Project Galaxy 4 – e-Sourcing Strategy

2011: Round 1

Phil Willcot thought about his meeting with the MD team of directors on his train back to
the big city. MD is a prospective entrant into the e-sourcing space, looking to acquire
market share from the dominant players by taking advantage of the best of today’s cloud
computing technology. The analogy they used was that they seek to do to Oracle, SAP and
Ariba what Salesforce and subsequently Zoho has done in the CRM space to Act and
Goldmine, or what Google has done in the application space to Microsoft.

At first he thought they were crazy, trying to take on the mature e-sourcing market
swamped by numerous players that already had at least a ten year head-start. How could
there possibly be room in the market for yet another entrant? How on earth could they
convince their potential customers to adopt their offering, particularly as customers were
increasingly looking for end-to-end solutions?

However as he listened to their proposition, he began to see that their ambitions were not
fuelled by experience and determination alone, but upon a sound market niche which they
were looking to exploit. Although ten years had allowed the competition to develop a
robust, feature-rich toolset, it had also encouraged complacency in the market. In fact, a
refreshing offering is precisely what the market needed. If marketed and positioned in the
right manner, MD could even manage to create a market of their own, one that very few
competitors would even consider. Just a cursory glance towards their main competitor,
Ariba, and you could see that the market was bracing itself for a shift, just the kind of shift
that MD had anticipated.

Phil contemplated his role as the lead for Project Galaxy, the name given to the activity for
the refinement and implementation of the MD business case. The MD directors had
constructed the initial business case from many months of analysis as well as using their
own experience as purchasing consultants. During their previous roles they had conducted
managed e-sourcing services for major clients in the oil and gas, manufacturing, automotive
and aerospace sectors, amongst others. During this time they had spotted something their
competitors had not or had chosen to ignore. Phil had no doubt they knew the product and
services. However, he noted that they did not have extensive commercial experience,
particularly in relation to board level strategy. It would be this top-level planning and
direction that he would most need to apply himself.

Through no coincidence this was precisely his background, having fulfilled roles within the
aerospace sector as a buyer then purchasing manager before joining the consultancy field
for a large blue-chip advisory firm. Dissatisfied with the rigid corporate structure inhibiting
his career path, he left to found his own niche management consultancy, an action which

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resonated well with the MD directors and perhaps even secured him the work. As one of
the first projects on his books, he was determined to make it a resounding success.

e-Procurement and Reverse Auctions

Billions of pounds are tendered every year on goods and services by companies across the
globe. Procurement as a profession is becoming an ever more important focus. Companies
realise that in these times, coming out of a recession with increased global competition, an
efficient procurement strategy can mean the difference between profitability and
receivership. Simple analysis at OEM’s such as Rolls-Royce shows that a 1% reduction on
procurement costs can relate to a 10% increase in gross profit.

Figure 1 below shows the growing trend for e-procurement which is enabling the
procurement profession to evolve and gain the much needed efficiency.

[Appendix 1 shown at the end of this case study also indicates the potential growth in the
SAAS sector of e-procurement]

E-procurement entered the scene in the mid-nineties with the dotcom boom and e-market
places. It took time for the real value to come to light after the initial surge and

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consolidation. One technology which emerged in assisting companies efficiently and
effectively reducing costs of their purchased goods and services was the reverse auction.

A reverse auction is an auction in which the roles of buyers and sellers are reversed. In an
ordinary auction (also known as a forward auction), buyers compete to obtain goods or
services, and the price typically increases over time. In a reverse auction however, sellers
compete to obtain business, and prices typically decrease over time. It is widely recognised
that the reverse auction does not conclude all negotiations but has its place in the buyer’s
toolset where it can be hugely beneficial when used correctly. Traditionally reverse
auctions in the procurement space were utilised solely for commoditised and readily
defined goods and services. Typical examples are office supplies and furniture, printing
services, IT hardware, utilities and so on. However, today they are increasingly being used
to negotiate for strategic goods and services, such as raw materials, logistics, manufacturing
processes and precision engineering services.

To make a reverse auction a success, there are several criteria you need to examine.

 Specification - The category needs to be defined exactly. The reverse auction will
focus on price so to be able to compare everyone’s prices, they all need to be
bidding on exactly the same commercial terms, service levels and standard of
product or service.
 Market Liquidity –The probability of a successful reverse auction increases with
every supplier involved who is willing to bid. It would be risky to run an auction with
fewer than three motivated bidders.
 Scheduling – The timing has to be right. The categories could involve hundreds of
parts for example and all the contract end points need to be examined so any result
from a reverse auction can be concluded swiftly, otherwise it will adversely affect
your potential market liquidity.
 Savings potential – A reverse auction can be quick but will generally involve a fair
amount of work. The most successful events will have well written RFQ’s and
involve personally calling the supplier base to sell them the idea and get them
involved. Thus you would not generally embark on this direction unless there is
sufficient ROI for the work involved. Typically you would look at tenders over
£250,000 to ensure not only that the bidders are attracted to the contract but also
that you see a return from the costly investment of time and resource.

Due to procurement professional’s poor level of understanding of this new technology, the
primary method of delivering benefits from reverse auctions was via a managed auction
service. This is where a third party consultancy or service provider manages and carries out
all the work during the reverse auction process, from composing the RFQ, sourcing,
qualifying and motivating suppliers to take part, expediting and analysing the quotations,

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managing and hosting the auction event and on occasion assisting with the implementation
with the chosen supplier(s). From start to finish the activity takes 6 to 8 weeks, requiring
both a project team from the client to sign off the documentation and suppliers lists and to
respond to any questions, and a project team from the service provider, typically a project
manager and a sourcing manager.

