I’ve always thought that auctions work best if they carry on while bidders are happy to bid. Most offline (and online) auctions I am familiar continue until no more bids are received – just like the way the standard procurement reverse auction works.

On the other hand eBay is notable for always finishing an auction at a predefined time. This encourages bid sniping where potential buyers tactically try to wait for the last possible moment to get their best bid in. So I was fascinated and entertained to read in “The English Year” by Steve Roud about traditional buying auctions which rely on a fixed time to end rather than continuing indefinitely.

In a candle auction a candle was lit and bids were accepted until the candle went out. Or a pin would be put in a candle and bids would be taken until the candle burned down far enough for the pin to drop out. Apparently this was an officially sanctioned way of running auctions in the 17th century and Steven cites examples where candle auctions still take place in England (on the 6th of April at Tatwell, 13th December at Aldermaston).

Other weird and wonderful (to modern readers) auction types Steven cites are

• The Running Auction that takes place in Bourne, Lincolnshire on the Monday before Easter. This is to auction grazing rights on a piece of land, and bids are accepted for as long as it takes for 2 children to complete a 200 yard race, and
• An auction at Wishford in Wiltshire that takes place on Rogation Monday, also for grazing rights, in which “[b]uyers are summoned by the church bell, about fifteen minutes before sunset, and the parish clerk walks up and down between the church porch and gate while the bidding takes place. As soon as the sun dips below the horizon, he strikes the church key on the gate, and the auction is over”.

Looks like eBay’s approach has a good historical pedigree

The serious point, though, is that these types of auctions that tried to fix a specific end time eventually died out to be replaced by open-ended auctions.

I’ve recently started at Rated People as their Technology Director.

I find the company fascinating for a bunch of reasons:

1. They are a marketplace that allows people to find tradesmen very easily. It’s shocking how easy for the user it is, in fact – and I speak as someone who has used the service as a user. The model is pretty similar to MFG.com - regular readers will know I’m a fan.
2. But even better than the traditional online marketplace idea, Rated People is more like a dating agency. I don’t go on the site and choose from hundreds of plumbers. The system chooses the best plumbers for me based on my location, budget etc.
3. The upshot of all of this is that the ratings system on Rated People is the best I’ve come across. It is the hardest to fake. Amazon’s ratings are useless – as a manufacturer I could easily hire plenty of people to post positive reviews of my goods. Even on MFG.com I could register myself as a supplier, create a number of fake buyer accounts, award myself some contracts and give myself a great rating. On Rated People you can’t just do this.
4. It’s still sourcing!

On a “small world” note, I was out with one of the guys last night and found out that he once used to be a buyer at Brakes where he used to run their reverse auctions and was involved in the early incarnations of Trade Interchange.

How important is the auction manager to the success of your reverse auction?

At TradingPartners the auction manager is central to the whole process – from the supplier selection and training through to actively driving the negotiation during the reverse auction itself.

For example during a TradingPartners auction the auction manager can be seen communicating via instant messaging with bidders in order to encourage additional bidding. I have written before about how judicious use of instant messaging increases bidding activity and therefore savings.

My moles in other providers tell me that many other purveyors of auction systems seem to treat the auction itself as a technical activity that pretty much runs itself, barring any technical mishaps. The auction manager’s role is a more “up front” role to get bidders ready for the auction. On the day of the auction event the auction manager’s role is to watch the event rather than to drive it, and to respond to technical issues rather than to stimulate further competition.

When I have discussed the role of instant messaging with non-believers the usual riposte I get is something like: “Ok, you have shown how sending an instant message at 10 minutes into the auction got you an extra bid and more savings, but even without that instant message, you would have got that bid in the revese auction extensions.” It is impossible to prove one way or the other what ‘would have happened’ so it’s an impossible argument to refute. When it’s been my budget up for grabs I’ve been keen to take every possible opportunity to get the best possible result rather than leaving things to chance.

If you are planning reverse auctions as part of your sourcing strategies take the time to consider whether you expect your auction managers to be watchers or drivers, and understand what your vendor/provider’s approach is.

Carnegie Mellon – the brand behind the global CMM standard for software providers,- or rather another part of Carnegie Mellon called the ITSQC -has another model available specifically for e-sourcing: the eSCM-SP and eSCM-CL or eSourcing Capability Model for Service Providers and Client Organizations respectively. Wikipedia link here. ITSQC homepage here.

