Many online reverse auction users assume that the savings gained from the online events will provide the return on investment needed to fund the cost of the software and implementation. And in most cases, they are right. But pharmaceutical firm Aventis chose another model to ensure that ongoing subscription and consulting costs are covered for each event they hold.

Strasbourg, France-based Aventis was created in 1999 when the European firms Rhone-Poulenc and Hoechst combined their pharmaceutical and agricultural businesses. Today, Aventis is a $19.4 billion company with a sizeable $7.1 billion annual spend. Aventis officials say about $2.3 billion of that spend is not considered sourceable yet because it is tied up in long-term contracts or otherwise inaccessible. The company's decentralized purchasing organization is divided across four major business organizations: R&D, industrial operations, commercial operations and shared services, with 400 purchasing staffers spread across the different organizations.

Aventis decided in 2001 that it was time to get on the e-procurement bandwagon and began to implement online catalogs across the company with the help of a string of consultants. But it was more than catalogs Aventis was after, so the company also began piloting hosted reverse auction tools from Pittsburgh-based FreeMarkets.

"Originally we considered implementing catalogs, e-sourcing, and an MRP system all at once," says Mike Flanagan, head of production supplies, services and capital expenditure purchasing for Aventis' Global Purchasing organization. "But that would have been too much. So we staggered our e-sourcing by rolling it out in the U.S. first. Europe came later in 2001."

With some solid hosted e-auction experience by August 2002, Aventis began looking at using a self-serve e-auction tool on certain commodities. After evaluating nine providers, Aventis deployed FreeMarkets' QuickSource product in Europe and its ES product in the U.S. for self-serve auctions. Aventis has relied on its 33 spend teams to work in various areas of the business to decide which areas are ripe for auction.

"Early on, the spend areas that we targeted were the common ones such as office supplies to get a feel of how this works in a noncritical part of the business," says Flanagan. "We are beginning to source more of our raw materials online, including capital expenditures."

Of course, there is a cost associated with the use of an e-sourcing tool like FreeMarkets and its associated services. To help offset the cost of FreeMarkets and ensure a return on investment, Aventis has implemented a unique funding model. All suppliers that win contracts with Aventis through FreeMarkets are required to pay Aventis a rebate based on the actual transacted volume that occurs, usually in the last quarter of the contract.

"We've applied [the rebate policy] to 100% of our auctions," says Flanagan. "Some suppliers said they are not prepared to work like this. But rebates are a standard purchasing tool and it says, 'If you do business with us and do well, you'll probably see more business.'"

The resistance from internal users to this policy has been minimal according to Flanagan, because they assume the supply base will simply factor the extra percentage (for the rebate) into the final bidding price, but Aventis will still see a significant savings. In 2002, Aventis saw an average of 27% savings on the spend it put through auction, while in 2003, it is expected to be a more consistent 15-19%. This year, Aventis plans to put about 12% of its sourceable spend through FreeMarkets, or about $286.5 million. Flanagan anticipates about half of that amount going through FullSource and half going through self-service tools.

About 80% of what Aventis sources online now goes through reverse auctions and the rest is put through e-RFPs. Flanagan says even if the commodity is not a candidate for auction, using online tools can expedite the communication process and help drive a standardized sourcing process across the 33 spend teams. The individual teams are left a good deal of freedom because of the specific needs of the different spend areas. For example, in a heavily regulated environment, quality is a much higher concern than in an open market where price is the driving force.

Aventis, like many other early e-auction users, underestimated the amount of time that it took to educate suppliers on the new tool. Flanagan finds that the more technical a supplier is, the more comfortable they tend to be with the e-sourcing tools. Suppliers with less tech-savvy sales forces may require more handholding through their first e-auctions.

But handholding is okay for now. Aventis' primary goal for 2003 is to get internal users familiar with e-sourcing and introduce suppliers to the tools and process. In 2004, there will be more performance-oriented goals set.