Why I am not a fan of e-auctions

In recent years, e-auctions have gained momentum in procurement circles, promoted for their ability to streamline sourcing processes and lower costs. However, after 15 years of working with e-auctions and often taking them on as a top-down departmental KPI, I find my experience far from positive. In my view, e-auctions can erode the art of negotiation, reduce supplier relationships to mere transactions, complicate setup, and expose buyers to costly pitfalls. Ironically, they can even lead to higher prices than conventional negotiations, locking buyers into rigid terms that may not align with stakeholders’ interests. Here is why.

E-Auctions Reduce Procurement to Just Price

Effective procurement requires a nuanced balance of factors: quality, service levels, lead times, and change management costs—dimensions that vary across suppliers. E-auctions, however, reduce all these considerations to a single metric: price. This reductionist approach strips away the art and nuance that skilled procurement professionals bring to negotiations. Rather than fostering valuable partnerships and developing holistic agreements, buyers end up creating an environment where price alone dictates success, overshadowing each supplier’s unique value.

Furthermore, the auction’s outcome often faces resistance from stakeholders. In many cases, a supplier may win the auction, but once stakeholders learn about the result, they challenge the decision, preferring a different supplier based on factors not fully captured in the auction—such as quality differences, service flexibility, or specific relationship history. This post-auction pushback disrupts the procurement process, highlighting how e-auctions can oversimplify complex decision-making and create friction within the organization.

Moreover, this process can be especially demotivating for suppliers. On one hand, procurement teams discuss strategic partnerships and innovation; on the other, they rely on e-auctions, which treat all suppliers as interchangeable, diminishing the unique value each one brings. To suppliers, this double standard erodes trust and undermines the potential for genuine collaboration.

Why Conventional Negotiations Often Deliver Better Results

E-auctions overlook the flexibility in pricing that traditional negotiations could achieve. Here is a simplified example:

• Supplier A has an initial offer of $100. Though the buyer does not know this, let us assume they are ready to go as low as $90 to win.
• Supplier B has an initial offer of $110, willing to reduce to $105.
• Supplier C has an initial offer of $120, willing to reduce to $110.
• The buyer’s target price is $95, though a lower price would be welcomed.

As you can see, a successful negotiation would lead to awarding the tender to Supplier A at $90—the best possible price.

In an e-auction, however, a competitive bid-down might occur between $120 and $110, with all three suppliers involved. Supplier C will stop bidding at $110, leaving Supplier A and Supplier B to continue from there. After a few rounds, Supplier B might halt at $105, leaving Supplier A to “win” at $104. This outcome not only exceeds Supplier A’s initial offer ($100) but is also significantly higher than the buyer’s target price ($95) and the theoretical best price ($90).

Following the auction, the buyer might attempt to negotiate further reductions with Supplier A—a difficult conversation, as the supplier now feels confident, having already “won” at $104 and holding a strong negotiating position.

To mitigate these pitfalls, buyers often attempt the following strategies:

1. Setting a Ceiling Price: In the auction setup, the buyer embeds a ceiling price alongside a disclaimer that they reserve the right to cancel the auction or initiate further negotiations if this ceiling is not met (e.g., $95 in this case). While this could theoretically prevent undesired high prices, it often creates friction, as suppliers feel misled. Knowing the “best price” from the auction, subsequent negotiations can be awkward and strained.
2. Forcing Suppliers to Start with Final Offers: Buyers sometimes require suppliers to enter their best possible prices from the start. So, in this example, Supplier A will enter the auction at $100 and hold the winning position without further movement. However, this approach still misses the target price ($95) and the theoretical best price ($90), limiting potential savings.

The Hidden Costs and Complexities of E-Auctions

E-auctions are not the plug-and-play solutions they might seem. Organizing an e-auction requires careful preparation and coordination with suppliers to ensure active participation. Often, buyers must chase suppliers to confirm attendance, hoping for enough competition to justify the process. This adds stress for all involved, detracting from a smooth, strategic procurement experience.

Some companies turn to low-cost third-party providers to set up and manage their e-auctions, but this is not a miracle solution. Much of the critical information still must come from the buyer. As such, miscommunications with such third-party providers can easily undermine the auction’s effectiveness, especially when precise language or specific requirements are essential.

When do E-Auctions Work

Proponents argue that e-auctions offer transparency and prevent favoritism. While transparency can be valuable in high-compliance scenarios, e-auctions can still backfire. Suppliers sometimes coordinate their bids behind the scenes, leading to collusion rather than competition. I have witnessed such manipulations firsthand, with auctions canceled due to clear hints of supplier collusion.

For an e-auction to work, offers must be compared on an apples-to-apples basis, which is not always possible because not everything can be converted to a number. Additionally, an e-auction requires robust competition—ideally from at least five suppliers.

E-auctions are best suited for standardized, repetitive purchases—like tactical freight services—where price is influenced by market conditions beyond anyone’s control. In such dynamic categories, it makes sense for the same suppliers to bid repeatedly in regular auctions.

Another approach is the Dutch auction, where prices rise from a rock-bottom starting point, and the first supplier to accept the incrementally increasing price wins the auction. While this format avoids some pitfalls of traditional e-auctions, it introduces new challenges—more on that in a future article.

The Pressure of E-Auctions as a KPI

Given these limitations, why do companies push for e-auctions? The answer often lies in the digitalization agenda in many companies with leadership eager to showcase advanced procurement tools. However, when e-auctions become a KPI, they can become especially counterproductive. Procurement teams shift focus from strategic sourcing to meeting arbitrary metrics, evaluating success by the number or value of auctions rather than meaningful outcomes.

At the end of the day, e-auctions are merely tools—no different from SAP or Outlook. Just as no one would measure procurement success by counting the number of emails you send per year, a procurement team’s success should not be measured by the volume of e-auctions. If buyers deem e-auctions the best fitting tool for that situation, they should use it. If not, they should refrain. Enforcing e-auctions as a performance metric encourages misuse, compelling teams to hold auctions in inappropriate contexts to meet quotas. This creates a “Cobra effect”—where well-intentioned targets actually hinder procurement success. (See my article, “Rethinking Procurement: How the Obsession with Savings Metrics Undermines Real Value.”)

Conclusion: E-Auctions Have Their Place—But Not Always in Strategic Procurement

E-auctions can be effective for tactical procurement and standardized purchases, but they may not be ideal for strategic sourcing. In complex, high-stakes deals, procurement professionals need the flexibility to negotiate directly, considering a range of factors beyond price alone. Companies should reassess the role of e-auctions, reserving them for situations where they truly add value.

At the end of the day, e-auctions are a tool, not a strategy. In strategic procurement, there is no substitute for expertise, relationship-building, and the finesse of negotiation. Rather than digitalizing for appearance’s sake, let us prioritize procurement excellence by using the right tools in the right contexts.