I’ve had a read of the eSCM-SP and am struggling to see what value it adds, certainly in terms of how I understand sourcing and eSourcing. Two things to bear in mind with this model:

1. The acknowledgements list includes contributers from Satyam, IBM, HP, Accenture, Deloitte etc. No mention of an Ariba or a Freemarkets (let alone anyone else in the space). No long list of CPOs from major organisations. No mention even of any organisations that track and analyse the space. Yet the ITSqc says in its description of the ITSqc research consortium that Our members consist of international industry leaders in eSourcing on both the Client Organization and Service Provider Sides of the relationship, including clients, service providers, advisors or consultants, and the standards community.
2. I’m dubious about the value of their definition of sourcing vs e-sourcing. You’ll have to download the documents yourself to see the graphic I’m referring to – in the meantime here are the definitions:

• IT Sourcing contains Applications Development & Management, Desktop Maintenance, Application Service Provider, Data Center Support, Telecommunications Network Support
• Task & Business Process Outsourcing contains everything from IT Sourcing and also includes Finance & Accounting, Engineering Services, Human Resources, Data Capture, Integration & Analysis, Call Center, Medical/Legal Transcription, Purchasing
• eSourcing covers IT Sourcing and also Task & Business Process Outsourcing
• Sourcing contains everything in IT Sourcing and Task & Business Processing Outsourcing and also the likes of Janitorial Services, Lines Services

Clear? Like I said – you’ll need to look at the graphic in their documentation to get a better understanding. In the meantime here is my interpretation:

According to the model the core of sourcing is the sourcing of IT-related services, e.g. Desktop Maintenance, Applications Development, Data Center support.

The next level up in the sourcing definition brings in the sourcing of what has become known as BPO (Business Process Outsourcing), e.g. the sourcing of Accouting services, the sourcing of Legal Transcription services, the sourcing of HR services, putting together call centers.

Both of these levels are covered by the model’s eSourcing definition. The sourcing stuff that is outside of scope of the model is, for example, Janitorial Services and Linen Services.

There is a pattern in all of this: The model defines eSourcing as the stuff you can outsource to a 3rd party offshore provider. It excludes from scope the stuff that needs people onsite, or transportaton of physical goods.

Now – if you look back at the list of the contributors of companies to the definition of the model you’ll see that, surprise surprise, they tend to be the providers of the outsourced services that can be provided offshore (e.g. legal transcription, application development services).

But when someone tells me that they are looking for eSourcing or IT-enabled sourcing, to me that means using IT to help make sourcing better. This can mean anything from using SAP to using Excel templates (or anything in between) and can certainly by used to source Janitorial Services better just as it can be used to source Desktop Maintenance better. The definitions used by the eSCM suggest that they see eSourcing as the procurement of services that can be provided remotely using the internet.

So is the model going to help you decide whether to go Ariba or SAP, or whether to outsource the whole of your sourcing function to China? Probably not. But will the model help you decide whether Accenture or Wipro will be best to run your 400 person call center? Possibly yes.

So tread carefully – and beware that just because people are using the same words doesn’t mean they are talking about the same thing.

While I’m on the subject of the eSCM here are a few more thoughts:

The eSCM shares the same brand as the CMMI that has become very popular with IT service providers over the past decade. But it doesn’t follow that just because the CMMI is a de facto standard in the IT industry that the eSCM will become a standard in the procurement space. In fact CMMI level 5 certification is not in itself a guarantee of a stable, quality provider: Satyam (coincidentally one of the contributors to the eSCM) are CMMI level 5 certified (check their awards page and scroll down to 2005-2006 for CMMI and pre-2001 for SEI-CMM, the predecessor of CMMI) and yet its leaders are at the centre of a fraud probe.

As far as 5-level maturity models go in the sourcing space I am quite taken with Hackett’s one. Incidentally my post on the subject is one of the most popular pages on this blog.

Till next time.

In England we have a phrase: nice weather for ducks. It means it’s miserable, rainy and wet. But still … nice if you’re a duck.

Reading me Economist this week (10th Jan issue) for the first time in a few months. First article in the Britain section is called Combating the Recession. Here’s paragraph 2:

The bank’s [latest rate cut] means that the base rate has now fallen by an extraordinary 3.5 percentage points since the start of October. It followed a clutch of closely watched business surveys of purchasing managers that painted a dismal picture of the economy in December. (my emphasis)

It’s a bit of a commonplace that the worse things get for a business the more it looks to departments such as procurement to dig it out of a hole. But even so: What an opportunity! If more and more people are sitting up and paying attention when buyers speak, perhaps now, finally, “the business” will act on all those things you’ve been hammering on about for goodness knows how long.

