GE’s CIO on Reverse Auctions

I read an article in Fortune about Gary Reiner, CIO of GE.  He has a $4 billion IT budget.  That got my attention.  He also runs GE’s $55 billion sourcing function.  Now I was really interested. 

Reverse auctions? They require a strategy.

In the article Reiner talks about the relationship between sourcing and IT.  He said, “On the direct side, we were one of the first to do e-auctioning. Our job would be to commoditize the item as much as possible and then leverage IT to have our suppliers bid for the business. ”  Assuming that all the bidding vendors met minimum specs, price was the number one buying criterion.  Lowest price wins.

On auctions, Reiner goes on, “The more commodity-like the part or service is, the easier it is to auction; and the more differentiated, the less easy it is to auction. By design, every year we try to make more of our business portfolio be products and services that are noncommodity – that are differentiated. So we have been fortunate not to be as auctioned on the sell side as we are on the buy side.”

The interviewer asked: “I would presume that as much as you like to buy things through reverse auctions, you absolutely hate to sell things that way.”   To that, Reiner responded, “That is correct.” 

Unless you’re in a commodity business, participating in reverse auctions is about as defensive as you can get from a strategy perspective.  By definition, the customer is determined to strip away any unique value from your products and services so they can buy at the lowest price.  They’re not interested in your unique value, a long-term win/win relationship with you, or anything else that will increase the cost to them. 

On the buy side, reverse auctions often indicates a strategic approach to cost containment.  Keep in mind there is a team supporting this approach—cost accountants, the procurement function, vendors selling procurement software, consultants hyping the cost-savings resulting from the reverse auctions.  That should suggest not approaching reverse auctions tactically from the sell side.

Numbers of companies I’ve worked with in the last ten years have had significant questions about, and challenges with, reverse auctions.  Salespeople were left hanging with no direction, tools or strategy on how to deal with the increasing number of reverse auctions.  The sales leaders had not included e-sourcing as a growing component of their customers’ buying process, so each new reverse auction was viewed with contempt, and without a plan to respond. 

There are strategies which can sometimes be effective with respect to reverse auctions.  Although it was written in 2004, here is an article on reverse auctions that will provide some insight.

Other resources:

• Reverse Auction Software Features
• How to Win at Reverse Auctions
• Reverse Auctions Blog