NSW, 2006; Schoenherr & Mabert, 2007).

Purchase Specification

Purchase specification faces similar concerns to those relating to purchase complexity. As e-RAs normally limit suppliers to compete only on price, it becomes imperative that all suppliers bid on the same specifications. As a result, researchers have recommended that e-RAs be used only for very clearly defined products (De-Boer et al., 2002; Smeltzer & Carr, 2003; Beall et al., 2003; Kaufmann & Carter, 2004; NSW, 2006). One commentator expressed concern that poorly specified products, combined with a lack of subsequent rounds of negotiations, may create uncertainty in bidders and lead to higher prices for buyers (Crane, 2008).

Wagner and Schwab (2004) found a strong positive logistic correlation between “easy to specify demand” and “success”, but noted that they did not find a correlation using linear regression. Gattiker (2008) found that specification was the most important factor in the opinion of buyers, echoing the comment “[i]f you can spec it, you can bid it” (Beall et al., 2003, p. 51). As long as purchases can be specified, e-RAs can be used for even complex purchases (Kaufmann & Carter, 2004). However, Schoenherr and Mabert (2008) found that difficulty in specifying demand has no direct impact, either negative or positive, on e-RA success, although they did find an indirect effect, as the difficulty to specify demand was found to negatively correlate with the number of bidders.


Changing Suppliers

Some of the most common criticisms of e-RAs, particularly in popular press articles, relate to concerns about buyers using e-RAs to change longstanding suppliers, merely because of price. However, we conclude that these issues do not apply in the public sector, first because the nature of public sector procurement requires that most purchases be made through a competitive bidding process, regardless of form, and second because these arguments do not apply to e-RAs any more than they would to more traditional auctions, such as sealed bid auctions.

Relationship with the Supplier

The literature on e-RAs places significant concern on the erosion of trust between long-standing strategic suppliers and purchasers following the implementation of e-RAs. Emiliani and Stec (2005) observed that e-RAs cause divisiveness between suppliers and the buyer, and that the buyer must take a long-term view of purchasing, rather than focusing only on short-term savings. Others note that e-RAs cause a breakdown in trust by implying that the buyer’s expectations are no longer being met, and therefore the purchase will be “shopped around” (Smeltzer & Carr, 2003). Moreover, some suppliers claim that e-RAs are only a tool for the buyer to conduct a market-survey or to obtain further price concessions from the incumbent supplier, with no real intention to award the business to the winning supplier (Jap, 2002). As a result of all these concerns, some suppliers may refuse to participate, reducing the number of bidders in the auction, while other suppliers may no longer be willing to invest in improving the quality of the goods provided to the buyer (Jap, 2002; Beall et al., 2003).

Perhaps the concern which underlies all of these arguments is that existing suppliers are naturally reluctant to risk their margins by entering into dynamic competitive bidding arrangements (Sashi & O'Leary, 2002).

Furthermore, some researchers appear to show that these concerns about trust may be exaggerated. Jap (2002) and Carter et al. (2004) observed that about two-thirds of buyers surveyed claimed improved buyer-suppliers relationships, greater cost savings, better performance, delivery and product excellence. Beall et al. (2003, p.


60) found “little or no evidence that e-RAs are driving suppliers into non-sustainable relationships with the buyers. In fact, there is evidence to suggest the opposite,” and Schoenherr and Mabert (2007) observed that this was how e-RAs were perceived only in the very beginning, and they suggested some strategies in order to overcome this prejudice. Recent research has also noted that buyers perceived the relationship to be suffering, but that suppliers largely felt that their relationship with the buyers remained unaffected by e-RAs (Loesch & Lambert, 2007).

One circumstance where e-RAs, and indeed any auction process, is not appropriate, is with strategic suppliers. Strategic suppliers are those that provide to the buyer a crucial product or service not easily replaced in the market. In such circumstances a competitive auction process is not appropriate, since replacing the supplier is not a viable option for the buyer (Mabert & Skeels, 2002). Hartely, Lane and Duplaga (2006) found that most buyers were able to distinguish between strategic and non-strategic suppliers and applied e-RAs in appropriate situations.

Switching Costs

Sometimes, the cost to a buyer of switching suppliers may be very high. Wagner and Schwab (2004, p. 16) observed that “[i]n general, the lower the switching costs, the more a buyer can benefit from conducting a reverse auction because switching costs would be offset by the potential savings. Therefore, several researchers have pointed out that the lower the expense of switching suppliers, the more suitable e-RAs would be”.

Wagner and Schwab (2004) also found a correlation between switching costs and the number of bidders willing to bid, since competing suppliers are unlikely to bid when they suspect that the buyer is not going to change suppliers due to high switching costs. Further, the incumbent supplier is likely to resist an e-RA in these circumstances, as they may perceive it as just a gambit to reduce the supplier’s margin (Smeltzer & Carr, 2003; Emiliani & Stec, 2005). In certain circumstances, the costs of switching suppliers may exceed the savings available from a procurement exercise, and alternative solutions should be considered.


