Digital procurement is the future of procurement, but will electronic auctions or stand-alone negotiations dominate?

Enterprise procurement teams can use electronic auctions to research and secure supplier contracts for over 25 years. Through these online negotiations, multiple vendors are able to compete directly against each other in real time to win a contract to provide a business with specific products or services. Technology has had a transformative effect, leveling the playing field for suppliers bidding on contracts, removing human biases from the procurement equation, and making the process of identifying and negotiating with suppliers much more important. more efficient.

Now, a new technique, autonomous negotiation, where a machine determines the negotiable factors in a supplier contract and conducts negotiations by email or via a chat interface, gives procurement teams even greater capabilities. Amazon has been one of the companies that has automated communications and negotiations with suppliers for years. Both approaches offer advantages over traditional manual negotiations and awarding contracts without any negotiation, which can lead to poorer results overall, but which technique, electronic auctions or stand-alone negotiations, is likely to be successful. to be the dominant form of business buying in the future?

To better understand the differences and benefits of the two, I recently spoke with two experts in digital procurement and negotiations, Jacob Gorm Larsen, digital purchasing manager at Maersk Group, and Rik Vera, partner at nexxworks and speaker and renowned advisor on customer orientation and digital disruption.

Where are the similarities?

Larsen is one of the world’s foremost e-sourcing experts and has written the definitive book on the subject of commercial e-auctions, A Practical Guide to Electronic Auctions for Procurement: How to Maximize Impact with Electronic Procurement and Electronic Trading. Surprisingly, Larsen argues that electronic auctions and stand-alone negotiations are almost the same.

“Auctions, when conducted correctly, have two stages: the value discovery stage, where joint value creation is explored, and the competitive negotiation stage, which is the auction process,†explains Feedback. “A negotiation is similar because it involves the same steps, only as part of a single process. “

According to Larsen, the goals are also the same with both approaches. Corporate purchasing specialists seek to get a good deal for both parties, make the process as efficient as possible, and maintain a strong relationship with their counterparts. The allocation problem they try to solve is always the same: finding out to whom they should sell their business under the most efficient conditions possible. But he cautions that credibility and engagement are the most important aspects of the electronic auction process, as sellers need to be confident that they will actually be rewarded if they win.

“An electronic auction needs to be part of a holistic procurement process, in which you explore joint value creation and understand the factors that both parties might sag on in addition to price,†Larsen adds. “What I’m preaching is the concept of ‘negotiations’, where you combine the competitiveness of auctions with the interaction and joint value creation of negotiations. “

Another similarity between the two techniques is competitiveness. It could be argued that auctions are inherently more competitive than negotiations, as the assessment of the value of each bidder throughout the auction process is influenced by the assessment of the value of their competitors. This shared information also makes auctions very efficient and generally allows bidders to avoid the winner’s curse, when the auctioned value of a contract exceeds its intrinsic value. But market-based negotiation is not unique to electronic auctions. Today, stand-alone negotiations can generate a similar level of competitiveness, as they rely on a machine capable of negotiating with many interlocutors simultaneously and taking real-time market feedback into account when negotiating.

What about the differences?

Using electronic auctions in complex spending areas requires human involvement in the value discovery process to ensure a total value approach, which means that these auctions are often used for larger, more strategic transactions where companies can justify investing significant resources in the process. Procurement teams facing time and budget constraints simply don’t have the resources to complete a full procurement process and electronic auction for every low cost supplier contract.

Rik Vera, a strong automation supporter who advises Fortune 500 companies on AI and intelligent automation and who speaks and writes regularly about the impact of digitization on business and society, notes that there is fundamental differences between autonomous negotiations and the actions of humans during negotiations.

“People tend to simplify the meaning,†Vera says. “Give people two parameters to negotiate on and they can do well. Give them three and they’ll struggle. Give them four? The truth is, humans can’t optimize well on four or more parameters. So if they have seven items to negotiate, they’re not trying to optimize the seven items, but reduce them to three, which seems like a more manageable set. Machines, however, will embrace complexity and even seek out additional elements that they can accommodate. “

Vera notes that he is “a big supporter” of generic algorithms and that a formula used in autonomous negotiation will continually adapt based on new data. The ability of technology to learn throughout the process is a major difference from electronic auctions, where the original limits of negotiation are inflexible. “If a machine manages the whole process, it will learn from each negotiation,†says Vera. “If a process relies on humans to complete the entire value discovery phase, AI is missing out on learning. “

Electronic auctions require a competitive market

Electronic auctions require multi-party competition, while negotiations only require two parties and therefore have wider applicability. Apparently, any trade deal can be negotiated, but not all contracts can be easily auctioned. For example, holding an electronic auction for a real estate transaction in a single location or for maintenance services in an area without competition is impractical: auctions require multiple bidders to be effective.

Autonomous negotiations, however, can be useful in a wide range of situations. They can be triggered on the basis of external data, such as changes in commodity indices or consumer demand, and, more importantly, the software that enables them can continuously learn and improve, as the creation and the distribution of value is part of the same process.

Takeaway meals

AI has made massive competitive negotiations possible in the commercial world, as demonstrated in recent years by Amazon and other major players in the retail and logistics industries. Electronic auctions and stand-alone negotiations offer a credible alternative to traditional manual negotiations and generally allow companies to generate much better results than awarding contracts with suppliers without any negotiation. Since stand-alone trading is applicable to a wide range of circumstances and offers many of the same benefits as electronic auctions, in addition to the capability of machine learning, it is a safe bet that they will become an essential solution to the future of shopping. Regardless of which of these two digital sourcing methods a business chooses, it’s critical that procurement professionals focus on co-creating value rather than just price.