Of course the attention on buyers and the opportunity this represents only exist  because of the wider crisis going on. So this opportunity for buyers also represents a challenge: Develop the necessary credibility within your organisation so your views are taken equally seriously once we are out of this recession …. and so business don’t wait until the next economic slowdown to consult their procurement departments again.

Those of you who follow the TradingPartners Senior Management Team pages will have noticed that I’m no longer there. Yes, it’s right, I have departed TradingPartners.

Over the past half decade with TradingPartners and the decade before with SAP and Ariba I’ve had the good fortune of being involved in a number of great projects and learning a lot about what makes a good piece of business software (hint: it’s not just what they teach you in project management school).

I’m looking forward to putting these ideas into practice in the next piece of business software I build. I expect to be posting less and less here, at least for a while – but at least you’ll know that what I do post will become more and more impartial In the meantime I expect to post more regularly over at my other blog – it would be great to see some of you over there.

All the best

Alan

It’s a sad indictement of the state of vision and innovation in the industry when the two top players in the e-sourcing space start competing on the basis of who has the best lawyers rather than who has the best product offering.

Spendmatters covers the judgement in Ariba’s favour against Emptoris as the latest step in the Ariba/Emptoris pissing contest patent spat here , here , and here (and the commentary, as usual, is lively and entertaining).

I am not a lawyer but have had the good fortune to have to read through some patents in my time. So I figured I’d read the patents in question: 6,499,018 and 6,216,114. Just for fun. They are written in impenetrable patentese so here is what I can figure out.

The two patents claim protection for the following features. You’ll forgive me if I appear flippant, but it really is a surprise to me that you can patent such generic, obvious and trivial enhancements to the basic auction process:

1. Dynamic Lot Closing Extension: Suppose you have  5 lots in your auction, each with their own closing time such that Lot 2 closes 10 minutes after Lot 1 (etc). If Lot 1 goes into overtime then Lot 2’s closing time is dynamically extended so that it always stays 10 minutes behind.
2. Flexible Overtime: This means that you can extend an auction not just on “winning bid” or “any bid” but you can have a rule that says “Lot 1 extends by 3 minutes if a bid that is 1st – 4th place is received in the last 2 mintues, and Lot 2 extends by 5 minutes if a bid is received that is within 2% of the current leading bid.”
3. Flexible  Bidder-Determined Line Item Decision Rules: As a bidder I can set line item rules so that for example I can decrease my total bid for Lot 1 by $50,000 and have that decrease apportioned, flexibly, across the line items that make up that lot based on the rules I have specified (e.g. Item #12345 must never go below $1.50 each).
4. Pending Status: The idea here is that when an auction completes it goes into “pending” status during which the buyer and suppliers can discuss whether the auction really is over or not. If they decide that the auction needs to continue they can move the auction back to a live status.
5. Auction Pause: Allowing the buyer to pause an auction (while the clock continues ticking) in a lot, several lots or the auction as a whole.
6. Bidder Specific Bid Limitations: In a reverse auction the idea is that you can set different ceilings above which you won’t receive a valid bid from a supplier. Apparently this is different to simply starting an auction with any “pre-bids” offered by suppliers.

Freemarkets (who readers will know I hold in very high regard for starting off the whole reverse auction industry) applied for both patents on the same day in May 1999. Even writing back in 1999, though, the points the patents cover are pretty trivial to say the least.

According to Ariba’s press release the judgement centered around “the use of individual bid ceilings and certain auction overtime rules“. As Jason describes in his coverage of the Emptoris patch this covers:

1. A feature that prevents a supplier submitting a bid higher than a pre-set amount
2. A feature that keeps staggered lots open when a prior lot gets extended

Some thoughts on this:

1. These two points are very trivial aspects of e-auctions. They are far from “key patents for electronic auctions” mentioned in Ariba’s press release on the subject.
2. But at least the really obvious parts of the patents (e.g. pausing an auction) were either considered invalid or not infringed.
3. This is another reason why such “software business process patents” are considered controversial by many in the industry.
4. Interestingly this news from early November seems to cast some level of scepticism over whether process patents, like the ones at the centre of this case, are even allowed in the USA. It will be interesting to see how this develops.

Lest anyone misunderstand me:

1. I’m not an Emptoris apologist. Their gorilla marketing when Ariba swallowed Procuri was no different to Ariba’s swipe this time round. And Emptoris have (at least attempted to) apply for equally embarrassing patents in the past, if memory serves.
2. I am not anti-intellectual property. But I think that software in general is more suited to copyright than patents. Far from encouraging innovation, as I’ve written before, business process software patents are a tax on innovation and should be stopped.

Assuming the mooted auction does go ahead here are some thoughts as to possible designs.

