Devil's Advocate: The e-auction game

A lot has been made of the public sector making big savings on procurement by purchasing items such as PCs through electronic auctions. But, asks Martin Brampton, is this approach as beneficial all round as it sounds?

Reports of huge savings in public sector purchasing of PCs are curious. The spin is that e-auctions are providing dramatic reductions in price. But that raises several questions.

In effect, the large deals are done directly with manufacturers, and for some years Dell has set the agenda. At one time, Compaq was caught in a bind, wanting to retain the strength of its dealer network while being aware that it could not afford to give them substantial margins. The possibility of obtaining profit from the mere 'touching of boxes' has, however, long been abandoned.

For pure product supply, the logic of the situation inevitably pushes towards minimising the intermediaries between manufacturer and large buyer. After all, logistics companies like UPS can provide facilities such as warehousing and delivery more efficiently than anyone else. If all you want is a box, what value does a dealer add?

Even the warehousing requirement has been largely eliminated by Dell's model of build to order. This model can suggest the manufacturer is doing the buyer a favour by custom building. The reality is, of course, that the move is driven by economics. Specifically, build to order is the only way to avoid the huge costs of redundant inventory.

The components that make up a PC are almost all traded globally in a highly competitive market. The only parts of a branded PC that are guaranteed to be different are those pieces of the case that bear the maker's name. And for the most part, the only substantial profit in the whole mesh of transactions goes to the software vendor. For many years now, it has not been difficult to find out the price at which dealers buy machines from manufacturers.

With software highly profitable, it might seem to offer scope for price variation. However, the vendor of the software has little incentive to reduce price since all the bidders in an auction will normally be driven by the specification to buy exactly the same software. Large makers, such as Dell, have some negotiating power over the purchase of software but it is severely limited since their business models are largely based on specific branded software.

So what is happening in these auctions? One can only suppose that much of the bidding is merely a game. The simple business of quoting a price is clearly far less of a disincentive than a typical, cumbersome public sector tendering procedure. The opening bids must have little function beyond being the electronic equivalent of “Hello!”.

Presumably if one of the early bids were to be accepted, the vendor would be shocked and delighted. All this is corroborated by the reports of e-auctions, which confirm that by the end, the spread of bids is a tiny percentage of the purchase price. In a recent example, the spread of the top three bids was just over one-twentieth of one per cent.

Buying boxes at the best price is surely the easiest part of IT management, with or without e-auctions. In the case of PCs it is quite easy to establish what it is you want; for more complex and lower volume products, it can be much more difficult. The final price of the box may be less important than establishing its viability and value to the organisation.

And that moves us quickly into the realms of needing skilled people. While there is certainly scope for competition in the provision of services, it hardly makes sense to buy technical services by e-auction, since quality is at least as important as price. And that's an issue which evidently causes a lot of heartache for everyone, most especially in the public sector.