Relevance to the Public Sector

We did not include the relationship with the supplier or switching costs in our research for the following reasons. First, in the public sector, buyers are almost always obliged to engage in an auction process as contracts expire. As a result, the introduction of e-RAs would not create new tensions in the relationship with suppliers (Major, 2007). The highly regulated auction process in the public sector, combined with the open and transparent nature of e-RAs, may even enhance supplier trust. Similarly, given that periodic auctions cannot be avoided in the public sector, switching costs are always incurred, and so switching costs would not be a relevant consideration.

Second, the very nature of any auction process, whether e-RA or any other traditional method, means that neither risks to the relationship with the supplier nor switching costs can be avoided. The only alternative would be to conduct a non-competitive, negotiated process, which in most circumstances is not permitted for public sector buyers. As a result, public sector suppliers will always risk being replaced, and switching costs will be incurred in each case, regardless of the form of auction. Since we are seeking to evaluate e-RAs as an alternative to traditional public sector auction methods, we have not evaluated these factors, as they apply equally to any form of auction.

RESEARCH

Research Methodology

This paper reviewed the primarily private sector-focused literature to identify factors that affect the success of e-RAs, and then identified those most relevant to public sector procurement by considering the structural difference between public and private sector procurement. Data on these factors was gathered from 139 e-RAs conducted by four organizations operating in the United States and the EMEA. The 139 e-RAs were used to purchase a wide range of products and services, from simple commodities to electronics, to a variety of services ranging from gardening to call-centers. Telephone interviews were subsequently held with purchasing managers from these organizations. The e-RA data was examined through statistical regression analysis, with a view to evaluating which of these factors


correlated with e-RA success for public sector buyers, and to what extent. We concluded by offering recommendations for public sectors buyers considering whether to conduct an e-RA for specific products or services.

Success

We considered e-RAs to be successful when the price achieved was lower than the price the buyer expected to pay, based on past auction experience and market surveys. The variable “success” was defined by the ratio between the expected price and the price achieved, and ranged from a high of 36.36% savings to a loss of 28.6%, with an overall average savings of 12.1%. Only four e-RAs failed to achieve any savings. However, two organizations did not provide data for e-RAs which had only one bidder, since such bids were automatically cancelled.

Our study did not consider the additional administrative costs of hosting e-RAs, and did not evaluate whether the purchase price savings exceeded such costs. As well, it was not possible to place a financial value on the administrative benefits which resulted from implementing a more streamlined and efficient online process, compared to paper-based procurement exercises. Due to the difficulties of measuring the additional costs of conducting e-RAs against any efficiency gains (Wagner & Schwab, 2004), the variable success is limited to the difference between the expected and actual costs of purchases.

Number of Bidders

The e-RAs reviewed attracted an average of 6.7 competitors, from a low of 1 to a high of 26. While we evaluated the effect that the number of bidders has on success, we did not seek to identify an optimal number of bidders.

Competition among Suppliers

Buyers were asked to estimate the competition among suppliers using three factors from Porter’s model for industry analysis to measure the degree of rivalry between suppliers (Porter, 1980). The buyers were asked to rank on a scale of one to three each of the following factors in relation to the competitive nature of the purchase-


specific supplier base: the market share concentration of suppliers, the barriers to entry and exit in their market, and suppliers’ sensitivity to competing supplier actions. Each sub-factor score was then aggregated to provide a score that approximated the degree of competition. For example, a market with one very dominant supplier, with very high barriers to entry, and complete indifference to the actions of its competitors would rank one, one and one, for an aggregate score of three.

Complexity and Specification

Buyers were asked to estimate the complexity of each product or service from a scale of one to five, with one representing a simple product or service, and five being very complex. Finally, buyers estimated how accurately the e-RA described the product or service on a scale of one to five, with one representing a poorly defined specification, and five representing a very well-defined specification.

Auction Volume

The auction volume was defined as the final price achieved, and ranged from $1,528 to $16.5 million, with an average of $771,492.

Research Findings

The bivariate correlations between the different variables of our research are summarized in Table 1. The main findings of our research are as follows.

TABLE 1 Correlation Matrix

Competition Number of Bidders

Auction Volume

Complexity Specification

Success 0.4015* 0.0970 . -0.0034 -0.3224* 0.3411* Competition - 0.5654** 0.0476 -0.5028** 0.5288** Number of

Bidders - - -0.0514 -0.4235** 0.3744*

Auction Volume

- - - 0.0231 0.1447

Complexity - - - - -0.7209**

Notes: ** Significant at the 0.01 level. * Significant at the 0.05 level.