The US Govt has a lot of experience in forward auctions selling treasury bonds as described here: http://www.newyorkfed.org/aboutthefed/fedpoint/fed41.html. If you have the time, Kenneth Garbade’s history of the treasury auctions is well worth a read – he emphasises the responses to failure as well as the successes in building a solid programme of auctions: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=596966.

For readers who are used to reverse English auctions the US Treasury format is very different from what you might expect. It is a single-round auction. As a bidder you put in one bid up until the deadline. This bid can state a price you wish to pay and how much you will buy at that price, or it can state a quantity you wish to buy at whatever the average price is. The Treasury then allocates the available bonds across the bidders based on who is offering the highest prices.

I expect that the US Treasury would want to use something similar in the proposed reverse auction. But things are not going to be as simple as that. There is some good debate amongst people who know auctions:

• Jason Busch and Sam Kinney discuss the level of optimisation functionality that could be used http://www.spendmatters.com/index.cfm/2008/9/29/Treasurys-700-Billion-Sourcing-Challenge–Is-it-Reverse-Auction-Time.
• NERA have produced a paper contrasting the existing Treasury Bill forward auction process with a potential reverse auction process here: http://www.nera.com/image/Buying_the_Bad_Stuff_Paulson_0908.pdf.
• Sam Kinney – co-founder of FreeMarkets (who pioneered the whole reverse auction space that TradingPartners is now a dominant player in) has some good thoughts here: http://www.uptheeconomy.com/?p=28

On one level the actual design of the auction is of secondary importance. Simple agreement on a bailout plan will be sufficient to soothe many nerves.

But once they start the reverse auctions will be the subjects of intense media and market scrutiny, at least in the early stages. So reverse auctions at the outset will need to be kept very simple. For this reason any real-time complex optimisation will need to be ruled out. At least to start with.

NERA point out in their paper (link above) a good issue: In a procurement reverse auction the buyer would likely only buy from one (or perhaps two or three, but certainly not all) of the bidders in the auction. So the bidders have to compete against each other to push the price down. Under the Paulson plan, if the government is committing to buying all the securities from all the banks (until the money runs out) then what is the incentive for any bidder to place a low bid? They know that the government will bail them out. To avoid this the auction process could include a number of bidders but commit the Treasury to buying securities from a small number of the bidders, or to buy a fraction of the auctioned value, such that all bidders have an incentive to bid.

There is also the question of one-round or multiple-round bidding. The US Govt currently sells Treasury bonds with one round of bidding so I’m sure they will be tempted to use a similar design for the bailout. But given the uncertainty around the value of the assets in question now I would expect the transparency of multiple-round bidding will be better. Paul Klemperer has some great horror stories of single-round bidding events. Search for “Banespa” and “New Zealand” in the document. The Banespa case was a first-price sealed bid auction, the New Zealand case was a second-price sealed bid auction (Vickrey auction). Both led to great embarrassment.

So could an auction work in this US bailout? It’s certainly well known across government and private sectors that auctions are the best way to ascertain a market price when the true market price is not known. I have seen some very successful reverse auctions for pension funds, for example. So perhaps using reverse auctions for mortgage-backed assets is not such a crazy idea after all.

On balance I think a long, regular series of auctions based on a multiple-round descending clock auction design with the government only buying a fraction of the securities on offer in each auction would be a good way to start the process. Then as the purchases become more commonplace, the desperate sellers offload their assets and prices creep up the government could look to add in optimisation technology.

From http://www.bnet.com/2403-13059_23-237128.html?promo=713&tag=nl.e713

“In a Results-Only Work Environment, people can do whatever they want, whenever they want, as long as the work gets done.” This is not simply company-sanctioned flextime. A true ROWE has unlimited paid vacation time, no schedules, no mandatory meetings, and no judgments from co-workers and bosses about how employees spend their days. In other words, managers trust employees to get their work done and do not mandate — or even comment on — when, where, or how it happens. Because everyone is evaluated based on what they accomplish, as opposed to how much time they spend looking busy at their desks, it becomes clear very quickly who is actually getting work done and who isn’t.

And an example

For example, after migrating to a ROWE, Best Buy’s strategic sourcing and procurement team boosted employee retention by 27 percent and shed 10 low-performing employees. But the real proof was the huge uptick in performance: The department, which buys materials for the corporate environment, saw a 50 percent increase in cost reductions over two years.

Now I suspect that there is a bit more here than meets the eye but nevertheless it’s a story worth keeping in mind for buyers.

Reading The Economist’s leader on Hank Paulson’s plan to save the US finance system.

Guess what – they’re planning to use auctions.