The companies who emerged offering this activity derived their benefits from their skilled
resource, cutting edge methodologies, robust technology and their proprietary supplier
databases. Some prime examples of such companies would be TradingPartners,
BravoSolution and FreeMarkets (now part of Ariba).

The most common form of remuneration for such an activity was a gain-share model of up
to 30% of the contingency savings. An upfront fixed fee may also have been applied for
more complex and resource-intensive projects, as a way of sharing the risk. The total fees
for such a service could command upwards of £60,000 on the turn of the millennium.
However, as the market matured and cost became a greater differentiator, a managed
auction service can now be bought for less than £30,000, despite the service being almost
identical to when it first hit the market. This was having a noticeable effect on the service
providers, provoking many to diversify their software and services into the broader cost
reduction and e-procurement arenas.

With sales revenue of managed Reverse Auctions apparently on the decrease, Phil Willcot
considered what the next s-curve in innovation would look like. With the general
understanding of reverse auctions vastly improved within the procurement community and
with universities teaching about e-sourcing as part of their curriculums, would procurement
professionals wish to run their own tenders via reverse auctions? Or do they just want a
wider range services in the e-procurement space?

Why companies would use e-auctions?

To help him direct the sales and marketing strategy, Phil Willcot contemplated why
companies actually use e-auctions (the broad term for both forward and reverse online
auctions) in industry. They are certainly growing in usage and awareness but what are the
driving factors and who would use them?

As the global economy was struggling to overcome the effects from the 2007 to 2009
recession1 with companies typically facing lower sales revenue from global competition,
there was an increasing pressure on cutting costs. Procurement became the heart of the
organisation. More efficient, better negotiated purchasing was required to keep the firms in
profit. The pressure on companies was immense, exemplified by the uncharacteristically
aggressive letters distributed to the supply chain from leading public sector service firms
such as Serco2 and MITIE3.

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Phil Willcot recollected the variety of sourcing strategies which he used to employ in his
former profession (Appendix 2). Reverse auctions easily fell in to the category of exploiting
buying power, which, on top of aggressive negotiation, sought other benefits such as spend
and invoicing consolidation and supplier rationalisation. Aggressive negotiation could take
several forms. There was the demand for a cash rebate based on the previous 12 months of
business or in return for a ‘preferred’ supplier status, there were cost reduction workshops,
held co-operatively with the key suppliers, there were tactical negotiations based on volume
increases, raw material price movements, currency fluctuations and other factors, there
were make versus buy decisions and there were sourcing and RFx (Request for Information /
Proposal / Quotation etc.) activities. Clearly the reverse auction was just one tool to be
used out of many potential alternatives. What could the reverse auction achieve that none
of these other activities alone could offer?

Reverse auctions are proven to generate more savings than face-to-face negotiations, on
average up to 25% when viewed against traditional paper-based tender processes4, as
suppliers are put under greater levels of competition than they would have otherwise
experienced. The other big advantage is the efficiency in the negotiation stages, as the
software could allow in excess of 50 suppliers to compete concurrently. This could not be
achieved either without some form of electronic bidding technology. Reverse Auctions not
only find you the true market price for your goods and services, but can also help you
narrow down your options for the final award decision process. Such a strategy can put
suppliers at ease as they know there will be a chance at the end for the top few to sell the
other value-added services that they can offer.

Reverse auctions have become increasingly popular in the public sector. The key reasons
listed by the government for adopting reverse auctions are 4:

 elimination of paper and streamlined processes

 short negotiation cycle
 better value for money procurement
 increased transparency of the contract award process

These sentiments are echoed throughout the procurement field and are not just applicable
to the public sector. As the government are morally obliged to represent the public and
therefore cannot rock the boat too greatly, it could be argued that reverse auctions are, in
the general consensus, the right approach. This bodes well for MD.

There are many typical objections to using a reverse auction as a negotiation tool and bad
practices by an unscrupulous few have not helped. Typically the objections centre on the
use of reverse auctions as nothing but a one-way negotiation on price and on the negative
impact reverse auctions have on supplier relationships. Auctions are price-focused but if
the adequate preparation is carried out and you clearly communicate your intentions with
the supplier at all time before, during and after the auction, such objections can be

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mitigated. With respect to supplier relationships, the open and honest approach of reverse
auctions has been shown to actually strengthen ties5.

Forward auctions also have much more value and application than is widely known. The
most obvious application is to dispose of excess stock or unused assets. Companies tend to
put little effort into these activities as it is not their core business and in many cases the
assets have been written off the accounts anyway. However, if these activities are
approached with the same rigor as the reverse auction activities, then significant
improvements can be made on their success compared to just selling the scrap to a local
dealer.

Increasingly many companies are realising the potential of selling their product to their
customers via a forward auction. If your goods or services are in sufficient demand and you
operate in a seller’s market, a forward auction presents a genuine opportunity to negotiate
the optimum sales price. It makes the process extremely efficient with great repeatability;
saving both time and resource.

Phil Willcot could see there were some unique reasons for companies to negotiate via an e-
auction. There is good awareness and positioning already in the market for reverse
auctions yet forward auctions were still largely underused. Perhaps it was connected to the
non-core nature of forward auctions or for their non-strategic sales process which enables
sites like eBay to cater for them. Either way, it would pose a significant challenge to address
the forward auction market, yet if successful there would be few competitors in the B2B
arena.

