Another Wrench in the Pitch: Agencies Lament Rise of E-auctions

After months of pizza-fueled late-night planning sessions, scores of PowerPoint presentations and thousands of dollars' worth of people hours, an agency pitch team takes a collective deep breath and waits by the phone. It rings. On the other end of the line is not the expected decision, but the potential client's procurement officer with one more step: an electronic auction.

E-auctions, long a practice for companies buying office supplies, furniture or even real estate, are increasingly cropping up in the marketing-services space, no doubt the result of procurement's increased focus on agency pitches and assignments.

Here's how one works: Senior agency execs -- often the chief financial officer, the CEO and the top new-business folks -- receive a link for signing into what looks like an online chat room. In minutes, this room transforms into a live auction in which the finalists are not negotiating rates with clients but underbidding one another until they can't drop their rates any lower.

These e-auctions are generating short-term savings for procurement executives, but criticism from agencies that say the practice devalues their talent.

Procurement executives typically trigger the auction, often held toward the end of the review process, for one of three cost targets: hourly rates of individual full-time employee positions (such as the account director, lead buyer, creative director); a lump sum that might include the combined cost of the budget and fees; or commission fees tied to the cost of buying media.

As the practice has inched into the advertising world, some vendors of e-auction software are tweaking offerings to work better with a services industry.

"One big hurdle we had to overcome was that sophisticated buyers have deep relationships with the people they're buying from," said Sean Correll, director of consulting and education services at IBM Emptoris, which offers e-auction services. "For them, it's about more than just price."

Adding that , "in the last five years, we've been bringing qualitative metrics into the bidding process," Mr. Correll explained that this is one of the factors driving demand for the product's agency-review function.

Depending on the model, agencies might be able to see only how they're ranked on a scale of the highest and lowest bids. In other cases, they might be able to view all competing bids.

The results provide the client with a way to benchmark the cost of different agencies. In some cases only the lowest bidders can win the business or make it to the next round.

A number of agency executives warn that when talent and creative work are treated as commodities in e-auctions, marketers risk getting less than they bargained for.

"Technology allows us to identify opportunities where we can realize efficiencies, [but] we have to question when is [it] the best use of those tools," said Brett Colbert, chief procurement officer for agency holding company MDC Partners.

Bidding wars can give agencies an incentive to overpromise and under deliver. If a client mandates a certain number of people on its team at a specific level, but the agency overly discounts that employee's hourly rate to win the auction, the agency will have to either pay for that talent itself and take a loss or prematurely promote a junior-level executive to the senior level required by the client. In the end, the work is never up to par, noted one agency executive, who has been through a number of e-bidding processes.

"A cheaper version of ourselves certainly isn't always the best objective," said Mr. Colbert. "Media is a commodity; people aren't. Equipment rental is a commodity; talent is not. It's never been a commodity."

Said Jeff Lupinacci, CFO of IPG Mediabrands: "We talk about value and pay for performance. If you look at a $10 million fee to a media agency vs. $1 billion in spend, you'd think [the client] would focus on delivering better marketing results and not a $10 million or $8 million fee."

On the other side of the fence, some procurement executives are rumored to have added fake agencies during an auction in a bid to drive down the rates of the real agencies.

"There's no hard evidence, but I've certainly heard rumors of that happening," said Mr. Correll. There are no real safeguards to prevent such occurrences, he said, but his company warns its clients about the practice. "If you're serious about putting together a sustainable e-sourcing program you can't compromise it or shoot the supplier in the foot by bringing in what suppliers call rabbits, doing the auctions behind closed doors or making another deal that 's closed to the other bidders in favor of a single bidder."

For some marketers, price is not a deal breaker.

Alex Leikikh, president of Mullen's Boston office, said that his firm participated in its first e-bidding toward the end of a recent review but did not discount its rates. "What we learned was that interestingly enough, very few of the agencies -- maybe two out of the 10 -- actually adjusted their rates in the downward way based on how other agencies responded."

His agency ended up winning the business, meaning that price factored less into the decision than the relationship his firm had already built with the client, he said. The recent influx of RFPs involving e-auctions -- he's seen about half a dozen in the last 18 months -- has prompted curiosity about the technology and a desire to try it out. "We knew it was coming around the corner as plenty of [marketers] are starting to do it," he said.

At the end of the day, Mr. Leikikh is not a fan. "I understand using e-bidding when dealing with the commodity product. But if a client is hiring an agency to apply creativity to sell products, it seems like an odd way to find a partner. It's not good for us or our competitors in this business."

Who Is Using E-Auctions?

Large companies with procurement teams and cost-cutting motives are more likely to use e-auctions. Intel is one example of a company that has hosted e-auctions, according to executives familiar with Intel's past media agency reviews. More recently, there has been high usage among large companies looking for global-agency consolidation, noted Emptoris' Mr. Correll.

Ariba, a big e-auction server, said that lately it has supported e-auctions for a number of marketers' creative and PR agency reviews. In the last six months, the company has worked on about 14 e-auctions involving PR and social-media shops.

Pfizer's use of e-auctions in recent PR and creative-agency reviews serves as only one example in the health-care industry, according to industry executives. They attribute the trend to the strict nature of procurement in the industry.

Despite general distaste of e-auctions among search consultants with whom Ad Age spoke, new search consultancy Madam will incorporate the e-bid systems in its review packages. Of his new venture, Madam owner Michael Lee told Ad Age : "It just enables everybody to get a lay of the land financially, and it is not the final negotiation." Below are some different types of e-auctions.

Reverse Clock E-Auction (Also Referred to as Japanese and Dutch)
Price is the only award criteria in this popular review model. Typically, the client is in control of the price decrements, and agencies can accept or decline at each level, noted one procurement executive. The client or buyer will often hide information such as the number of suppliers -- agencies in this case -- and other bids.

Reverse English E-Auction
Along with Dutch, English is another commonly used model in reviews. It might take into account qualitative factors such as turnaround time and creativity scores that the client has already assigned to each agency. Typically, suppliers submit decreasing price bids until the bidding ends. In this format, each supplier is aware of the lowest bid and where they're ranked amongst competitors.

Multidirectional E-Auction
With this model, the agency bids downward on certain items and upward on others. The model is used when the client wants to factor in cash back, rebates or other value-adds from a supplier or agency. "For example, a supplier might negotiate the item price downward and negotiate a rebate percentage upward (e.g. to help with promotional or advertising costs)," noted a former procurement executive.

Alternative Models
There are additional versions of these models, such as "weighted e-auctions" and "multi-attribute e-auctions," as well as custom models created by the technology companies that host the reviews. For example, Emptoris touts its Optimized Auction, which takes into account quality metrics and agency feedback during the auction.