Electronic reverse auctions (eRAs) appear to be an effective and efficient method of gathering pricing information. But have we as a profession over-utilized this tool, damaging our relationships with our strategic partners and clients?

Here are seven questions to ask yourself to be sure you limit your eRAs to initiatives that will yield the best results:

1. Is there enough competition? Having adequate competition is probably the most important factor in running a successful electronic reverse auction. The live dynamic pricing environment functions best when suppliers are working against each other driving prices down to the market-clearing figure. The more competitors there are working against each other, the better the results.
2. Are the suppliers really qualified? The most desirable (and lasting) results will be achieved only when best-in-class suppliers participate in the auction. And pre-qualify suppliers before inviting them to bid. It's the best way to mitigate the risks associated with having an incapable, fly-by-night operation skew your results.
3. Is the value worth the suppliers' time? Also, make sure the value of the purchase is enough to interest suppliers. If the figure is too low, prospective suppliers may bow out of the project and spend their time on what appear to be more profitable endeavors. And if the expected spend is minimal, the eRA may be an inefficient use of the buyer's time.
4. Is the product or service specification clear? Commodities with clear, universal grading are ideal candidates for online auctions. A particularly complex item or service creates substantial risks. First, suppliers will be less confident in bidding online for business that traditionally required several rounds of negotiations and/or early supplier involvement. And less confident suppliers will almost always result in higher bids. Second, the more complex a product or service is the more difficult it is to develop and communicate complete and accurate specifications. The success of an eRA depends heavily on whether or not the bidders are all quoting on exactly the same product or service. So, clearly communicate the applicable specifications.
5. How does the auction fit into the big picture? An eRA is not a good fit for all projects. Live dynamic pricing events may be the wrong way to commence or build upon a long-term strategic partnership. Many suppliers view the real-time competitive environment as threatening and unnecessarily adverse. There will always be situations when an auction is going to put undue stress on an existing partnership, or get a future alliance off on the wrong foot.
6. What's the benefit? If the event will assist the buyer in lowering total cost of ownership without sacrificing quality or service levels, or if it will streamline the sourcing process and shorten the purchasing cycle time, the tool will add value to the process and may be a good fit. Don't forget the value of having a complete audit trail after the event so you can respond quickly to protests. While this is particularly valuable to government contracting officers, private industry agents in the post-Sarbanes Oxley Act world are increasingly enjoying this benefit.
7. Can you translate evaluation factors into numerical values? It is extremely important that all applicable evaluation factors can be easily translated into numerical values. No matter how subjective in nature, these determinants must be compared across prospective suppliers fairly and consistently, and this is best accomplished when the factors are quantifiable. The less qualitative the non-price factors are the more likely an eRA will be successful.

In certain circumstances, electronic reverse auctions are an effective market-making and price-mechanism. There is no correct number of auctions to run, just the right circumstances to do so. The challenge is to separate the good opportunities from the bad.