Competitors in the Reverse Auction Market

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The reverse auction market is very competitive yet equally there are potential niche markets
which can be exploited. The competitors can be broken into four segments:

Large multinationals: The traditional large companies such as Ariba, SAP, Emptoris and
Oracle dominate this segment, which offers reverse auction capability as part of a much
wider purchase-to-pay offering. They are beginning to embrace the notion of cloud
solutions with a pay as you go approach. Ariba signaled their intentions when they bought
Procuri in 20076 to be able to offer a subscription service. However as these companies are
large, global corporations, they are less agile and responsive than some of their smaller
counter-parts. In many cases it can be off-putting to companies turning over less than $1bn
to partner with such dominant solution providers. On the other hand, other very large
organisations with sales into the many billions would actively seek to partner with solution
providers in this segment for the breadth and depth of the service that they offer, as well as
the reassurance of working with a recognised brand.

Boutique consultancies: There are many consultancies in this area such as TradingPartners,
BravoSolutions and Hedgehog. They offer managed e-auctions, typically hosted on their
own bespoke software, to companies on a fixed and/or contingent fee arrangement. The
software used by these vendors is not developed explicitly for use by third-party purchasing
professionals rather it has tended to be largely influenced by the e-auction process that the
consultancies follow. Nevertheless their software is on occasion licensed to their customers
but more to supplement their service offering. It is these consultancies that are facing the
greatest pressures, as the barrier to entry for an experienced procurement professional to
enter this market is low, particularly if their clients have their own licensed software or if the
professional can partner with a software vendor. TradingPartners, for example, has
undergone a major restructuring of their business, greatly reducing the headcount in their
head office7. The question that needs answering to ensure longevity in this sector is do
companies still want a managed e-auction service or do companies want a much broader e-
auction and cost reduction service covering all aspects of their supply chain? Depending on
their interpretation, they may either remain as boutique consultancies in a wider context or
they will become software vendors.

Tailored software vendors: These could be typically classed as SMEs who offer bespoke e-
procurement software packages solely for use by their customers. They differ from the
large multinationals in that they traditionally aim at specific solutions and do not have the
infrastructure to support the large global corporations. Traditionally their software has
been locally deployed on their clients’ premises and they will have a legacy of pricing which
inhibits their ability to offer a clear price level. Companies in this sector may also offer some
level of supplementary services or consultancy, such as supplier sourcing, bid analysis and
managed e-auctions. However they differ from the above as they would still class
themselves as a software company. Examples here are Iasta, Curtis Fitch, Quadrem and
Wax Digital.

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Commoditised software vendors: This is the sector inhabited by MD, which is where e-
auction software is offered to the general market as an off-the-shelf, easy-to-use product;
much like the Hotmail of the e-mail world or the Facebook of social media. Increasingly this
is the sector that e-auction providers are seeking to infiltrate, with companies such as
CPOConnect and Purchasing Auctions already established in this area. The differentiators
here come down to support levels, price, professionalism and features. The software has to
be carefully balanced so that one size fits all yet is not over-complicated or insufficient to
their customers’ needs. Provision of support is also vital to provide reassurance to their
customers, yet it also has the potential to place too great a demand on the vendor.

Phil Willcot realised that it is in this sector that MD should look to uniquely position
themselves. Yet he also saw that as they expand, the strategy must allow them to compete
in the other, more service-oriented sectors. He could see that this could be a difficult
challenge, particularly as MD had no intentions of becoming yet another service provider.

The MD Proposition

MD believes it has realised a gap in the market for a commoditised product that could cater
particularly well for the SME market. The apparent paradigm shift away from the managed
e-auction service towards the software-as-a-service (SaaS) model, that allows any company
to run their own e-auctions, makes the basic concept very attractive to them. The
traditional managed auction service had been considered a luxury product in the market,
affordable only by those companies with significant areas of spend, whose cash flow would
allow for a high level of investment for a medium-term return. However, by pricing in their
cloud software at a level affordable to many SMEs, MD believes they can create their own
market niche.

Since very few companies had entered the e-sourcing market since 2001, there were very
few companies in this industry who were in a position to radically adapt their company
structure and strategy around the SaaS model. The teams of highly-skilled sourcing
consultants recruited by all these companies would find themselves largely redundant in an
SaaS company. Therefore it would take a very brave CEO to make the irreversible call to
switch to a software model. By the end of 2010, only one dominant player, Ariba, had made
the decision to focus on e-procurement SaaS when they decided to sell their sourcing
services and business process outsourcing (BPO) services assets to Accenture for $51
million8. Just 6 years earlier in 2004, Ariba spent $493 million to acquire the same outfit
which at the time was called FreeMarkets9. Despite the less-than-exemplary performance
by Ariba, MD shared the vision that SaaS was the future of the e-sourcing market.

MD had spent the last 3 months designing and developing their e-sourcing and e-auction
software in-house to keep the start-up costs to a minimum. The software, written in Ruby

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on Rails, a platform shared by Twitter, Groupon and Shopify, was not innovative in terms of
feature/function, as they believed that 90% of e-auction needs could be catered for by the
bare essentials, but was novel in the way it could approach and be positioned in the market.
The MD unique selling point and mantra is that there is no e-auction software on the market
offering a solution which combines the following characteristics:

 Easy to use (no training costs),

 Professional processes (ensures success),
 Transparent pricing (great value)

MD, by offering a combination of the above features, feels it is uniquely placed to take e-
auctions to the next stage in their evolution. Not only can they build on the understanding
already in the market place, which ironically is continually increased the more prodigious
their competitors become with their managed e-auction services, but their software can
also be marketed to any ‘average’ purchasing professional by providing a very low barrier to
entry with respect to cost, usability and best practice. The definition of the term ‘average’
is any purchasing professional that has a decent grasp of e-procurement, spend analysis,
RFQ compilation and supplier sourcing. MD recognises that by addressing the average
purchasing professional, their software will not be suitable to the very large enterprises, for
example the major supermarkets, that run complex, combinatorial e-auctions almost on a
daily basis. MD made this decision early in their developmental phase to help focus their
product yet sought to incorporate functionality to cater for 90% of the e-auction market.

