Farewell-ish
Those of you who follow the TradingPartners Senior Management Team pages will have noticed that I’m no longer there. Yes, it’s right, I have departed TradingPartners.
Over the past half decade with TradingPartners and the decade before with SAP and Ariba I’ve had the good fortune of being involved in a number of great projects and learning a lot about what makes a good piece of business software (hint: it’s not just what they teach you in project management school).
I’m looking forward to putting these ideas into practice in the next piece of business software I build. I expect to be posting less and less here, at least for a while - but at least you’ll know that what I do post will become more and more impartial 
In the meantime I expect to post more regularly over at my other blog - it would be great to see some of you over there.
All the best
Alan
Add comment January 3, 2009
On The Ariba / Emptoris Patent Spat
It’s a sad indictement of the state of vision and innovation in the industry when the two top players in the e-sourcing space start competing on the basis of who has the best lawyers rather than who has the best product offering.
Spendmatters covers the judgement in Ariba’s favour against Emptoris as the latest step in the Ariba/Emptoris pissing contest patent spat here , here , and here (and the commentary, as usual, is lively and entertaining).
I am not a lawyer but have had the good fortune to have to read through some patents in my time. So I figured I’d read the patents in question: 6,499,018 and 6,216,114. Just for fun. They are written in impenetrable patentese so here is what I can figure out.
The two patents claim protection for the following features. You’ll forgive me if I appear flippant, but it really is a surprise to me that you can patent such generic, obvious and trivial enhancements to the basic auction process:
- Dynamic Lot Closing Extension: Suppose you have 5 lots in your auction, each with their own closing time such that Lot 2 closes 10 minutes after Lot 1 (etc). If Lot 1 goes into overtime then Lot 2’s closing time is dynamically extended so that it always stays 10 minutes behind.
- Flexible Overtime: This means that you can extend an auction not just on “winning bid” or “any bid” but you can have a rule that says “Lot 1 extends by 3 minutes if a bid that is 1st - 4th place is received in the last 2 mintues, and Lot 2 extends by 5 minutes if a bid is received that is within 2% of the current leading bid.”
- Flexible Bidder-Determined Line Item Decision Rules: As a bidder I can set line item rules so that for example I can decrease my total bid for Lot 1 by $50,000 and have that decrease apportioned, flexibly, across the line items that make up that lot based on the rules I have specified (e.g. Item #12345 must never go below $1.50 each).
- Pending Status: The idea here is that when an auction completes it goes into “pending” status during which the buyer and suppliers can discuss whether the auction really is over or not. If they decide that the auction needs to continue they can move the auction back to a live status.
- Auction Pause: Allowing the buyer to pause an auction (while the clock continues ticking) in a lot, several lots or the auction as a whole.
- Bidder Specific Bid Limitations: In a reverse auction the idea is that you can set different ceilings above which you won’t receive a valid bid from a supplier. Apparently this is different to simply starting an auction with any “pre-bids” offered by suppliers.
Freemarkets (who readers will know I hold in very high regard for starting off the whole reverse auction industry) applied for both patents on the same day in May 1999. Even writing back in 1999, though, the points the patents cover are pretty trivial to say the least.
According to Ariba’s press release the judgement centered around “the use of individual bid ceilings and certain auction overtime rules“. As Jason describes in his coverage of the Emptoris patch this covers:
- A feature that prevents a supplier submitting a bid higher than a pre-set amount
- A feature that keeps staggered lots open when a prior lot gets extended
Some thoughts on this:
- These two points are very trivial aspects of e-auctions. They are far from “key patents for electronic auctions” mentioned in Ariba’s press release on the subject.
- But at least the really obvious parts of the patents (e.g. pausing an auction) were either considered invalid or not infringed.
- This is another reason why such “software business process patents” are considered controversial by many in the industry.
- Interestingly this news from early November seems to cast some level of scepticism over whether process patents, like the ones at the centre of this case, are even allowed in the USA. It will be interesting to see how this develops.
Lest anyone misunderstand me:
- I’m not an Emptoris apologist. Their gorilla marketing when Ariba swallowed Procuri was no different to Ariba’s swipe this time round. And Emptoris have (at least attempted to) apply for equally embarrassing patents in the past, if memory serves.
- I am not anti-intellectual property. But I think that software in general is more suited to copyright than patents. Far from encouraging innovation, as I’ve written before, business process software patents are a tax on innovation and should be stopped.
3 comments December 15, 2008
On the Paulson US Treasury Reverse Auction Process
Assuming the mooted auction does go ahead here are some thoughts as to possible designs.
