Auction Action: Right for Your Company?

FRAMINGHAM (02/24/2000) - Consumer goods aren't the only hot items on online auction blocks. In fact, on any given day, you'll find thousands of networking products up for bid on eBay Inc. And business-to-business auction sites are attracting a legion of followers, moving truckloads of products and forging previously unattainable partnerships around the globe. Best yet, the IT experience you'll need to engage in auctions is easy to come by.

Industry watchers agree that business-oriented auctions are one of the hottest new online trends, drawing participation from small businesses and Fortune 500 companies alike. In fact, business-to-business online auctions handled $109 billion worth of transactions in 1999, and that number is expected to jump to $1.3 trillion by 2003, notes Forrester Research Inc., a market research firm in Cambridge, Mass.

The rocketing interest, coupled with large transaction numbers, have analysts and user organizations putting their muscle, and their dollars, behind this burgeoning technology. Procurement people who have access to auction systems rave.

"It's a fantastic tool," says Michael McGaugh, senior market supply manager for The Dow Chemical Co., an $18 billion chemical giant in Midland, Mich., with 35,000 employees worldwide. "It allows us to diversify our supply base and create a dynamic marketplace for buying and selling. Now, I can reach a competitive market price very quickly and with much less effort than phoning around and taking bids manually. I can do it in a matter of hours instead of a matter of weeks."

Dow is a good example of why business-to-business auctions are becoming a hot avenue for buyers and sellers. As a seller, Dow uses auctions to meet new customers. As a buyer, it uses online auctions to find lower prices on the tons of raw materials and packaging the company needs to make and ship its products.

McGaugh says he routinely saves 2 percent to 5 percent on purchases through online auctions and sometimes as much as 20 percent. That's because bidding pressure can drive down the costs of buying from new suppliers, particularly for commodities such as packaging, auctioneers contend.

"An oat company might have all these procedures in place to get the best price on oats, but it doesn't think about what it pays for industrial supplies. If it pays $200 million a year and can save just 10 percent, that's $20 million," says Paul Baier, CEO of, a 6-month-old online auction company in Burlington, Mass.

It's no wonder that online auctions are quickly proving their value. As a sales system, they save time and money, bring in new customers and suppliers, and extend corporate reach from one end of the globe to the other.

The business case can be so strong, in fact, that you'd be wise to begin experimenting with auction technology and investigating third-party hosted sites. If internal users haven't discovered auctions already, you could be the hero by bringing them into the company.

Still, as with any fledgling venture, you're likely to find the technology doesn't yet provide a perfectly paved road. Some vertical markets may not be ready. And you may have to improve infrastructure to do it in-house, or hire out.

The Internet auction is a natural way to meet new partners while eliminating the protracted sales process. A company looking to sell a product can put it up for bid online, noting a minimum price and a cutoff date.

Or a company looking to buy can tell suppliers what it's looking for and then wait for bids.

Unlike traditional auctions, with the bidders gathered in a physical location, online attendees can participate from around the globe, 24-7.

Reaching new customers is one of the guiding reasons that John Deere Co. built an auction site, says Nancy Headley, operations manager for the farm equipment manufacturer in Lenexa, Kan. John Deere has been helping its 1,600 North American dealers auction off used equipment since last October. It's hosting a site ( with IT help from OpenSite Technologies, an auction software vendor.

For some industries, auctions already have reached the must-do stage. If you're a network executive in those verticals, you should be examining auction technology and outsourcing options on the double - or you'll be letting competitors reap the cost and customer advantages. Such verticals include computers and electronics, chemicals and motor vehicles, says Keith Pitcher, president of ComAuction, a business-to-business auctioneer in Dowagiac, Mich.

You can begin to get a feel for the process and how it will integrate into purchasing and sales systems by auctioning off used equipment. "Auctioning really comes into play for a unique piece of equipment or any type that may not have a standard, fixed price, such as specialized equipment or something that has been modified. If it's hard to get a book value for it, this is a good way to sell it," Pitcher says.