In addition to the reverse auction, the MD software can be used for forward auctions for
activities such as asset disposal, where platforms like eBay lack the professionalism. MD
intends to exploit such immature markets in order to maximise their revenue potential.

Another prospective revenue stream identified by MD is to approach the purchasing

consultancies and interim purchasing managers, as there is a clear overlap in their sales and
marketing targets. Typically e-sourcing software would take many months to develop and
would incur significant costs; hence it is major barrier to entry for the niche consultancies,
of which there are thousands in the UK market alone. Instead consultancies and interims
offer their skills, experience and resource as a service to assist their clients with reducing
cost in their supply chain. However, due to the clear and highly competitive price level of
the MD solution, consultancies could now be tempted into adopting the software into their
own service offering to their clients. Not only would this help MD rapidly infiltrate the
market through an affiliated network but it would also generate multiple revenue streams
from selling either directly to the consultancies or indirectly to the clients they engage with.
Very few competitors would be able to similarly perform this feat as they have their in-
house consultants to take precedence.

Notably, the majority of the MD marketing plans were focused on the private sector. The
main reason was the lower barrier to entry. The public sector, whilst on the one hand has a

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huge market potential and has a vested political interest in e-auctions10, was on the other
hand dominated by a handful of large organizations, such as BravoSolution and Due North,
who were firmly embedded within the various public sector bodies on up to seven year
contracts. It would take a huge overhead in terms of time, cost and resource to develop
software that could compete in this market. MD took the decision that whilst the potential
return could be significant, the risks involved were too great for a self-capitalised start-up.

MD also had great ambitions in the horizontal market. They stated their intentions of
offering their solution to the consumer; a completely untapped market. Their innovative
USP of ease-of-use, clear pricing and professional software would render their solution
attractive to companies or individuals with a tender value as little as £20,000 to allow, for
example, consumers to negotiate the price for their new conservatory or for re-roofing their
house. Furthermore the software could cater for new initiatives for forward auctions such
as property and estates. This potential for new business is vast and would only require new
website designs with the same e-auction engine integrated into the back-end.

One of the more unique features of the MD offering was their payment system. MD offered
two payment structures, the first a Pay-As-You-Go type approach, which cost £1,000 per e-
auction, regardless of scale, complexity or value. The second was an Annual Licence model,
which cost £5,000 per user and permitted an unlimited number of e-auctions. As the
software could also be used as a paperless method of gathering in quotes, regardless of
whether or not the user then goes on to run an e-auction, the Annual Licence also had
further benefits in this way. What was unique about this system was not the pricing, but
the way it was paid for. The payment method was transacted via a credit system, whereby
1 credit cost £10. Therefore to run one successful e-auction you would purchase 100
credits, which would then be expended when you invite your bidders to interact with your
event.

MD was keen to push the advantages that their customers would have from this approach.
Firstly they believed it gave their clients flexibility to choose when and what to spend their
money on. They were not tied into any monthly subscriptions and could simply purchase an
e-auction, run the auction, then not use it again for a year. The credits also allow their
customers to consolidate their purchasing and invoicing transactions, as they could bulk buy
credits and gradually use them at each opportunity.

The advantages of the credit system to MD was that the credits were purchased in advance,
perhaps many weeks prior to the event being created, which greatly helps their cash flow.
Secondly it allows them to develop add-ons for their software, which could then be sold for
additional credits. Thirdly, MD could design various marketing campaigns that could bring in
leads enticed by the offer of say 20 free credits towards their first event. Once MD grows in
size, the campaigns could grow accordingly, such as 30 credits to the company that runs the
most valuable e-auction each month.

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Phil Willcot enjoyed discussing the ambitions and ideas of the MD directors. There is
certainly logic behind their reasoning but at the same time it is a difficult and competitive
market with some interesting challenges around differentiation and adoption.

Challenges

Phil Willcot was well versed in the challenges MD were going to face, relying on his
experience to know that the process of selling e-auction software to organisations was
demanding. The sales process was certainly going to be one major challenge, as there could
be a little in the way of a proof of concept or a trial, due to the time and resource required
to run a successful e-auction. Traditionally the cost of sale for these types of solutions is
very high. However, a solution sold at a commoditised price level cannot afford a high sales
cost. MD would have to modernise and streamline their sales process.

Phil broke the sales and marketing strategy down into the constituent elements. Firstly
there was lead generation. Their best bet was to market the software very clearly on the
web, outlining the benefits and the USPs. The website could be supplemented by other lead
generation activities such as webinars, seminars, viral marketing campaigns, cold calling, e-
mail rushes, sending hand-signed letters, SEO, networking through social media as well as
attending events, paid advertising and so on. The leads would then be qualified with the
realistic desired outcome being the arrangement of a demonstration, preferably over the
web due to the limited MD resource, but also face-to-face. Once a successful
demonstration was carried out, it would be over to the sales process to sign up the
customer by encouraging them to register on the website and make the purchase. Herein
was their challenge, as there was no firm hook, for example, that would be provided by a
managed auction activity first which would demonstrate the potential ROI of e-auctions.
The Pay-As-You-Go and credit-based approach allowed the potential customer to make the
purchase on their own terms. Without a monthly subscription, there would be no recurring
revenue, yet at the same time that was also one of MD’s competitive advantages (although
the Annual licence with the ability to collate quotes as a mini RFQ system would create a
recurring revenue stream). Furthermore the transparent price levels did endanger the
opportunity for further negotiation. If a prospective customer was not attracted by those
prices prior to having any discussion on the benefits or return on investment, it would be
more difficult to engage them in the sales process. If, however, the price was attractive to
them as they understood the benefits, the negotiation aspect would be negated and the
sales process should be a lot more efficient. Phil did wonder whether improvements could
be made in this area, both for MD and for the prospective customer who may not be
familiar with a credit-based system.

