RISKS AND CONTROLS IN ELECTRONIC REVERSE AUCTIONS: COMPARING BUYER AND SUPPLIER PERSPECTIVES

Chaitanya Sambhara, Arun Rai, Mark Keil, Vijay Kasi

Despite the touted benefits that Electronic Reverse Auctions (e-RAs) can save gross margin of 20% for buyers and draw new clients for suppliers (Jap 2003; Stein, Hawking et al. 2003), the success of e-RAs has been uneven, with their adoption being challenged and even abandoned in many instances. In numerous cases, buyers have not accrued expected savings, suppliers have incurred significant preparatory costs and yet not won the business of a client, and both parties have reported the destruction of mutual trust. As a result, the role of e-RAs as an effective sourcing mechanism is questioned (Reese 2004; Jap 2007; Mithas and Jones 2007). We suggest that achieving effective use of e-RAs requires (a) identifying the risks of using e-RAs from the perspectives of buyers and suppliers and (b) understanding the control mechanisms that buyers and suppliers can apply to mitigate key risks.

We chose the Delphi-survey methodology to investigate the first question. This approach has been used (Schmidt, Lyytinen et al. 2001; Singh, Keil et al. 2009) where there was a need for comprehensive information about the topic of interest and for group consensus to identify and prioritize the issues related to the topic. To understand buyers’ and suppliers’ risk perceptions, we recruited two expert panels: (i) buyer’s panel of 28 sourcing and procurement professionals and (ii) suppliers’ panel of 34 sales, marketing and business development professionals. We collected and analyzed our data using the rank-based Delphi-survey methodology (Van de Ven and Delbecq 1974; Preble 1984; Brancheau, Janz et al. 1996; Schmidt 1997; Okoli and Pawlowski 2004).

Our findings reveal (a) the unique e-RA risks for buyers and suppliers (16 unique risks for buyers, and 31 unique risks for suppliers), (b) the risks that are common to both buyers and suppliers (18 common risks), and (c) the risks where the perceptions of buyers and suppliers differ. We map the identified risks to the following: (i) constructs identified from inter-firm governance theories (i.e., TCE, agency, and relational view) (Cachon and Zhang 2006; Mithas, Jones et al. 2008); (ii) adoption risks of technological innovation (i.e., internal resistance, top management support, lack of adequate knowledge of the process etc.,)(Kauffman and Mohtadi 2004; Rai, Brown et al. 2009; Rai and Tang 2010); and (iii) risks attributed to e-RA mechanism design (i.e., specific to, or spanning pre-auction, auction execution, and post-auction phases)(Jap 2007; Mithas and Jones 2007). We find buyers are most concerned about small number bargaining and pre-auction mechanism design risks while suppliers are most concerned about mechanism design risks that span all phases of the auction, risks that are particular to during-auction, and relational risks. These findings highlight the classic principal-agent problem where goal incongruence leads to difference in perceptions of risks (Eisenhardt 1989). The findings also surface that key theories of inter-firm governance and adoption risks of technological innovation do not adequately define the leading risks as there are significant risks associated with the e-RA mechanism design.

We recently completed the final phase of the study (i.e., 13 semi-structured expert interviews of which 7 were with buyers and 6 were with suppliers to understand how the top-ranked risks can be controlled by buyers or suppliers). The preliminary analysis suggests that majority of buyer risks can be controlled by standardization of processes by implementing behavioral and self control mechanisms, and majority of supplier risks can be controlled by implementing effective communication channels and therefore using outcome and clan control mechanisms.

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