Along with chemicals, steel and electronics, any old items lying around the stockroom are fodder for online auction experimentation. You probably have some. Approximately $350 billion worth of unused assets are owned by American companies, according to the U.S. Department of Commerce.

By selling off the storeroom's assortment of oldies, you not only turn dust collectors into cash, but also gain a means to engage business-to-business auction technology, evaluate the security needed to allow purchasing agents to bid via your Internet connection and figure out how to integrate payment into your general ledger systems. And you do this without interrupting existing purchasing and sales systems.

Afterwards, you'll be in a stronger position to decide if you want to build an auction site, join one or wait.

Should you want to begin now, be warned - implementing an auction site in-house will almost certainly cause some bumps on your electronic roadways. ComAuction, for example, found that auction success could mean infrastructure strain. This year-old company auctions any type of new and used equipment from agricultural machines to computer equipment. It reached total sales of $50,000 in 1999 but expects sales to balloon to $50 million by the end of this year.

That thousandfold jump in sales is now forcing infrastructure upgrades, says David Olsen, chief technical officer at ComAuction. Olsen is currently operating ComAuction on two Sun Solaris servers running Oracle8. Next year, he plans to increase the number of servers and each one's capacity. While he hasn't chosen the new servers yet, he knows he'll have to move from his 100M bit/sec Hewlett-Packard ProCurve switch to a gigabit switch at the same time.

Upgrades such as this make outsourcing look like the best route for building private auction sites. This might go against your grain. E-commerce managers overwhelmingly reported that they prefer to rule over their own e-commerce systems, according to a survey of 100 Network World readers conducted for this issue. (See E-comm Intelligence Report, page 56). Nevertheless, early adopters say that hiring consultants, working with a hosting firm or even joining an existing site and leaving the whole caboodle in someone else's hands is best.

"Going with a third party brings a level of integrity to it," Dow Chemical's McGaugh says. "The neutrality makes the sellers more comfortable. If I'm hosting the auction, suppliers may not be comfortable that I'm treating everyone fairly. They might think that I'm withholding information from some and giving it to others."

Dow buys 500 to 600 different products by doing its online auctions through ChemConnect, a 4-year-old San Francisco site that auctions chemicals online.

And while the company's suppliers have the security of a third-party host, Dow has fewer nuts-and-bolts worries since ChemConnect handles all of the auctions' technical needs.

"I would assume with time we could build these systems, but it's not one of our core strengths," McGaugh says. "It makes sense to build a relationship with a third party that does have these strengths."

Even John Deere, which handles more online auctioning responsibilities than Dow, leans on OpenSite Technologies for hosting and management. Although John Deere may eventually take the site in-house, today it sends the auction information to OpenSite, and the vendor posts it online and handles most of the technical needs and problems.

"We just don't have the technical staff for it," John Deere's Headley says.

Third-party online auctioneers may also handle some of the logistical problems for your company. A buyer could ask the auction host to contact sellers and have them attend a private bidding in a secure part of the host's Web site. The seller could name the suppliers, or ask the host to find them. The host may even arrange for delivery, says Jay Hall, vice president of product management and a co-founder of ChemConnect.

"We're able to find buyers and suppliers in places in the world a company might not have had access to before," he says. "You start expanding your supply base and expanding your competition."

With the Internet's extended market reach, the auction is one road that most businesses should plan on traveling soon. You should start looking for potholes in that road today.

Sidebar: Switching to dollars: Used network gear selling like mad on online auctions.

Online auctions have become a great way to buy and sell used networking equipment.

"Of all the computer-related equipment we deal with, the hottest is networking,'' says Robert Davie, founder of ITParade, an online business-to-business auctioneer of refurbished high-tech equipment in Research Triangle Park, N.C. "People are upgrading networks regularly and quickly.