The other important consideration of the sales process is ‘who are they selling to?’. MD
had listed several key target markets but developed a brand that had a broad focus,

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essentially aiming at any company or individual who was looking to buy or sell something for
over £100,000. Whilst it could be advantageous to keep the spectrum wide, there are also
advantages in addressing a niche client base or industry, such as aerospace or electronics, to
help establish some traction and brand recognition to re-invest in other areas. Phil
wondered whether MD would be best investing their time and energy into creating a
leading e-auction brand in one specific industry.

Phil also considered the typical objections from a potential customer against using e-auction
software to run their own events and came up with the following list, although he knew it
was not exhaustive:

 E-auctions are too price-focused, where in reality companies seek to find the “best
value”. Such an example would be buying a cheap kettle for £5 that breaks after a
year or buying an expensive kettle for £30 that lasts a lifetime.
 E-auctions hurt supplier relationships as it leads to an erosion of their margins hence
a degradation of the level of service and flexibility that they offer.
 It may be hard to convince suppliers to actively take part in e-auctions, particularly
the incumbent suppliers, as they do not welcome such high levels of competition.
 Buyers may not have sufficient spend categories for an e-auction. Reasons may
range from:
o Spend levels are too low,
o there may be no available specifications for the goods or services,
o there may not be anyone else in the market who can supply such goods or
services,
o the goods or services are far too strategic to the company to take to the open
market,
o the spend categories are tied up in lengthy contracts, etc.
 Buyers simply do not have the experience, resource or capability to run their own e-
auction. Without a capable purchasing team, the e-auction will not be a success and
will therefore not be adopted.
 There is a risk the buyer may not achieve a return on investment. In particular, that
risk lies with person who decided to run the e-auction.

Phil compared the MD offering to the objections above and noted some short-comings.
Clearly some objections to e-auctions would be extremely difficult to overcome, whereas
perhaps others could be mitigated by a few simple strategies.

Phil also noted that the list above would be the objections that a customer would mention
out loud. There would be other objections that would prevent a sale yet would not be
revealed at a meeting. One that he had personally arrived at was that if his alternative
approach to negotiation involves dealing directly with the incumbent supplier and he
achieves the pre-defined savings target from this, what motivation would he have in

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complicating and extending the process to be an e-auction for the sake of extra savings that
he would not personally gain from? Furthermore, if he achieves excellent savings in Year 1,
what is left for Year 2 and Year 3? Ask this question to the Financial or Managing Director
and the answer would categorically be “get those extra savings in now”. However, MD was
not necessarily conversing to their customers at the board level, due to their low price level,
and so their marketing may need to be more embracing than simply about the bottom line.

In the past some companies, such as Oracle and WhyAbe (part of Source one), have offered
e-auction software for free, based on the firm reasoning that the software acted as a lead
generation tool for them to offer their consultancy services and other solution packages.
The free software had a very low uptake, mainly from its the poor design and performance,
as well as the general distrust from the market in investing time and resource into
something that is free, as it would have little or no support, the plug could be pulled at any
moment and they might be bombarded with sales calls from prospectors asking them to
upgrade and try other services. Also Source One would not want to detract from it
managed auction services. As MD has no service provision, Phil contemplated whether their
business model could be destroyed by a better marketed and more capable push by these
companies, and others, into offering free e-auction software. However that would affect
the market to such a huge extent that it would be highly unlikely.

There are also some other very professional on demand solutions out there from companies
like Ketera and Ariba. However Ketera counter-balance their low price offering for the
buyers to use their software by charging the suppliers a fee instead. This can exacerbate the
objections as suppliers now have to pay to use something they dislike, plus they factor the
costs of taking part into their final offer to their customer, which means the customer gets a
worse deal. Ariba have also started to offer an on demand solution but it is too complex as
it tries to incorporate every possible feature, plus it has many costly add-ons. Both these
examples provided Phil with some very important lessons and would clearly be worth
exploring further, particularly how and if Ariba make a success in the SME market.

Phil also wanted to differentiate MD from the traditional boutique consultancies, as this was
where a large proportion of the e-sourcing market value lay. The most recognised
advantages that clients had by partnering with a consultancy were the highly skilled
professionals with category and industry specific knowledge, the robust methodologies
developed over the years, access to large supplier databases, and use of their sophisticated
technology. In comparison MD could only offer the technology aspect and would have to
convince their sales leads that they already have the skills, processes and knowledge within
their company. However, supplier databases can be built over time and most established
organisations have their own in-house. MD offer their own free consultancy guides and
advice on their website to greatly assist the first time e-auctioneer. The MD software is
designed and developed in such a way that the e-auction process is already embedded
within it. Therefore there would not be any off-piste incidences. Phil wondered whether

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this would all be enough, even with the ever-increasing knowledge and awareness of the e-
auctions process. Software and guides can never provide as much feedback and advice as
an industry expert. There was still a big question whether the MD Directors should openly
offer their skills to help manage the first few e-auctions per customer, even if they only
involved themselves at key milestones, such as signing off documentation or approving the
supplier lists.

One further advantage of a third party working on a fully managed auction is that they can
act as a barrier between the supplier and the buyer so as to protect the buyer-supplier
relationship. MD would not be able to repeat this but could advise the buyer to
depersonalise the relationship by telling the supplier the decision came from the top and
was not his/hers. The best approach MD could attempt would be to make the software so
easy to use that suppliers actually prefer it to the traditional and laborious alternatives.
This, too, would be a significant challenge and is not something that has been done in the 15
or so years that e-auctions have been around for.

