The reverse auction & the agency relationship

In a reverse auction, agencies go neck-to-neck with their rates and the client chooses the cheapest one. In some cases, agencies are not allowed to view the other agencies' rates, but can only see where they rank on the "auction".

While the rationale for this is mainly cost-effectiveness, agencies say that it severely strains the client-agency relationship to the effect of the business going up for pitch shortly, in about a year's time after it has been won.

Regional managing partner of The Observatory, which offers advisory services for clients looking to shortlist agencies and agency-client relationships, Richard Bleasdale is clear on his stand in the issue: it’s simply damaging to the agency relationship and unsustainable.

He says: “It is impossible for a partnership to exist if it is one-sided and based solely on price. Reverse auctioning is damaging for both parties and I believe its time the respective client and agency industry bodies, produced some guidelines around them.”

When asked if he felt there was any strong rationale for carrying out such a selection process, Bleasdale had little comment. “You’d be best to seek the opinion of someone who believes in it. The only rationale I can imagine is short-termism, and a focus on price, not value,” he said.

When is it reasonable?

Linda Locke, marketing director of Club 21, feels there are circumstances when reverse auctioning is justifiable. She says: "If it (the business going up for a pitch) is a large business with a high volume of creative units required and of average to low quality such as a supermarket or property companies, it can be a cost effective way of choosing an agency, as cost, and efficiency are the determinants."

Also, if the clients are honest and clear that competitive rates are expected from the agencies but still high creative quality in their work and conduct the process amongst agencies of a similar calibre so the playing field is fairly equal, reverse auctioning can be a reasonable system says Locke.

"It does require however that the business be of a significant size, so that the agency can recoup some of the monies over time. It also requires a client who can provide clear and timely briefs and has a simple chain of approval," she said.

The bump in the road

However, in other situations, she admits there are severe repercussions for the client-agency relationship. Locke, who has a considerable number of years on the agency front under her belt says: "Unfortunately it is also applied to other types of business and while they advise the agency that cost is a higher issue to them than the creative quality it is not entirely true. With that in mind and with the clients' knowledge, the agency proposes costs based on a junior or less strong creative team. The reality is that the client invariably ends up dissatisfied with the creative work and continually rejects it, so much so the agency ends up putting the more expensive teams on the business in a desperate bid to stop the financial blood letting.

The result is a very demoralised agency which inevitably will have to face the possibility of terminating the relationship and a client who has to start all over again to educate a new agency (a hidden cost).

(Another alternative is that) the client does accept lower creative quality, but learns how the agency set up works and then takes the business in house."

The Observatory’s Bleasdale says that the trend is not as prevalent now. “I know in the past, it was quite popular within the IT category, particularly – however, I think they have realised how much of a false economy it really is.”

Bharad Ramesh, regional executive director, strategic operations & trading, Asia, Starcom Singapore said: "The fact is that clients generally do tell agencies what exactly they are expecting - reverse auctioning or otherwise.... This(reverse auctioning) leads to problems down the road when firstly, a lot of things are out of scope, and the clients end up wondering what exactly are they paying the agency for and secondly, clients experience high turn-over in agency staff."

Reverse auctioning is often thought to be the result of procurement overrunning the pitch. One procurement professional Marketing spoke to admitted that she does see some companies using reverse auctioning. However, Rina Wang, general procurement manager at Lenovo feels that cost savings are not everything, especially in the marketing pitch.

"Yes, we do realise that some companies are using reverse auctions as a tool to drive cost savings, but there still needs to be a lot of additional work going on in the background. You also need to be very careful in making sure the criteria and scope are extremely clearly defined so as to enable fair comparisons. I don't expect this tool to fully replace the conventional bid process at the moment, especially for marketing services," says Wang.

Why agencies still sign up

It's a portfolio thing, one agency source told Marketing - an investment agencies make to be able to say they have that brand on their portfolio.

Ramesh adds: "If agencies want to win business, and these are the rules of engagement with the client, then the agencies will have to do it. I don't think any agency wants to 'opt' for reverse auction if there are alternatives." He goes on to say that while a formal system of 'reverse auctioning' using a B2B system  is not very prevalent, it is fairly common for agencies to get on the phone with clients and work out the ideal number desired by the client, and where one agency stacks up vs. the other.

Matthew Godfrey, Young & Rubicam's president for Asia and Singapore chairman says he can see why it happens: clients have budgets and bottom-lines to maintain. But he believes the process discounts quality for price.

His stand on it? "I am fine with reverse auctions - provided the scope of agency services and the benchmarks for media costs are standardised. This ensures agencies have as much information required to make a competitive offer, and the clients are comparing on a like-to-like basis," he said.