Transformational bidding – Part 1 – Using percentages and non-price values to affect bids
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This is the first blog in a series discussing how transformational bidding can be used to negotiate complex tenders more effectively.
It’s not just about the price
Focusing exclusively on price can be a recipe for disaster. I was reminded of this recently when the USB cable I purchased for less than £1 online damaged my wife’s mobile phone.
This focus on price is a common argument against using Reverse Auctions. However, there are numerous ways to prevent this from becoming an issue, including
- Clear specifications which set out the level of service which is expected
- Pre Qualification stages (to ensure only suitable suppliers progress to the auction stage)
- Weighted Auctions (to allow non-price factors to weight bids)
All these approaches have one thing in common – they are done before the auction takes place.
Doing it during the auction
Transformational bidding is a mechanism to capture non-price factors and directly include them into the auction. This differs from the other approaches mentioned above because these factors may be controlled by participants and changed during the auction. These factors can be attributed in the auction by a simple numeric value or a picklist converted to a numeric value or cost.
Example – office cleaning
In this example, we will look at how transformational bidding could be used in a reverse auction for office cleaning services.
In the auction, we may want to penalise suppliers who will use 3rd party staff, and we can assign a cost of £800 per annum for any suppliers that do so. This could be based on additional costs/admin associated with this. Perhaps, in reality, you might deal with this differently although we just want to demonstrate the premise.
Additionally, we want to understand the 1 year and 3-year contract cost, and whether suppliers are prepared to offer a discount in exchange for a longer contract.
This leads us to set up our lot as follows:
There are six columns:-
- Size in sq ft (information provided by the host)
- Annual cleaning cost (the supplier’s bid will go here)
- 3-year contract discount (a numeric field where the participant can choose to offer a discount for a longer contract)
- 3rd party staff (a Yes/No dropdown, chosen by the participant. The Yes option equates to an additional £800 per year (to cover the additional risk of using 3rd party staff)
- Total cost (a calculation)
- Total cost -3yr contract (another calculation).
Running the event
During the event, participants can amend their basic price, and also the type of staff they plan to use and the level of discount they can offer. They get feedback on how all these factors affect their overall rank and can the adjust their next bid as a result.
Participant One
Participant One can see that although their annual price is not the most competitive, and they do not offer a discount for the 3-year contract. However, they do not use 3rd party staff, and as a result are able to offer the best overall price.
Participant Two
Participant Two notices that they have been outbid on Suite 47 and Dojo House, however, they are winning overall for Unit 8. Despite offering a competitive annual price, and a hefty discount for the 3-year contract, they are penalised for using 3rd party staff.
Having this detail means that they can decide if (and how) they want to proceed. For example, they can continue to reduce their annual cost in order to win Suite 47.
By reducing their annual cost on Suite 47, they are able to move into the first position.
Participant Two can now focus on the Dojo House lot, and the other bidders must decide whether to bid again in order to regain the lead on the other two lots.
Conclusion
Transformational bidding offers a way of including factors other than price into your auction and RFQ events.
Bidding in this way can make the process more transparent give participants a clearer understanding of how competitive they are. This, in turn, means that hosts get the best offer for their requirements.
October 15, 2018