Despite MD’s unique positioning and approach to the market, Phil felt certain he needed to
firm up their strategy. He was not sure there was enough encouragement for buyers to try
reverse auctions. He was equally uncertain that the software alone would give the buyer
the confidence they needed. The managed e-auction route was certainly one way to
demonstrate the advantage of the e-auction whilst also providing valuable experience to
the buyer for conducting their own. There were two ways that instantly came to Phil’s mind
for MD to overcome these issues and those were either comprehensive training sessions
with supporting documents, perhaps modular and via the web, or to focus the selling efforts
of the software to the consultancy and interim network to enable them do the managed e-
auctions. Both were worth considering further in his mind.

Phil Willcot knew that one area MD were going to find particularly challenging is offering the
right level of support. A successful reverse auction on a complicated category requires
significant preparation, which in turn can lead to numerous support queries. MD are
offering phone, e-mail and live chat technical support along with a strategic consulting
session. However, Phil could see that MD was vulnerable to a few inexperienced customers
saturating their resource. Despite MD stating that their support is technical, they would not
be in a position to risk turning down a customer’s request for assistance.

There was no doubt in Phil’s mind that the recession was providing the impetus for
companies to challenge the norm and to find savings in a more aggressive and
comprehensive way. Phil hoped to use this as the tipping point in MD’s favour. Finally, if he
does successfully assist MD in becoming the next big player in e-auction software, his final
challenge would be to prevent competitors and new entrants from repeating the act to MD.

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Way forward:

Phil had heard and read all he needed to. He was clear in his mind that his strategy had to
embrace every aspect of the business plan from the market and competitor analysis, the
sales and marketing strategy, the product positioning and branding, the pricing, and the
challenges and risks that lay ahead. MD certainly had a unique proposition and he was sure
he could make it work. The SME market lay largely untapped to a tool that was creating
huge success for the large enterprises. There were some interesting horizontal markets to
explore, such as forward auctions for asset disposal and property or expanding the product
into the consumer market. There was also the prospect of one day moving into the public
sector. Either way, for now it was simply a case of getting the basics right and getting the
name MD on the map and that is exactly what Phil Willcot had in mind.

2012: Round 2

Phil thought back to his first engagement in 2011 and considered the success that he had
had. The plan that he helped design, clarify and implement had been so successful that the
MD team had brought him in for a second project.

2011 had been a great year for Market Dojo. The sales and marketing plan Phil had helped
create, being varied and diverse had enabled the team to keep their fingers in many
different proverbial pies. This allowed them to understand the most successful routes to
market and focus on the most relevant to bring in leads from many different directions.
LinkedIn proved to be the best social media site, with ‘Spend Matters’ being the most
influential blogging site for the procurement community. The MD team also dabbled with
their YouTube channel adding software videos and even virals 11. The creation of several
resellers instantly helped them to rapidly expand their sales force and they are also scouting
for interesting software partners to help create a fuller solution.

Phil had made some great other suggestions that the team had followed.

Firstly he was a great believer in letting the clients develop the software. Taking this on
board and working closely with their first customer, before long they had developed an
integrated ‘Request for Quotation’12 capability along with many other smaller developments
such as white labeling 13 and allowing the clients to upload supplier databases.

Secondly he suggested and implemented changes to the pricing structure. It was quickly
noticed that the Pay As You Go solution was less attractive than the subscription model.
Due to the pricing of other solutions on the market, the quick ROI from Auctions and the
surprising interest in their solution from large enterprises14, the Annual Licence was proving
to be popular. As a modification to their pricing structure, they decided to include monthly
pricing at £500 a month. This made for an easier business case for buyers who wanted to
use their software, whilst spreading the MD revenue across the year and generating 20%
more revenue over the upfront one-off fee of £5,000 per Annual Licence.

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Lastly he knew that support was the key area to focus upon. By analyzing the process and
design they managed to create an environment which only yielded about 20 queries over
300 sourcing events. This is the key to profitability and gaining the customers’ confidence.
The key word which was emphasised again and again was accessibility and this is now a key
driver for any new developments. There have been many successes with the design of the
software. In one instance, a company ran their first auction for over one million pounds of
telecommunication equipment with no training for the suppliers or the buyers. In another
case, a company signed up, created an event as far as they could with the free log-in then
just requested a month to run an event. This is the key to being able to scale quickly.

Unfortunately the plans for the consumer market had to be put on hold due to resource
constraints. However, with Phil’s help, the MD team did manage to secure some funds for
developing the basic capability to tackle the public sector requirements. This covered the
ability to create questionnaires within the software and move forward to a weighted event.
A weighted event is simply an activity (RFQ or Auction) where the scoring is broken down
into the pricing and non-pricing elements. For example, 50% of the score can be based on
price, and the other 50% can be based on quality and delivery. These developments would
take around six months but have the capability of opening up a huge new market.

The biggest new challenge though was the current reaction of the main player in the
industry; Ariba. Ariba has been the first to move and created a dilemma that the MD team
must understand. Ariba started out by creating an on-demand solution which evolved over
the year. The basic solution started out at a relatively similar price to MD, although the
many necessary add-ons drove the final price much higher15. This then changed further to
offer initial discounts until they finally offered a completely free solution for two users16.

Phil discovered that it is not a straightforward offering. He saw that there are a few things
that are worth knowing about the 'free' Ariba tool and that is that it is limited to two users,
that you have to run at least one sourcing event a month and that between the two users
you cannot run more than 4 sourcing events a month. Also all your suppliers get placed on
the Ariba Discovery network, for which there are subscription costs, meaning suppliers will
seek to recoup their costs in their pricing to the buyer. This can get expensive to the buyer
for multi-year contracts, where the supplier can recoup their costs several times over. It also
means the suppliers can be bombarded by requests from any other Ariba user. Crucially, the
only support offered is via e-mail and their web-form.

