In this corner: Label converter Suzanne Zaccone.

In the opposite corner: Online auctioneer Jeff Zeman

Online reverse label auction have become a hot-button issue for label converters and label buyers alike. Our Narrow Web Niche columnist, Suzanne Zaccone, is a principal of Graphic Solutions Intl. and a veteran of several reverse label auctions. We asked Suzanne to pose a series of questions to Jeff Zeman, national account executive with Ariba, recently merged with FreeMarkets, Inc., which has hosted many recent online label auctions.

While Suzanne can hardly be termed objective on this issue, her views do represent those of a large percentage of label converters who feel that these auctions reduce the entire label transaction to price, with no consideration given to quality or service. Zeman, on the other hand, maintains that his firm is simply responding to the desire of label buyers to reduce their costs wherever possible. The full text of this conversation can be found on our Web site, www.convertingmagazine.com, where you'll also find a place to add your own comments on this issue.

Zaccone: Jeff, reverse-auction bid packages often contain inaccurate specifications, order quantities and other important requirements that do not remotely reflect real world buying patterns or specs for the items in the packages, therefore making the prices inaccurate from the start. In all cases we were involved in, the customer and FreeMarkets (now Ariba) were made aware of this, both in writing and over the telephone, yet the bid proceeded without those corrections being made. How can there be a viable bid process under those conditions?

Zeman: This is a tough question to answer without all of the details. However, every effort is made to communicate to the client all interactions with the supply base (in these situations Ariba acts as the aggregator of information for presentation to the client for response). If the client does not change the information, Ariba cannot do so either.

Situations also arise where the client specifications do not match what suppliers have been supplying. Again, the client is responsible for aligning demand and supply. The client "owns" specific commodity specifications, requirements and details. Every effort is made to synchronize and verify the information as accurate. The client has final sign-off and responsibility for bid package representation before release to the supply base.

Zaccone: It seems that in every reverse auction there is at least one bidder who is not remotely qualified to produce to the requirements of the auction, but throws in low-ball bids due to their lack of knowledge. Those of us in the narrow-web printing industry wonder why reverse-auction companies don't work harder to qualify those bidding?

Zeman: Ariba makes every effort to profile and validate supplier capabilities, and of course buyers have the right to adjust their risk tolerance. Remember, our clients hold the final approval of suppliers for participation in any sourcing event. Clients approach this responsibility in various ways; some pre-qualify everybody with in-depth RFI's and site assessments, others prefer to do online qualifications with final site assessments following bid event results. Again, in the situations where we function as a service bureau, the client "owns" the supplier selection, qualification and final award responsibility.

Zaccone: How would you suggest an incumbent label converter handle a situation where they are asked to be involved in a bid where, to their certain knowledge, the quantities are wrong and the specs are several years old and no longer accurate?

Zeman: If the incumbent has been supplying the goods or services over some period of time, why would the specifications and quantities not reflect current conditions? Everybody talks about "preferred supplier relationships." If these truly exist, both parties have a responsibility to keep the "current state of supply" accurate. The bidding process can allow for such interaction—public query and clarification, for example, so that all suppliers benefit from the response to a single supplier's question. This is one of the benefits of using technology or structured processes for sourcing in order to be transparent in the way information gets shared. In other words, no single supplier has an inside track, which we believe leads to better business all around. Don't forget that at the end of the day Ariba works for the clients (buyers) and transmits the information as presented without bias. Suppliers have a forum for sharing ideas and correcting information within the process, however the client needs to actually make the changes.

Zaccone: We have seen many instances where the business was sourced again within a year, to a new supplier after a reverse auction, due to the incompetence of the winning bidder, the substitution of inferior materials, or the simple inability to deliver. What percent of reverse auctions for custom labels result in the failure of the winning bidder to take on the business satisfactorily, and the business being assigned back to the incumbent?

Zeman: Sourcing is a discovery process by nature—progressive clients are always on the lookout for more creative, productive, efficient, cost-effective suppliers to address their requirements. The statements related to "incompetence, inferior materials, delivery capabilities, etc." are difficult to understand given the rigidity of the process. However, the clients as well as the prospective suppliers all have a responsibility to share the "true conditions" related to the supply of goods and services. This is one of the reasons clients may choose to implement our supplier performance management solutions, for example, which can factor in supplier quality ratings during the sourcing process. In theory, there is a disincentive for sloppy bidding (or buying) patterns.

Zaccone: Would you agree that most of your customers that initiate these auctions would stay with their current supplier as long as they meet the best bid price, even though they were not the lowest bidder or even if they chose not to participate?

Zeman: Clients have all kinds of different reasons for sourcing specific goods and services, but generally all are aiming to improve their bottom line results. Ariba does not question clients as to their reasons—we are employed to improve the process and/or find additional suppliers for their evaluation. If the incumbent supplier is better for the bottom line-not just the lowest price-then yes, there would be an incentive to stay with them. But they've got to be able to prove that to senior management.

Zaccone: Concerns have been raised as to the true existence of some of these bidding companies. There is speculation that some bidders are in essence fake—not really printers at all, but someone from the customer's purchasing department acting as a bidder. Your response to this would be important.

Zeman: Users of self-service technologies have this potential, however it goes against everything written related to ethical fair markets and the exchanges between buyer-suppliers. I'll point back to my previous answer that sloppy bidding or buying can come back to haunt you. Also, keep in mind that the number of bidders or the price of the bid are not necessarily the only factors in making a final decision. Bundling of other services can come into play, diversity of supply might be relevant, or even simple things like a track record of reliability.

This situation would not happen when Ariba is running the sourcing event (as in Full Service or Managed Service environments), but again could happen in the case of buyers using technology without any expert advice or guidance from Ariba.

Zaccone: How is your company compensated? As a percentage of annual savings, flat commission, or what?

Zeman: Ariba has a revenue model consisting of licensed software, subscription services, and consulting services. No two customers are alike and all contracts have varying levels of complexity. Compensation related to percentage of savings is minimal.

Zaccone: What percentage of companies using the reverse auction process actually switch suppliers as a result?

Zeman: It all depends on the commodity, its importance to their business and the difficulty of implementing new suppliers. Over the years the percentage of incumbent suppliers retaining the business has been declining. The last reported numbers were 50–60 percent retention by incumbents. Again, this is variable given the particular industry, commodity and initiatives related to Global Sourcing efforts.

Zaccone: As the reverse-auction industry is consolidating, (for example the Ariba buyout of FreeMarkets), what is the future of the process?

Zeman: Sourcing is really much broader than reverse auctions. It is part of the spend management process, but there are other components as well: procurement, contract management, analytics, invoicing, etc.

These are all areas that Ariba projects to grow as our customers seek new ways to accelerate results to their bottom lines. I see the process of reverse auctions as maturing, and being better understood as a piece of the entire supplier relationship, and the companies that can deliver reverse auction support that works for buyers and suppliers will survive and grow.