Reverse auctions and how they apply to sourcing consulting services

Basically, reverse auctions are a type of bidding process where suppliers undercut each other and progressively reduce their price. Do you know how, the seller lists a product at X dollars and you find yourself competing with other buyers to get the product for more than the previous bidder?

On this week’s Smart consulting Sourcing podcast, I will share with you my thoughts on reverse auctions and how they apply to sourcing consulting services.

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Key Takeaways

What is tricky when buying consulting services is that the scope of negotiations can touch all the elements of the RFP: the scope, the deliverables, the deadlines, the team composition,etc… If you follow my podcast, you know that I always try to focus on value rather than savings.

What matters most when buying consulting services, is not the price you pay but the impact you get from the project. Reverse auctions may work for very specific situations and help get prices for a product very quickly.

But the very nature of consulting makes reverse auctions almost counterproductive. Because the price in consulting is just one element of the negotiation, and since the impact for the company is so important, that’s where you should focus your attention.

Transcript

Hello everyone and welcome back to Smart consulting Sourcing, the only podcast about consulting procurement.

I am Hélène and today we will be talking about reverse auctions for consulting services. It is a question that someone asked me in my last webinar in December. But before we get there, let me come back to last week’s episode.

I tried to convince you to involve your stakeholders at the very beginning of a consulting project.

A good project manager needs to identify the main stakeholders and keep them involved in their projects. It is a key element of success. At each step of the process, including sourcing and project management, the project manager needs to assess which stakeholders to involve.

But this week, I’ll share with you my thoughts on reverse auctions and how they apply to consulting services,

Sounds interesting? Let’s dive right in.

So first question: What are reverse auctions?

Basically, reverse auctions are a type of bidding process where suppliers undercut each other and progressively reduce their price.

You know how, in an auction, the seller lists a product at X dollars and you find yourself competing with other buyers to get the product for more than the previous bidder? Well, reverse auctions are exactly the opposite. You list your product or service at X dollars…

And bidders compete against each other to win your business by offering lower prices than the one you listed! It’s as simple as that.

They’re really common online: think eBay for instance.

Who uses reverse auctions?

Any organization can use reverse auctions.

The most obvious candidates are large organizations with very specific requirements for their products. You’ll find reverse auctions everywhere where there’s a requirement to buy something very specific in short periods of time: hotels often ask bidders about availability before the auction starts instead of after.

The process eliminates potential misunderstandings down the line by asking for information beforehand, rather than having to deal with people trying to haggle over price once they’ve already made all the preparations needed for their stay.

Reverse auctions make sense in some very particular situations, like when you need to source something very quickly. But once again: Reverse auctions can be used by any organization but it doesn’t mean that they should be used for every purchase!

How do reverse auctions work?

Ok, reverse auctions sound interesting but how do they work?

First of all, the reverse auction organizer (in this case, your organization) creates an online bidding platform accessible to bidders (in this case, consultants). More accurately an instance for their organization on a bidding platform.

Then, bidders submit their bids for the maximum amount they’re willing to bid for the project. Let’s say that you ask for budget proposals or pricing on a specific project. One consultant might be willing to bid 400 dollars per day while another may only want to work for 300 dollars.

The reverse auction software will process these bids and sort them to retain only the best price submitted so far. If the first consultant’s bid is 400 dollars per day and nobody has submitted a better price yet, he or she is considered the best bidder.

On the other hand, if the reverse auction software detects that another bidder has submitted a lower bid, then this new bidder becomes the best bidder.

In reverse auctions, bidders never know what the others’ bids are. They only see information down to their own bid. However, reverse auction software lets bidders know when they’re the winning bidder.

It is what we call in French “Moins disance”, literally “Saying less”, as opposed to “Mieux disance”, literally “Saying better”. In other words, you compete only on the price and not on the quality of the proposal.

What about consulting services?

So consulting is an intangible service. It means that the results are intangible: it can be expertise, team alignment, company valuation, etc.

And what is tricky when buying consulting services is that the scope of negotiations can touch all the elements of the RFP: the scope, the deliverables, the deadlines, the team composition, etc.

I think you know where I am going. The key principle of reverse auctions is that you set a price for an item and let the bidders compete. It means that the requirements for the service are final and every bidder will submit proposals that are comparable. Isn’t it the definition of commodities?

And guess what? Consulting work is not a commodity. Unless we are talking about body-shopping.

For those among you that don’t know what body shopping is: it is a term to define when consulting companies are outsourcing tiny bits of projects to independent consultants. It happens when consulting companies don’t have the expertise in-house to complete a project, for instance.

If you follow my podcast, you know that I always try to focus on value rather than savings. What matters most, ultimately when buying consulting services, is not the price you pay but the impact you get from the project.

And until reverse auctions can include some sort of estimation of the return on investment, I don’t see how you can use it efficiently for consulting projects.

However, there might be some situations where reverse auctions for consulting services can be only applicable.

– The service is a commodity.

OR

– The service has a list of requirements that are not negotiable and it will lead to a compliance or checklist approach.

And actually many consulting marketplaces use reverse auctions to select the right bidder on a project. But we are talking about either body-shopping or very short projects.

In conclusion, reverse auctions may work for very specific situations and help get prices for a product very quickly. But the very nature of consulting makes reverse auctions almost counterproductive. Because the price in consulting is just one element of the negotiation, and since the impact for the company is so important, that’s where you should focus your attention.

And that marks the end of our podcast, folks. Next week, I’ll talk about the value created by consultants? Is it savings? Impact on the project? Why do your stakeholders work with consultants? So stay tuned.

Till then, stay safe and happy sourcing!

And we have a webinar coming up on February 1st. We will be talking about how to drive the sourcing process for consulting services. If you want to register, you can go on my Linkedin profile and find the event in the highlights section. Looking forward to see you there!

To see the replay of the webinar How to Drive the RFP Process for Consulting Services?

Bye and see you next week! Au revoir!

 

JE NE CHANGE ICI POUR FAIRE BISQUER PAUL!!

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Helene Laffitte

Hélène Laffitte is the CEO of Consulting Quest, a Global Performance-Driven Consulting Platform. With a blend of experience in Procurement and Consulting, Hélène is passionate about helping Companies create more value through Consulting. To find out more, visit the blog or contact her directly.

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