Reverse auctions gained popularity during the halcyon buyer’s market days of the late 1990s. Today, e-sourcing is standard operating procedure for nearly all large companies, as well as many mid-size firms. And reverse auctions are becoming as common as Abercrombie and Fitch T-shirts in your local high school.

Yet, despite their growing, reverse auction technologies are still only applied to a small fraction of total spending. According to new research from the Center for Advanced Purchasing Studies (CAPS Research) the typical e-sourcing user applies reverse auctions to only 5.4% of total spending.

No, that is not a misprint. And the number is way off the one-third of total spending previous CAPS said could benefit from reverse auctions. My own experience suggests that some of the low penetration of reverse auctions can be attributed to the following factors:

• Supply market dynamics: earlier studies into reverse auction use were conducted during a time when supply market dynamics favored buyers and the use of reverse auctions. The rising energy prices and tightening commodity markets in today’s global economy are less conducive to reverse auctions.
• User demographics: earlier studies were also conducted during a time when reverse auctioneers were predominantly early adopters at larger U.S-based enterprises – a segment that has larger spend leverage and is generally more aggressive in its negotiation approaches. The growing number of mid-market, European, and Asia-Pac companies adopting reverse auctions skewed the overall bell curve. On the whole, these companies are less aggressive in their application of reverse auctions and less mature in their reverse auction approaches.
• e-sourcing approaches: most of the early market hype surround e-sourcing focused on the market clearing benefits of reverse auctions. So much so, that many companies – particularly those in Europe and Asia — continue to erroneously equate e-sourcing and reverse auctions as synonymous. They are not. Reverse auctions are merely one negotiation approach within the typical e-sourcing solution. In fact, other online negotiation approaches – such as e-RFx or sealed bid – are used far more often than reverse auctions. (A fact that is growing due to tighter supply markets.)

Unfortunately these factors only partially contribute to the low penetration of reverse auctions. The greater culprit is that we haven’t really come all that far as a supply management discipline.

Sure, nearly all e-sourcing users report amazing savings for the spend they’ve sourced online. And certain companies like Sun Microsystems are applying e-sourcing techniques to most of their spending. But the harsh reality is that most companies have had a hard time expanding and sustaining their e-sourcing results.

Evidence a recent Aberdeen Group report (registration required) which found that even the “Best-in-Class” companies were only applying e-sourcing to about a third of total spend. And in my own personal experience, a week doesn’t go by that I don’t hear of a company requesting help in expanding their e-sourcing program to more spending.

Some tips for overcoming e-sourcing mediocrity:

• Reorganize e-sourcing operations into a hybrid center-led structure in which field sourcing and commodity managers can specify requirements, initiate sourcing projects, and even run basic e-RFx and reverse auction events. But all complex e-sourcing projects – such as those with multi-line-items or cost structures – are managed by highly trained e-sourcing experts in a shared center of excellence.
• Alter your negotiation approach, trying alternative lot structures, bundles, or negotiation types to encourage more aggressive bidding and alternative offers from suppliers.
• Lower the dollar volume thresholds required for e-sourcing – i.e., if you only require e-sourcing be used for spend volumes over $1 million, try lowering that threshold to $500,000 or even less.
• Recruit an executive champion, such as a functional head – CFO, CIO, etc. – or business unit executive to help evangelize how e-sourcing has improved the cost structure, performance, quality, and productivity of their organization.
• Market your successes by issuing deal sheets – pre- and post projects – that clearly communicate your e-sourcing approach and results. Piggyback on existing company communiqués, such as internal newsletters or intranet, to deliver your message.
• Tap market and sourcing expertise either within other functions (e.g., IT, marketing, or advertising personnel) or outside your company (such as the category and sourcing support from your e-sourcing provider) for assistance in attacking new categories or applying new techniques.

Use the comments section below to post your own recommendations and tactics for expanding and sustaining e-sourcing success.