WHAT DO COPIERS, ELECTRICITY, AND OFFICE SUPPLIES have in common with meeting services? Some major corporations are purchasing all these things, and more, using a reverse auction process. This efficient, but somewhat contentious, sourcing strategy is essentially a fixed-duration online bidding event in which multiple suppliers compete for a buyer's business.
As purchasing pros apply their e-business tools in search of cost savings and efficiencies in the meetings realm, some observers argue that the approach can't work in an industry where service and relationships are king. There's no denying, however, that many companies experimenting with meeting auctions are finding success, and use seems to be growing.
Cindy D'Aoust, senior vice president of Consolidation Business Solutions at MaritzMcGettigan in Philadelphia, didn't do any reverse auctions in 2002, but last year had several requests from pharmaceutical clients, including one who put 80 meetings out to bid in one auction and two others who used reverse auctions to get bids for their preferred vendor agreements. MaritzMcGettigan has had to train staff on the auction tools in order to meet their corporate clients' needs.
D'Aoust expects the trend to continue. “In 2002 we saw the move to negotiate with preferred suppliers and begin a process where meetings over a certain criteria are bid out — even among preferred suppliers,” she says. “In 2003, instead of just a silent bid process, they were taking it to a more competitive environment. This is really procurement's job — to create a competitive environment. Now they want to increase their discounts or add to their amenities. It's kind of the next step in the evolution. … Several of our customers have this [reverse auctions] on their task list — their list of goals for 2004.”
Take It to the Bank
It's important to note that in a reverse auction, the low bidder is often, but not always, the winner. That depends on the parameters set up by the buyer. Online reverse auction software, such as Procuri, FreeMarkets, and ePASS, has evolved to allow buyers to weigh a variety of quality, price, and performance factors. Other users, such as Bank of America, run meeting auctions as RFP gathering sessions, not as a way to award business.
Bank of America began using the Procuri reverse auction tool for meetings sourcing in June 2003. The company adopted the technology as part of its commitment to Six Sigma methodology, which uses data and statistical analysis to measure and improve a company's performance. When the company scrutinized the traditional method of collecting RFPs and compared it to the reverse auction process, the results were startling: Reverse auctions, the analysis said, would cut the time spent by purchasing on each event by approximately 42 percent.
As of February 2004, Bank of America had conducted about 80 online meeting auctions. It uses the tool primarily to gather RFPs; the lowest bidder is not necessarily the winner. Here's how it works: the bank's meeting logistics partner, WorldTravel Meetings & Incentives, Chicago, assigns a program manager to a meeting. The manager consults with the Bank of America client to determine meeting requirements, potential cities, and type of hotel. The manager then contacts hotels to assess availability and fit. Once a list of candidates is compiled and discussed with the client, it is turned over to WTMI's auction specialist, who contacts the hotels and invites them to bid. An online auction training session is scheduled for participating hotels, and time and date are set for the bid.
At any time during the bid process (usually a 30-minute window), a hotel can enter its offer online, attaching an RFP with information on service, recent improvements, and other data that might help to win the bid. The system ranks the bids by price as they come in, and bidders can modify their bids. When the bidding is over, WTMI's auction specialist gives the results to the program manager, who advises the client.
The bank implemented the process to improve productivity rather than “a reverse-auction mentality around driving down the final cost,” says Dana Catchpole, vice president, meeting and event management at Bank of America in Charlotte, N.C. “Bank of America continues to be extremely sensitive that hotels are not your typical ‘commodity.’ While cost is a driving factor, it is not the only factor considered. At the end of the day we want the best package of price and service.”
While Bank of America is still evaluating its time and money savings, the indications are positive. “It solves an efficiency issue we had with the dreaded phone tag and other communication maladies that exist in today's business environment,” says Carol Blackman, general manager, WTMI.
Take It to the Bank
Bank of America has earned suppliers' respect with an auction strategy that is not just about price. By January, Starwood had participated in about two dozen of its online events. “And I anticipate it will be significantly higher in '04,” says Trish Boyd, global account director in Starwood's Global Sales Office in Charlotte, N.C. “It's an information-gathering tool that levels the playing field,” says Boyd. “It's a tool to be more strategic, but I don't think it's going to replace the buying process altogether.”
