Since the onset of the global pandemic, organizations have been forced to adapt to survive. A silver lining has been a long-overdue acceleration of digital transformation for business spend management, causing ripple effects across many functions.
Digital transformation has become a crucial business initiative over the past year with 63% of professionals in a KPMG survey increasing their digital transformation budgets due to COVID-19. While companies have squeezed years worth of transformation into a short period, most companies are still far from complete in their journey. Many Chief Procurement Officers (CPO) are experiencing increased prominence in their organizations, as CEOs and boards kept a closer eye on sourcing and supply network resilience. With this new spotlight comes an opportunity for CPOs to bring a more strategic approach to maturing their digital transformation journey, relative to the mad dash of the last year.
Companies relying purely on sourcing through in-person negotiations during the pandemic realized that traditional methods alone were not going to work. Over the last year, more and more companies realized the need to invest in digitizing their entire business spend management process, with sourcing as a natural first step. One company that is doing well in digitizing sourcing is Maersk, an integrated logistics company.
I had the chance to chat with Jacob Larsen, Director of Digital Procurement at Maersk, a noted thought leader on digital sourcing and negotiations who just released his book, A Practical Guide to E-auctions for Procurement: How to Maximize Impact with e-Sourcing and e-Negotiation, on lessons learned and best practices on e-auctions. Over the past 10 years, Jacob has turned to e-auctions as a key sourcing strategy, resulting in major cost savings and increased agility at Maersk.
Can you explain what e-auctions are and the benefits of using digital sourcing methods?
In my book, I define an e-auction as an online, market-driven negotiation based on total value with commitment. To break it down, I think it's helpful to discuss the differences between an e-auction and traditional negotiations. In traditional negotiations, you are conducting bilateral negotiations with each supplier. Whereas with an e-auction, you remove the buyer and allow suppliers to negotiate the actual outcome.
If applied correctly, e-auctions will deliver millions of dollars in cost savings for any procurement organization. In my book, I use the example of how we sold our North American Headquarters through an e-auction. While this is not the typical use case for an e-auction it demonstrates the potential. We were able to provide a fair and transparent process that enabled competition. The e-auction ended after 81 minutes of active bidding, several extensions, a total of 61 bids, and a final price of $53.3 million.
We talk a lot about the digital transformation of the back office. How do e-auctions play into that conversation?
E-auctions can be an important starting point for the journey to digitization and building the foundation for the rest of your procurement processes. When you deploy e-auctions, you get prices in a digital format which you can then turn into electronic catalogs. Those catalogs can become the foundation for digitizing the purchasing processes throughout your organization.
One of the common misconceptions about implementing an e-auctions program is that it's going to be this heavy lift. It's actually relatively easy from a technical point of view. Since it's SaaS, you can get it up, running, and generating impact for your business in weeks.
In your experience, how can you build a business case for e-auctions?
Another myth about e-auctions is that it's all about price, which isn't quite true. Cost savings are an important benefit, but there are many other value adds as well. Process efficiency and agility are huge outcomes. At Maersk, we have a Center of Excellence that supports the global organization with people who have key skills, so our team of seven can cover thousands of supplier negotiations. With a smaller team, you can still generate impact for the business. Our team is doing thousands of auctions a year, covering more auctions per person per year with a digital solution. On top of that, we are able to execute very quickly.
I know that trying to sell your boss new ideas can sometimes be hard. How do you convince key stakeholders about the value of starting an e-auctions program?
Convincing your CPO can be a tough discussion if they're not fully bought into the concept of e-auctions. My recommendation is to show them the money. Demonstrate the value and potential e-auctions can provide by systematically mapping all your categories and adding up the savings. I did this ten years ago and was able to show more than $100 million of potential savings. Once you get buy-in, execute and deliver when you get the chance. At Maersk, 50% of our auctions are still delivering double-digit savings 10 years later and we're seeing five to seven percent of incremental savings compared to traditional negotiations.
So once you have convinced your stakeholders of the need and secured the technology, how can you ensure you will be successful with e-auctions?
There are three key components that are central to be successful with e-auctions. First, you must take a sustainable, fair, and transparent approach to how you apply e-auctions to your supply base. That means adopting the right definition for e-auctions and the right governance for execution. Second, you need to adopt a strategic approach to auction design beyond pilot schemes and tactical tail spend. You should not approach e-auctions in the same manner every time. The third is driving adoption which requires adopting a change management mindset — it is a lifestyle, not a diet. What I mean by that is the effort of working with people, winning them over, and creating a culture of change will never cease.
You mentioned when convincing a stakeholder about the value of e-auctions delivering results is critical. From your experience, what is the best way to measure success and show that you're delivering?
When it comes to e-auctions there are a lot of different KPIs that you can use to measure success. I recommend three in particular. First off, look at the number of auctions done as part of the program. Find out the spend covered and the savings created. Finally, measure the auction throughput, or the percentage of spend covered through e-auctions. These three things will provide you with a solid picture of your success.