Published In November 2001
Most of the talk about e-commerce has covered how you can, might, or will use e-business for your company’s benefit. Let’s turn the tables. What if you become the “e-commodity?” You are already part of a market in which the low bid, or the low responsive bid, or the lowest bidder from a qualified list, wins the work in a significant percentage of cases. What if the customer uses e-commerce to make you and your competitors bid, electronically, on his or her work? Stop laughing! People who work in the construction industry find this proposition funny. First, contractors already do a fair job of beating each other bloody on price, via sealed bids and competitive pricing. And, of course, customer’s representatives bid shop. Next, the idea of a group of electrical contractors using their computers to lose profit on a reasonably large job is strange. The ultimate fiber optic nightmare is: Drop your prices at the speed of light! Here’s the problem: significant corporate customers are getting accustomed to buying via “reverse auctions” on the Web. Most of these auctions are private, so they haven’t attracted your attention just yet. A great deal of the effort by these companies—your customers, perhaps—is experimental. Much of it involves real goods. Here are three frightening cases in point: • Emerson Electric—this manufacturer of electrical and telecommunications (and a lot else) says that, within a few years, it will buy roughly $3 billion of its annual materials purchases (it buys $5 billion per year right now) via reverse auctions. • General Electric—this company is so big, and so complicated, that it’s tough to pinpoint what’s going on at any one time. But General Electric has let it be known that it conducts 2,000 private “reverse auctions” on the Web each month. • Owens Corning—this company is moving its material buying to the Web, reporting savings from 10 percent (on products such as pipes, valves, and fittings) to over 60 percent (on bottled water) via the Web-based “reverse auction” process. These companies and others who will follow them hire electrical contractors. How long will it be before they or their followers begin to hold “reverse auctions” on significant portions of their construction work? FreeMarkets.com Leading the charge into this New World is FreeMarkets.com. This company had fewer than 70 clients as of this summer, but they are all big. Most importantly, they are all—through their various needs and experiments—blazing a trail, creating a track record. Here’s the key: To hold an orderly auction, a buyer has to compare apples with apples. Let’s say you are buying 100,000 widgets, with bidders from Utah, Kansas, and Taiwan. The Utah company (your current vendor) supplies widgets just the way you like them; the Kansas doesn’t exactly meet your packaging requirements; and the Taiwanese company can guarantee widget flow only within a 72-hour window—not within the 24-hour guarantee you’ve specified. FreeMarkets.com has specialists who learn your business, including how you use widgets, the value you attach to services, and the value the suppliers attach to the widgets. They work with you to “rank” the values, and how closely each company meets the “ideal” spec. The end result is that a bid of $100 from the Utah company beats a bid of $93 from the Taiwanese and a bid of $97 from the Kansans—because of how the services are ranked. Now, this is really the only way strange new bidders can be brought into the fold to compete with established suppliers for a given customer—a buyer of widgets, or a buyer of electrical construction or VDV services. Everything has to be placed on a level playing field, and if one supplier is above or below the others in key customer-specified categories, his “low bid” has to be a lot lower to win. . . . it can too happen here! More than a year ago, a governmental entity in Pennsylvania decided to do a Web “reverse auction” on a VDV job. According to reports, the initial bid on the work was $3.8 million. There were limitations on bidding (each bid had to be so many thousands of dollars lower than the previous one). Fewer than two dozen bid on this work. Here’s the bottom line: While the first bid came in at $3.8 million, the winning bid—more than one hour and more than 100 progressively lower bids later—was at around $2.6 million. Unfortunately, your humble correspondent has not heard about more of these. If you know of “reverse auctions” for electrical contracting, line construction, or VDV services, please e-mail me. I promise not to laugh! SALIMANDO (email@example.com) is a Vienna, Va.-based freelance writer. He writes a monthly e-commerce column for www.tedmag.com.