“We support what they're doing,” says Hilton Corp.'s Steve Armitage, senior vice president of sales. “Bank of America has done a great job detailing to us how they weigh services and product.” That compliment means a lot coming from a man who, in 2002, earned a place on the Business Travel News annual list of “25 executives whose efforts made the most significant impact on the business travel industry” for refusing to participate in most business travel auctions. Before bidding, Hilton insists on knowing specifically how the final decision will be made (is it price alone or other factors?), room-night volume, duration of the agreement, and who, in general, it is bidding against (full-service properties? limited-service properties?). As a consequence, Hilton has refused to bid in the majority of corporate travel auctions into which it has been invited.
In terms of meeting-specific auctions, Armitage says, “This past year we have begun hearing more,” particularly in the pharmaceutical world. Armitage cleaves these auctions into two camps: those Hilton will participate in and those it won't. Bundled meetings often fall in the latter category. It's not uncommon, he says, to see a company that wants bids on a package of meetings but isn't prepared to specify dates or location. “I don't think blind bundling is healthy,” he says.
Hilton will, however, compete in reverse auctions for single events, or even a group of meetings, that are well specified and meet Armitage's other criteria. And even though the term “auction” is technically correct, he says the lexicon should change.
“While some people in the industry still call it a reverse auction, I think it's an electronic RFP,” he says. “There are some companies that take the reverse auctions to the extreme. They clearly say, ‘Here's what we want, give us your best price. Price is the only thing that matters, and this is the way we'll do business on the Web.’ Even in that extreme, I still look at that as an electronic RFP because I have customers who tell us every day, ‘Here's what I want; all I care about is the best price. Give it to me and I'll make a decision.’” The key, says Armitage, is that the online event be based on a precise request for proposal — dates, number of rooms, F&B needs, meeting space. “That's exactly what we do today, except we do it in paper form or e-mail, and it's time-consuming and laborious — very inefficient compared to saying, ‘Come to the Web on this day and give us our price quotes and we'll make a decision.’”
Commoditizing the Market?
As Bank of America illustrates, buyers may not be bound to accept the lowest bid, but reverse auctions' reputation for awarding business based on aggressive price competition gives many in the meeting industry pause.
“As procurement has gotten more involved in looking at … meeting spend, they believe that they can apply the same sort of principles and use the same sort of tools to procure group meetings,” says Christine Duffy, president of MaritzMcGettigan. “There's definitely some concerns on the part of the industry and hoteliers about what the auctions mean, how they are going to be used, are we really comparing apples to apples. … But we don't see it going away, either.”
“There is a concern about the movement toward procurement and the implication that price is the only factor,” says Christie Hicks, senior vice president, Global Sales North America, Starwood Hotels & Resorts in White Plains, N.Y. “That ends up commoditizing the market to a point that we're not comfortable with. Everything about a meeting is so inventory- and date-specific that if price is the most important thing, chances are the customer will almost always find a hotel that will give them what they want at the price that they want. And as long as that phenomenon continues — and I can't imagine that it won't — I think these things [reverse auctions] will start to take hold. If the department is measured by cost savings, it is going to be able to demonstrate cost savings. The question then becomes, do they get those cost savings by giving up other things that are equally or almost as important? That's the $64,000 question.”
On that list of “other things” are the benefits of a strong planner-supplier relationship and the suitability of the property itself: The price may be right, but does the property send the right emotional message? Is the service adequate? Does the meeting space flow?
A Different Twist
Schering-Plough Corp., Kenilworth, N.J., isn't using reverse auctions to find the hotels that will host its meetings, but rather the companies that will manage its meetings and exhibits.
Schering-Plough held its first auction for meeting services in 2000 and held two last year, one to find preferred suppliers to provide logistics services for its 2004 meetings and the other for a multiyear exhibit-management.
Donna Solazzo, Schering-Plough's manager of global strategic sourcing, explains that the auction for preferred meeting suppliers sought a manageable number of vendors to handle the company's 1,300 annual meetings, and gathered bids for pricing of management fees, on-site staff salaries, and per diems. (All other meeting costs, Solazzo says, are passed through as actuals.) In the end, Schering-Plough awarded the business to five suppliers, with two or three of the firms assigned to each of approximately 10 types of meetings, including product launches, incentive programs, and continuing medical education.