 How will this affect the Market Dojo philosophy?

 Should they change their positioning or pricing?
 Do supplier pay models work?
 How will they maintain and evolve their competitive advantage?

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However, it is clear that the market is reacting to the new environment that companies find
themselves in. Phil needed to consider all that has happened, the success that MD has had,
and decide how their strategy should evolve.

2013: Round 3

Phil was brought back for the third time. 2012 was a decisive year seeing Market Dojo carve
a path in the e-Sourcing market. By focusing on what they know and through careful
marketing, they have firmed up a secure reputation. Basically Phil’s 2012 strategy which
won out was to focus on making Market Dojo the best e-Sourcing application out there and
beat competition like Ariba through their dynamic support and innovative, user-friendly
product.

By the end of 2012, significant milestones were achieved:

- Their first Fortune 500 customer and first multi-licence customer with 20 users. This
represented a significant milestone beating major players in the process. It has also led to
the development of a User Hierarchy in the product to give large customers the control they
desire.

- A major release following the first grant enabling Market Dojo to tackle the Public Sector,
especially for Sub-OJEU tenders and mini-competitions.

- The award of a second grant from the Technology Strategy Board to build Category Dojo.
Category Dojo is a new web-based tool to help procurement teams identify, prioritise and
manage cost reduction activities, acting effectively as the missing link between spend
analysis and e-sourcing.

It was also a year which saw some serious changes to the market.

- Ariba, who was feared as a company to dominate the space, was purchased by SAP for
$4.3B 17. Their potential of devouring the Commoditised Software Vendors space with their
‘Start Sourcing’ solution was never realised. This was due to a number of reasons although
principally due to their corporate ethos 18 and the ease, through the facilitation of SaaS
products, for companies to pick best of breed solutions 19.

- Emptoris, another large multinational, was purchased by IBM. 20

- Trading Partners, the original boutique consultancy, collapsed 21. Without evolving with
the market into the gap which was seen by Market Dojo, the writing was on the wall.

- Enhanced competition. It seems that the market has awoken to the potential for new
providers in the sourcing space. Several years ago it was the growth of the ERP and P2P
arena followed by the consolidation and mergers. Now there is much focus on the e-

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Sourcing space. What is being seen is a rapid increase in the number of sourcing companies
with a similar view to Market Dojo and the ambition of being bought up when the
consolidation ultimately takes place.

Market Dojo have taken the path of becoming a Best of Breed sourcing application.
Through this model they can be offered to any company looking to streamline their
procurement process and save money through auctions. Their solution can be bolted onto
existing ERP solutions, which by their very nature and structure could not offer the same
type of solution as Market Dojo. e-Auctions are a great entry point to companies. They offer
a negotiation technique which procurement professionals can’t do by themselves. However
they are just a part of the whole sourcing solution which is needed to offer the stickiness of
their product for real recurring revenues.

Phil asked himself: how can Market Dojo stay on pole position to grow rapidly and carve
their share of the market? As a micro company, their dynamism and customer focus has
helped secure a loyal customer base, although without rapid expansion, is this enough to
avoid being hidden next to all the other solutions? Resource is limited with many
developments on the go, although any disadvantage is partially curtailed through customers
paying for these innovative features.

Phil needed to understand how the technological landscape is changing and whether
Market Dojo are pioneers in this changing environment or will they just become a ‘me too’.
What are the other directions that Market Dojo could move into without breaking out of the
directive of e-Sourcing?

Could this expansion be achieved through automating the final parts of the sales process to
move to a zero touch model with viral marketing or would Market Dojo need to seek
investment?

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2014: Round 4 – [Case study – Imagine you are Phil Willcot in this year]

Phil was brought back for the fourth time. 2013 was a solid year creating more growth and
focusing on new developments. No investment was sought and Market Dojo grew through
Phils plan of prioritising between sales and development. Several telesales campaigns were
completed with fair success however Market Dojo in reality need to move to a zero touch
sales model.

Market Dojo’s client base grew with both large and small companies joining their ethos.
Most notably Phones4U were signed up which is a great household names and very much
add to the credibility of Market Dojo.

Two new major developments were released at the end of 2013.

The first was Innovation Dojo22. ”This simple, yet effective, way for managing the early
stages of ideas will help pave the way for a possible Request for Proposal (RFP) or Request
for Information (RFI).

It gives the opportunity to efficiently examine blue sky thinking and forge closer
relationships with your suppliers. It truly allows for a collaborative framework with your
suppliers to rapidly progress innovation”.

This was actually part of the first grant but it has had a proper facelift and ready to use.
Many clients have expressed a view to using this tool for managing innovation from retail
stores feedback to looking for cost down in engineering components. Apparently it would
seem that the market is now looking to collect innovation as an integral part of Supplier
Relationship Management (SRM) and perhaps it is slightly ahead of its time.

The second innovative development was from our second grant, Category Dojo 24.

“Every procurement department needs to analyse their spend, understand the

opportunities and determine the correct strategy.

Category Dojo delivers an innovative procurement web application that will provide spend
category insight, strategy and opportunity assessment for public and private sector
procurement teams

The benefits of the unique tool will allow procurement teams to consistently address more
cost reduction opportunities, reduce the time taken to compile and manage category
management plans, and mitigate against the wrong procurement strategy being adopted.

Category Dojo is the missing link between spend analysis and e-Sourcing.”

This tool, like the Innovation Dojo23, is sourcing neutral and further pushes the bounds on
innovation within the eSourcing space instead of heading towards developing into the P2P
arena for example.