Success

Surprisingly, we found that success did not correlate with either auction volume or the number of bidders, despite widespread support for their importance in the literature. However, we found that success was correlated with competition (r=0.401, p<0.05) (the higher the competition, the greater the success), specification (r=0.341, p<0.05) (the better defined the purchase, the greater the success) and complexity (r=-0.322, p<0.05) (the less complex the purchase, the greater the success).

Competition

Competition was also found to correlate strongly with the number of bidders (r=0.565, p<0.01), specification (r=0.529, p<0.01) and complexity (r=-0.503, p<0.01), but not with auction volume.

Number of Bidders

We found that the number of bidders correlated with competition (r=0.565, p<0.01), specification (r=0.374, p<0.05) and complexity (r=-0.423, p<0.01). No correlation was found between the number of bidders and either success or auction volume.

Specification

In addition to success, competition and number of bidders, specification was also strongly correlated with complexity (r=0.721, p<0.01), but not with auction volume.

Complexity

Complexity correlated negatively with all other variables except auction volume.

Auction Volume

Auction volume did not correlate with any other variable.

DISCUSSION AND RECOMMENDATIONS

Following our literature review, we identified seven factors that are commonly said to affect the success of e-RAs, and we considered five to be particularly relevant to public sector buyers. Our review of


139 e-RAs found a number of similarities with the private sector literature, but also some important differences.

Success

Success was found to be correlated with competition, complexity and specification, and not correlated with the number of bidders or auction volume.

Competition

Success correlated most closely with competition. The literature widely supported the importance of competition as the primary driver of e-RA success. Our findings appear to support that argument, as competition correlated strongly with three out of the other four variables measured, save auction volume. As e-RAs are designed to leverage the competitiveness of suppliers to provide greater savings, this conclusion is not surprising.

Specification

We note that Schoenherr and Mabert (2008) found no correlation between success and specification, but did find it with complexity, while Wagner and Schwab (2004) found the exact opposite. Our findings, however, found a correlation between success and both specification and complexity.

Some of the buyers interviewed suggested that specification affects only the degree of competition among suppliers, and so any effect on success would be indirect, if it exists at all. These buyers believed that competition was the only causal factor affecting success, while specification had either an indirect or spurious effect. However, others noted that without clear specifications, some suppliers would either hesitate to participate in e-RAs or would provide themselves with additional margin in order to compensate for this uncertainty, thereby directly affecting success.

Complexity

Success was found to be negatively correlated with complexity. This finding may support the argument that complex purchases require further clarifications and negotiations to discuss all aspects of a purchase. We also observe that the same buyers that believed


specification had either an indirect or spurious effect on success also believed the same about complexity.

Our finding that e-RAs achieve the best savings for simple products appears to undermine those who suggest the higher margins in complex purchases might allow for greater savings. We note, however, that our data included relatively few examples of complex and very well-specified products. Complexity and specification are two separate measures of supplier uncertainty, strongly correlated with each other, and it may be that success is greater when both measures are satisfied. Further review of e-RAs for a larger number of complex and very well-specified products may demonstrate higher success, in part from the greater potential for margin reduction as compared to simple, commoditized products, and ,indirectly, by attracting more suppliers by being well-specified. Nonetheless, our findings clearly indicate that public sector buyers should have confidence in using e-RAs for simple, easily specified purchases.

Number of Bidders

Our findings did not show a correlation between success and number of bidders. Unlike the recommendations in the literature against conducting e-RAs with few bidders, we found no evidence that public sector buyers should be concerned with the number of bidders. Some buyers even observed that strong competition among two suppliers may be all that is needed to hold a successful e-RA.

We also note however that the number of bidders is strongly correlated with competition, and may be a factor which affects the degree of competition among suppliers in the market.

Auction Volume

Auction volume was not found to correlate with any variable, including success. The literature suggested that higher auction volume would directly affect success, with higher volume leading to higher savings through economies of scale and lower transaction costs. However, our findings suggested that such savings, if any, were not being passed on to buyers. Some buyers speculated that in some cases, experienced suppliers were able to calculate their internal


costs across differing auction volume amounts accurately and maintained their profit margins accordingly.

Competition

Competition was found to be correlated with all factors except auction volume.

Number of Bidders

As widely observed in the literature, our findings showed that competition correlated most strongly with the number of bidders, although causation is unclear. While it was assumed that more suppliers would lead to higher competition and greater success, no direct correlation was found between the number of bidders and success.

Specification and Complexity

The correlation with specification and complexity is thought to result from the greater certainty given to suppliers by better quality specifications or lower differentiation. As a result, suppliers are better able to assess their margins, and better able to react to bids from their competitors.