The other 2003 auction sought bids for design, building, storing, and moving of Schering-Plough's exhibits for the 100-plus annual trade shows and conventions at which it exhibits. Two suppliers won three-year.
“Reverse auctions have proven to drive pricing to true market values, and have reducedtime,” says Solazzo. In addition to meeting services, Schering-Plough has conducted reverse auctions for corporate travel hotel rates as well as a range of other goods, from analytical services to print and premium items. According to Solazzo, it is not unusual to reduce spending by 20 percent to 50 percent by having an online auction although, she notes, savings vary depending on whether it is the first, second, or third time the service has been auctioned. The first auction is likely to lower prices by a greater percentage than later auctions because suppliers presumably have offered their best discounts the first time around.
But just as with Bank of America, price isn't the only factor that goes into the supplier selection process. “The winner is not necessarily the lowest-priced in the auction,” stresses Solazzo. “The auction does help drive the prices downward. The details of the auction bid need to be heavily analyzed along with other qualitative factors.”
At Schering-Plough, the sourcing professionals and the meeting professionals have joint accountability for the auction. “Meeting professionals must clearly define required services, volumes, and expected service levels,” says Solazzo. “The purchasing professionals review and clarify specs and build the reverse auction projects using the technology available. Meeting professionals are the primary (although not the only) decision makers for awarding the business. Together, results are compared, assumptions are clarified, and vendor capabilities reviewed. The closer both groups interact, and the more involvement that the meeting professionals have with conducting the reverse auctions, the more successful the auctions are.”
Bank of America, Schering-Plough, and other companies using reverse auctions for meeting-related services are looking for bids from an industry new to online purchasing tools. Solazzo acknowledges that some vendors are not pleased with having to learn auction technology with no promise of future business, and that smaller vendors may not have the technological savvy to prepare for the events. WTMI's Blackman agrees. “The only disadvantage so far has been the newness of the tool and the education and training of the hotel staff.”
Starwood's Boyd says of her experience: “It's a huge educational process. And at the end of the day, there are hotels that don't want to invest the time, energy, and resources for one transaction.” The reverse auction tools, she says, are not self-explanatory, and users definitely need to take a training course.
Suppliers also have the burden of learning a variety of technologies. There are numerous auction vendors, and knowing one system does not necessarily prepare you for the next. Also, suppliers need to adapt their sales approach: “The other downside,” says Boyd, “is that lack of people communication. Everything's electronic. You lose that personal touch.”
The pioneers in reverse auction meeting purchasing may have their challenges, but they may also get credit for paving the way for significant changes in the way planners and suppliers communicate electronically. Online bidding events are among procurement departments' promising sourcing tools. As the auction process evolves to take into account quality, reliability, and value-added services in the meeting buy, don't be surprised if the traditional RFP process is going, going, gone.
Improving Auction Outcomes
Online reverse auctions first came into the corporate purchasing scene in in the late 1990s with mixed results and not a little controversy, according to Debbie Wilson, e-procurement specialist and editor of the online publication Cool Tools for Purchasing. “In the last two years, as companies continue to experiment, they've grown much more careful. The pitfalls are becoming much more common knowledge,” she says, citing a number of procedures that companies are using to improve reverse auction outcomes:
If there's a chance that unqualified bidders will be part of the auction, companies are calling the auction a “pre-screen,” and notifying bidders in advance that the lowest bid will not necessarily be the winner.
The pre-bid process has become more sophisticated, Wilson says, allowing bidders to see the requirements a few weeks in advance. This gives them time to submit their first bid, and if it's unusually high or low, the buyer can contact the supplier to see if they understood what was being requested. “This type of pre-bid process is catching errors that previously were occurring during an auction and basically ruining suppliers' bids,” she says.
“Another important thing is that companies are realizing that price isn't everything. They may use a reverse auction to get the prices from various suppliers, but then take that information and weight it by less tangible factors. For meetings, that might mean assigning a weight to the convenience or cost of getting to the venue, the service reputation, or other factors.”