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On top of these two developments (and many other client led additions to Market Dojo)
Market Dojo was awarded a third grant which is perhaps the most exciting. Many
customers have asked to be able to create their own eMarketplace using Market Dojo. The
third grant facilitates the first phase in this development with an ‘Energy eMarketPlace’ as
the first candidate. This will hopefully allow business users to negotiate fairly for their
energy in what some might call a broken market.

Also any clients, who know their market well, such as their potential customers, the bidding
strategies, the suppliers, will be able to use the Market Dojo eMarketplace to make their
own ideas for creating a company become a reality. In some ways similar to eBay who allow
people to create businesses within their environment. Clients can manage the eMarketplace
and charge their users to run events using specific templates and dedicated supplier pools.
Later versions of the eMarketplace will allow clients to better manage their own users.

On top of this, the development will allow current users in Market Dojo to be able to create
complex bidding templates moving Market Dojo in line with the capabilities of a lot of the
main players, but with the difference being the Market Dojo focus on usability and
adoption.

This year Phil has to understand how and where Market Dojo should grow? They now have
a robust sourcing product as well as new sourcing neutral applications. Not to mention a
whole new product to develop for mid 2014 with the eMarketplace. How should Market
Dojo prioritise their time between development and growth; how should they effectively
get their message out there? Currently they are just the 3 co-founders with offshore
development resource and outsourced telemarketing. When should they look for
investment, if at all? How do you scale the business organically?

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References
1
http://en.wikipedia.org/wiki/Recession#Late_2000s
2
http://www.ft.com/cms/s/0/f03a34b4-e58e-11df-b023-00144feabdc0.html#axzz17Qcor4ER
3
http://uk.finance.yahoo.com/news/Mitie-We-wrong-ask-10-000-fee-tele-3522750903.html?x=0
4
http://www.idea.gov.uk/idk/core/page.do?pageId=82675
5
http://www2.uwe.ac.uk/faculties/BBS/BUS/Research/CENTIENT/iadapt.pdf
6
http://www.procuri.com/aribaacquisition.asp
7
http://www.spendmatters.com/index.cfm/2010/9/20/Trading-Partners-Does-
Restructuring-Portend-Changes-in-the-Reverse-Auction-Market-Part-3
8
http://www.ariba.com/news/press_release.cfm?press_id=2920
9
http://www.crmbuyer.com/story/32677.html?wlc=1291717028
10
http://www.egovmonitor.com/node/35233
11
http://www.youtube.com/user/marketdojo
12
‘Request for Quotation’: The current purchasing process in most companies starts with a
requirement, or a requisition. The next stage involves taking this requirement, creating
appropriate documentation and obtaining quotations. These might be obtained over the
phone, by email, or through a bespoke system. After which you could go to an auction, a
face to face negotiation or just go with the lowest price. The Market Dojo system for a
‘Request for Quotation’ basically allows a company who is collecting quotes by email or
phone to streamline and centralize this activity through their platform. Not only that but it
offers an easier to use system to the companies who actually have a current ERP system
such as SAP or Oracle. In fact, the first customers using this already had their own ERP
system and wanted a solution to sit on top of their ERP system as it was far more useable.
13
White labeling: This is where a client can upload their own logo and menu colours onto
the MD platform. This means that the client and the suppliers will see the clients branding
when they log onto the platform. This adds to the professionalism of the solution.]

14
http://www.spendmatters.com/index.cfm/2011/12/8/A-UK-StartUps-Viewpoint-on-the-Paradigm-
Shift-in-eSourcing
15
http://www.spendmatters.com/index.cfm/2010/10/5/Ariba-StartSourcingStartContracts--
Commendable-SMB-Effort-Not-as-Cheap-as-they-Seem-Part-1

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http://www.spendmatters.com/index.cfm/2010/10/6/Ariba-StartSourcingStartContracts--
Commendable-SMB-Effort-Not-as-Cheap-as-they-Seem-Part-2
16
http://www.spendmatters.com/index.cfm/2011/12/1/Ariba-StartSourcing-Just-How-Good-is-Free-
Part-1

http://www.spendmatters.com/index.cfm/2011/12/5/Ariba-StartSourcing-Just-How-Good-is-Free-
Part-2
17
http://www.spendmatters.com/index.cfm/2012/5/22/SAP-to-Acquire-Ariba-at-a-20-premium-
45Share
18
Ariba prisoners: http://www.spendmatters.com/index.cfm/2012/12/28/Suppliers-and-
Ariba-Prisoners-or-Not
19
Best of breed: http://www.spendmatters.com/index.cfm/2012/12/10/SourcetoPay-
Selecting-More-Than-One-ESourcing-Tool
20
http://www.spendmatters.com/index.cfm/2011/12/15/First-Take-IBM-Acquires-Emptoris
21
http://spendmatters.co.uk/tradingpartners-bankruptcy-confirmed-exploring-customer-full-
service-sourcing-alternatives/
22
http://buyersmeetingpoint.com/about-us/latest-news3/672-7-11-2013-crikey-now-that-s-
innovation
23
http://www.marketdojo.com/innovationdojo/learn-more
24
https://www.marketdojo.com/categorydojo/learn-more

Notes:

(i) Ariba - http://en.wikipedia.org/wiki/Ariba

(ii) TradingPartners - http://www.tradingpartners.com/
(iii) BravoSolution - https://www.bravosolution.com/cms/uk
(iv) CPOConnect - http://www.cpoconnect.com/
(v) Software-as-a-service model - http://en.wikipedia.org/wiki/Software_as_a_service

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Appendix 1: Global ePurchasing Solution Revenues by Product and Type of Revenue:

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Appendix 2: Typical Sourcing Approaches applied at a large Aerospace OEM:

Supplier Group Positioning Matrix:

Basic Approaches from Positioning Matrix:

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