Auction Sites Bid For Big Time

Business-to-business auctions are coming of age, with auction services pioneer FreeMarkets last week announcing plans for an initial public offering and auction host TradeOut.com moving more than $10 million worth of surplus goods and equipment in its first two months online.

Business-to-business auctions are coming of age, with auction services pioneer FreeMarkets last week announcing plans for an initial public offering and auction host TradeOut.com moving more than $10 million worth of surplus goods and equipment in its first two months online.

The hottest player of them all, though, is a 73-year-old Midwestern management consultancy, A.T. Kearney, which recently hosted a sophisticated, $150 million online auction for Visteon Automotive Systems and has deals in the pipeline that should enable it to handle transactions for about $1 billion worth of goods and services for corporate clients this year.

"That figure should grow by an order of magnitude next year," says Niul Burton, vice president of operations at Kearney's strategic sourcing practice. "Almost every large organization is potentially a user of auction services."

Kearney, which earlier this year ran a $75 million online auction for Sprint telemarketing services, soon will unveil contracts to conduct auctions for large companies, including an information technology services firm interested in purchasing more than $150 million worth of personal computers, as well as an automotive company in the market for molded rubber parts and a financial institution shopping for office supplies.

The auction boom is proceeding along two tracks. TradeOut.com offers a forum for buying and selling surplus inventory in much the same way that eBay moves tchotchkes from one consumer's basement to another.

"We're addressing the largest inefficient market left in the global economy," says TradeOut founder and Chief Executive Brin McCagg, referring to the state of corporate purchasing. He hopes his site will attain an eBay-like critical mass of users, becoming the one site where serious players must see and be seen. There's plenty of competition, though, including a beefed-up B2B service planned by uBid.com and several industry-specific sites, such as ChemConnect and MetalSite.

The strategies pursued by Kearney and FreeMarkets are quite different than that of the auction sites, more of a service and consulting model with an online component.

"These service providers are really about strategic purchasing, while the sites are more tactical," says Aberdeen Group analyst Tim Minahan. "You go to a site hoping to find what you're looking for, but you go to a FreeMarkets or a Kearney to really address your sourcing issues. It's not a one-off engagement to find a particular machine tool."

Kearney builds on its established sourcing practice to develop detailed requests for proposals (RFP) and to prescreen potential suppliers, so that the actual auction at the end of the process includes only serious bidders who meet corporate criteria on reliability, service, shipping and so forth. The reverse auction format, in which would-be suppliers try to underbid the competition while meeting these other standards, is familiar to corporate buyers. At Visteon, which used Kearney to purchase circuit boards, the benefits of the auction process came less from the low prices it paid than the establishment of a well-vetted global supplier network and the reduction in time needed for a large purchasing process.

The auction itself is a relatively low-key process. Visteon's was conducted at its Detroit headquarters, where PCs in a designated "war room" linked to Kearney's auction software, which is housed on a server in Texas operated by Kearney's corporate parent, EDS. Bidders used their regular Internet connections to gain access, with some receiving prompts from the auctioneers urging them to bid more aggressively.

Kearney's Burton says the process lends itself to almost anything a company might want to purchase. "This is not only for commodities," he says. "If you can come up with the parameters so that you are putting apples vs. apples, you can auction anything. We see growth into services and more expert-engineered equipment."

Kearney hasn't yet decided whether its booming auction business will be a profit center or a value-add for customers. So far, the firm has conducted auctions only for its consulting clients, but it may pursue the business on a broader scale by marketing the service to noncustomers.

Should Kearney falter, FreeMarkets will still have plenty of competition. "This is a real opportunity for companies with supply-chain practices to move in," Minahan says. "Look for a lot of familiar names from the consulting world to get involved."

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