Networking equipment turnover is higher than mainframes or midrange systems that tend to sit out there for a while.''Auctioneers explain that companies such as Cisco and Sun Microsystems are using third-party auction sites to sell slow-moving products. But they also note the bigger trend is for user companies, such as Winn-Dixie Stores and AT&T, to use online auctions to sell older equipment once it's been replaced.

On EarthWeb, an IT business portal, about 1,500 of the 9,000 hosted hardware auctions are for networking equipment, and most are from user owners, says Scott Anderson, vice president of worldwide marketing at the New York firm.

Although fewer in number, the transactions represent bigger bucks because networking equipment sells for higher prices than other hardware categories, such as peripherals.

With each incarnation of networking technology, older but useful network equipment becomes impossible to sell via normal channels, say industry players such as Raymond Letulle, chief technical officer of Moai Technologies, an online auctioneer in San Francisco. When that happens, don't throw the products in the trash; put them up for bid at an online auction. Auctioneers guarantee you wider reach and help you get maximum bucks.

"We assist in determining what the used market value might be by polling our used networking dealers. Then we help set up a minimum acceptable bid,'' Davie says.

Sidebar: Making an auction site successfulDon't just build it; teach people how to use it.

Even the most innate benefits won't stop your pet technology project from bombing if people don't use it. Early adopters say the danger with auction sites is even greater, because auctions aren't quite mainstream e-commerce yet.

So if you build the site, also develop a marketing program that kicks in the moment the site is debugged, advises Nancy Headley, operations manager at John Deere Co., a farm equipment manufacturer in Lenexa, Kan. She speaks from experience.

Immediate results of John Deere's auction site were less than enthralling.

Headley wouldn't put a number on John Deere's auction sales from October's launch through January, but did say they were far below 50 percent of items offered. She remains confident that transactions will grow when John Deere initiates its marketing plan for the site over the next few months. "We've been getting the logistical and technical things right before we do a lot of publicity," she says.

If your company isn't in a hot e-commerce vertical, auctions may be an extremely tough sell. Equipment Exchange Company of America, a $3 million used commercial kitchen equipment merchant in Erie, Pa., moves 250 to 300 pieces a year. It tried online auctions but pulled out after dismal sales deflated its plans.

"We're not mainly an online company," says Bob Breakstone, president of the 21-year-old company. "It was another avenue of marketing our goods. It wasn't that work-intensive. It just wasn't active." Breakstone says the company only sold about three or four pieces of equipment in the four or five months it held the auctions.

There simply wasn't a big enough auction-savvy market for his used kitchen niche, which includes industrial food processors and similar items, he says.

Now Equipment Exchange is putting its efforts into simply featuring items for sale on its home page. But he adds, "It's not inconceivable that we would try again."

Finally, for those who choose to join a third-party site rather than go it alone, make sure the users of the system are trained in the art of auction deal-making. Unlike their consumer counterparts, the goods don't always go to the highest bidder in business-to-business auctions.

Increasingly, they are awarded to those that offer the best all-around business deal.

"We're talking about more than an auction," says Michele Hincks, marketing manager at ChemConnect, a 4-year-old San Francisco Web site that moves bulk loads of chemicals, doing 10 to 15 transactions per week, with an average of $200,000 per transaction. "A seller doesn't have to accept a bid just because it's the highest price. Look at the financing terms or the better shipping options. It gives you room to negotiate. It gives you more flexibility."

And that flexibility means better decisions - and better business, says Tim Minahan, an analyst with Aberdeen Group, a market research firm in Boston.

"People have been doing dynamic pricing, going for the highest bid," Minahan says. "This is turning into dynamic commerce. It goes beyond price. You can take your three top bids and then go offline and check out the other conditions. Lead time, shipping, warrantees, financing terms . . . there's more to business than the best price."

So ensure that the user interface of your auction system serves up more than just prices on the screen. It should allow bidders to see all the conditions of the deal, before they raise their electronic hand with an offer.

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