As more companies explore new ways of using the Internet, many are participating in online auctions or reverse auctioning.
Simply, online auctions are a form of e-buying where the entire solicitation process takes place over the Internet.
The Request for Quotation (RFQ) document is placed on the Internet and proposals are submitted the same way.
In some cases, the bidders do not see the other bids; however, in most instances, all bids are available for viewing by all bidders and this is where the whole process becomes interesting.
All about the benefits
Those who put their RFQs on the Internet like the process because of the increased competitiveness it creates and the resulting lower pricing.
In addition, this system has also been estimated to decrease the amount of time that it takes to complete the entire purchasing process by over 50 percent.
Other arguments for this process include: Greater access to a wider audience of suppliers, exposure to more alternatives in the products and services being purchased, and everyone bids on the same package and format, which creates a level playing field for everyone and makes it easier to evaluate.
Meeting face to face
The biggest challenge for those using the process has been making sure the successful bidder is able to deliver the product or service at the price offered.
It also eliminates the ability to meet with the supplier and have face-to-face discussions.
Most successful businesspeople know that face-to-face discussions are the most important part of the process.
It is common for buyers to make a decision based on price and when an actual meeting takes place, their mindset changes.
Challenges in the cleaning business
It has been my experience that reverse auctioning works for commodities or tangible items where exact costs are known or higher gross margins allow for sufficient cost reductions to justify the process.
However, I have found that it is not as successful in service industries, such as cleaning, where gross margins are low and contractors are often not sure of their exact costs.
It is fairly normal today that gross margins in the cleaning industry are less than 10 percent, and on large accounts are often less than 5 percent.
Cleaning supply costs are also typically less than 5 percent and often lowering cleaning costs by purchasing lower quality products can actually drive up labor costs.
As a result, in order to be competitive and lower costs, the only available option for a contract cleaner is to lower labor costs.
Decreasing labor costs was an option when productivity levels in the industry were lower compared to today.
Technology and competitiveness have boosted productivity by about 25 percent in the past decade.
This diminishes the opportunity to reduce costs without sacrificing quality.
Online auctions, in many ways, remind me of where the cleaning industry was 15 years ago.
Bids were based on what the work went for the last time it was bid or what the rumor was on the street for the right price.
The industry was then typified by two types of contractors: The labor broker and the professional.
The labor broker bid on what it took to do the work without any consideration for actually meeting the specification and the professional bid to the spec and keeping the customer happy.
Another way of looking at it is that the labor broker bid on the profit portion first and then whatever was left went into the contract, whereas the professional bid on doing the job and whatever was left was profit.
I believe we have been going through a period of increased professionalism in the cleaning industry as customers have found that hiring the labor broker simply doesn’t work due to the lack of real expertise and desire to perform a satisfactory level of service.
Online auctions are changing this to some degree, as they encourage low bids and provide very little consideration for what is actually required to meet the levels of service necessary, bringing many of the labor brokers back into the business.
Online auctions need to resolve many of the issues related to a service industry before they can become truly successful in the cleaning industry.
Bill Garland is joint managing director and owner of Daniels Associates Inc., a consulting company. He received the “Member of the Year” award from BOMA International and the Building Maintenance Contractors Association Industry Award in 1994. He co-authored the BOMA Cleaning Study: “Office Building Cleaning Operations in North America.” He is also past president of BOMA Canada and BOMA Int’l. Garland can be reached at firstname.lastname@example.org