Auction Volume

Auction volume did not correlate with competition, suggesting that auction volume does not promote additional competition. Our data included a wide range of products, and the degree of competition in each market varied significantly. Further research on this issue should be conducted to determine whether these findings remain the same when purchasing the same product for both small and high volumes. Keeping competitive factors constant, increasing auction volume may further increase competition.

Number of Bidders

The number of bidders was found to be correlated with competition, specification and complexity, but not with auction volume or success.


Complexity

As anticipated by the literature, our findings appear to indicate that simple purchases had more participating suppliers. However, it is unclear whether simpler purchases cause more suppliers to attend, whether there are simply more suppliers in the marketplace for simple purchases, or whether both are true.

In order to address this issue, it may be useful to conduct further research, such as measuring the proportion of the number of suppliers participating against the total suppliers in the market for each purchase. For example, it may be that very complex purchases have four out of five suppliers in the market bidding, while for commodities, ten out of fifty suppliers participate. While this appears to show that simple purchases attract more bidders, in relative terms, complex purchases may have very high participation rates among very few total suppliers. Such research will assist buyers in determining how changes in complexity affect the number of participating bidders. We note, however, that since complexity is also negatively correlated with competition, and competition is correlated with number of bidders, it may be that the absolute number of bidders, rather than the proportion of bidders participating, has the greatest effect on e-RA success.

Specification

As expected, improving the specification appeared to increase the number of participating suppliers. The literature suggests that this is a result of reduced supplier uncertainty, which enabled them to better assess their lowest price and gave them more confidence to participate.

Auction Volume

Perhaps most surprising is that no correlation was found between auction volume and the number of bidders. The literature recommends increasing auction volume to attract additional suppliers; however, the relationship is either very weak, or perhaps indirect. Buyers noted that differing auction volumes may attract different suppliers. For example, smaller auctions may attract smaller businesses, whereas very large auctions may be dominated by large, multinational companies. As a result, the number of bidders


does not correlate with an increase in auction volume. Buyers also noted that in some cases, where there were a limited number of bidders in the market, all suppliers participated, regardless of the amount. This was particularly likely with complex purchases containing a high degree of intellectual property.

Specification and Complexity

Specification was found to strongly correlate with complexity. This suggests that simple products are more easily accurately specified, whereas complex purchases were more difficult to specify well. In our interviews we noted that buyers felt that simple purchases were almost always well-specified.

In our research we measured the effect of specification against complexity based on the buyer’s view of how well he or she (or their requisitioner) specified the purchase. We noted that one defense department buyer indicated that his extensive procurement experience in defense-related purchases ensured that he was always able to well-specify both simple and complex purchases. Future researchers may wish to survey suppliers for their views on specification and complexity, first to verify the strong correlation of these factors, and second, to determine how their perception of the specification and complexity affected their willingness to participate and their pricing strategy.

CONCLUSIONS

This paper examined the factors which could affect the success of e-RAs in the public sector. Our findings indicated that competition among suppliers, the complexity of the purchase, and how well the purchase was specified were the factors which were most strongly correlated with e-RA success. We also note that neither the number of bidders nor the auction volume should be a determining factor for whether public sector buyers should use e-RAs. Our findings indicated that success was possible regardless of the number of bidders, provided that other factors such as competition, complexity and specification were favorable. Similarly, the auction volume in itself had no apparent effect on success, or on any other factor. Our findings on the number of bidders and auction volume differ from the general recommendations in the literature against conducting e-RAs with few suppliers or with low auction volume.


Competition among suppliers is the single most important factor in achieving successful e-RAs. Buyers would be well-advised to assess the competition among suppliers in each purchase-specific market when considering whether to hold an e-RA.

Our findings indicate that the more well-specified the purchase, the greater the success will be. While simple purchases were found to be better specified, and correlated with greater success, we also note that this may be more a function of the lack of well-specified, complex purchases. Nonetheless, buyers new to e-RAs may wish to start with simple, easily specified purchases initially, as both the literature and our findings support such an approach.

Public sector buyers should also note that concerns about e-RAs creating distrust between buyers and suppliers and the occurrence of switching costs are not relevant considerations.

Several limitations in our research are worth noting. First, the sample data reviewed in this study was taken from large public sector organizations with significant purchasing power. Future studies may wish to consider whether differences exist among smaller government agencies, public corporations, and whether the nature of the buyer affects the relative importance of the factors studied. Second, the heterogeneity of purchases may mask whether certain goods or services are particularly ill-suited for e-RAs. Finally, our statistical model emphasized success as defined by cost savings alone. However, public sector buyers are often required to consider many other factors when making their purchasing decisions. Measuring savings alone does not adequately capture product quality, procurement cycle times, or audit or compliance possibilities, all of which may be more important than cost alone. Subsequent research may seek to measure these variables against the factors described herein.

NOTE

The views presented in this paper are those of the authors and do not necessarily reflect the views of the United Nations or any other organisation.


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