Reverse Auctions Fail To Deliver On Their Promise - InformationWeek

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Reverse Auctions Fail To Deliver On Their Promise

Online reverse auctions promise faster sourcing, lower prices, and quick ROI. But research by two critics of the practice points to the opposite result.

"The data doesn't support the market hype," says Bob Emiliani, president of the Center for Lean Business Management at Rensselaer Polytechnic Institute. "If you critically analyze and meticulously pick apart details, you'll find mostly unsubstantiated claims. The typical outcome is poor for both buyers and sellers."

Emiliani, along with David Stec, looked at reverse auctions in the aerospace and wood-pallet industries, two diverse markets that resulted in "very consistent outcomes," Stec says. Among the findings: Savings from online auctions are difficult to measure and generally don't yield quick ROI or reduce sourcing time. Perhaps more important, reverse auctions are inconsistent with ethical business practices and trigger opportunistic behavior, the researchers found.

Buyers are "abusing this process to test the market and see just how low the price will go to drive down their current supplier, with no real intention of switching to another supplier," Emiliani says. Suppliers retaliate by increasing prices on goods and services, he says. "They're certainly not going to do anything extra for that customer."

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