The US Govt has a lot of experience in forward auctions selling treasury bonds as described here: http://www.newyorkfed.org/aboutthefed/fedpoint/fed41.html. If you have the time, Kenneth Garbade’s history of the treasury auctions is well worth a read - he emphasises the responses to failure as well as the successes in building a solid programme of auctions: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=596966.
For readers who are used to reverse English auctions the US Treasury format is very different from what you might expect. It is a single-round auction. As a bidder you put in one bid up until the deadline. This bid can state a price you wish to pay and how much you will buy at that price, or it can state a quantity you wish to buy at whatever the average price is. The Treasury then allocates the available bonds across the bidders based on who is offering the highest prices.
I expect that the US Treasury would want to use something similar in the proposed reverse auction. But things are not going to be as simple as that. There is some good debate amongst people who know auctions:
- Jason Busch and Sam Kinney discuss the level of optimisation functionality that could be used http://www.spendmatters.com/index.cfm/2008/9/29/Treasurys-700-Billion-Sourcing-Challenge–Is-it-Reverse-Auction-Time.
- NERA have produced a paper contrasting the existing Treasury Bill forward auction process with a potential reverse auction process here: http://www.nera.com/image/Buying_the_Bad_Stuff_Paulson_0908.pdf.
- Sam Kinney - co-founder of FreeMarkets (who pioneered the whole reverse auction space that TradingPartners is now a dominant player in) has some good thoughts here: http://www.uptheeconomy.com/?p=28
On one level the actual design of the auction is of secondary importance. Simple agreement on a bailout plan will be sufficient to soothe many nerves.
But once they start the reverse auctions will be the subjects of intense media and market scrutiny, at least in the early stages. So reverse auctions at the outset will need to be kept very simple. For this reason any real-time complex optimisation will need to be ruled out. At least to start with.
NERA point out in their paper (link above) a good issue: In a procurement reverse auction the buyer would likely only buy from one (or perhaps two or three, but certainly not all) of the bidders in the auction. So the bidders have to compete against each other to push the price down. Under the Paulson plan, if the government is committing to buying all the securities from all the banks (until the money runs out) then what is the incentive for any bidder to place a low bid? They know that the government will bail them out. To avoid this the auction process could include a number of bidders but commit the Treasury to buying securities from a small number of the bidders, or to buy a fraction of the auctioned value, such that all bidders have an incentive to bid.
There is also the question of one-round or multiple-round bidding. The US Govt currently sells Treasury bonds with one round of bidding so I’m sure they will be tempted to use a similar design for the bailout. But given the uncertainty around the value of the assets in question now I would expect the transparency of multiple-round bidding will be better. Paul Klemperer has some great horror stories of single-round bidding events. Search for “Banespa” and “New Zealand” in the document. The Banespa case was a first-price sealed bid auction, the New Zealand case was a second-price sealed bid auction (Vickrey auction). Both led to great embarrassment.
So could an auction work in this US bailout? It’s certainly well known across government and private sectors that auctions are the best way to ascertain a market price when the true market price is not known. I have seen some very successful reverse auctions for pension funds, for example. So perhaps using reverse auctions for mortgage-backed assets is not such a crazy idea after all.
On balance I think a long, regular series of auctions based on a multiple-round descending clock auction design with the government only buying a fraction of the securities on offer in each auction would be a good way to start the process. Then as the purchases become more commonplace, the desperate sellers offload their assets and prices creep up the government could look to add in optimisation technology.
3 comments October 1, 2008
Unlimited Paid Vacation Time For Buyers
From http://www.bnet.com/2403-13059_23-237128.html?promo=713&tag=nl.e713
“In a Results-Only Work Environment, people can do whatever they want, whenever they want, as long as the work gets done.” This is not simply company-sanctioned flextime. A true ROWE has unlimited paid vacation time, no schedules, no mandatory meetings, and no judgments from co-workers and bosses about how employees spend their days. In other words, managers trust employees to get their work done and do not mandate — or even comment on — when, where, or how it happens. Because everyone is evaluated based on what they accomplish, as opposed to how much time they spend looking busy at their desks, it becomes clear very quickly who is actually getting work done and who isn’t.
And an example
For example, after migrating to a ROWE, Best Buy’s strategic sourcing and procurement team boosted employee retention by 27 percent and shed 10 low-performing employees. But the real proof was the huge uptick in performance: The department, which buys materials for the corporate environment, saw a 50 percent increase in cost reductions over two years.
Now I suspect that there is a bit more here than meets the eye but nevertheless it’s a story worth keeping in mind for buyers.
2 comments September 30, 2008
Using auctions to save the world
Reading The Economist’s leader on Hank Paulson’s plan to save the US finance system.
Guess what - they’re planning to use auctions.
Add comment September 29, 2008
Service interruption …
Hiya
Just dropping a quick post to let you know that I am now a proud father second time round - hence the absence of postings over the past couple of weeks… Normal service should resume from next week.
All the best
Add comment September 25, 2008
Reverse Auction Guidelines from Purchasing.com
Purchasing ran an article some time ago providing guidelines on running electronic reverse auctions.
They make 7 points presented as questions and answers that buyers should take into account when figuring whether to run a reverse auction. Here are the 7 points:
- The more competition the better
- Do your supplier qualification before the event – protect yourself from having fly-by-night bidders offer an attractive price that then turns out to be unsustainable
- Make the spend in the reverse auction as large as possible to make the reverse auction as interesting as possible for your suppliers
- Make sure your specs are clear and watertight
- Beware of running reverse auctions where a strategic relationship with your supplier is important (reverse auctions may damage supplier relationships)
- Reverse auctions can offer a range of benefits in addition to (or instead of) lower prices e.g. faster sourcing times, a clear audit trail
- Make sure you factor in all non-price parameters as numerical values into your auction
It is a great article and I just want to add a few comments/clarifications from my perspective.
Point 1: The more competition the better. I do agree with this – and generally I would like to see 4 suppliers in a reverse English auction. But bear in mind that in 2008 the auction industry now has more experience across a range of auction designs that can be particularly useful where have limited competition. In particular I am thinking of the successes I have seen with reverse Japanese auctions.
Point 5: Your ability to gain the benefits of a reverse auction, and still have a strategic relationship with your supplier, depends on how well you manage the process and not on whether you include a reverse auction or not. New suppliers are usually happy to win business through a reverse auction. Incumbents are usually unhappy having to compete with anyone to retain your business (whether through a reverse auction or whether simply through any traditional offline mechanism). In my own personal experience I can say that I have got a great relationship with the software development company that I selected via a reverse auction.
Point 7: I still see very many buyers shying away from incorporating non-price factors into their auctions. The good news is that there are nowadays robust methodologies in place to make doing this easier for you than would have been the case even 5 years ago.
3 comments September 1, 2008
More Reverse Auction momentum
Some more recent reverse auction stories that popped into my Google Reader:
Using Reverse Auctions to buy advertising spots on Radio. A quote:
Bid4Spots allows the media buyers (that’s us) to set a maximum bid and allow stations to bid ever-lower media prices. After all, the stations are selling next week’s leftover airtime.
The real power of Bid4Spots is the steadily lessening of price rather than the gradual increase. In a Bear economy, when most businesses are cutting their media spend, there exists a real opportunity for small and medium-sized businesses to get a lot of airtime for their money.
City of Waco uses a reverse auction to buy electricity. There seems to be a lot of interest in running reverse auctions for electricity these days. A quote:
“We’ve been wanting to try a reverse auction for some time, as we believed the process could significantly benefit the City and, ultimately, our taxpayers,” said Danny Jackson, Administrative Engineer, City of Waco. “I can’t say enough about how great World Energy’s people were throughout the process. The market directors were extremely knowledgeable about the industry and helped us make key decisions regarding structuring the auctions to ensure we had significant supplier participation. We were particularly pleased that World Energy was able to drum up supplier interest for the auction, even though we used our own paper for awarding the contract.”
2 points on this:
- The Bid4Spots story is spot on in linking an upswing in reverse auction interest to the current downwards trajectory in the economy. This is what happened last time round in 2002.
- The Waco story is spot on in highlighting the importance of market making support in running a successful auction. It’s no good these days for software companies to sell only software and/or software integration/implementation services. These days successful technology delivery revolves around what What Max Bleyleben (Disclosure: he works for Kennet, an investor in TradingPartners) calls software/services/content convergence.
Add comment August 21, 2008
An honest, open and transparent approach to supplier selection
I was doing some googling recently about Japanese auctions to see if there is anyone out there apart from TradingPartners who has anything useful to say about them in a procurement space. Turns out there doesn’t seem to be. But in the process I stumbled across this entertaining old article from the NY Times:
Takashi Hashiyama, president of Maspro Denkoh Corporation, an electronics company based outside of Nagoya, Japan, could not decide whether Christie’s or Sotheby’s should sell the company’s art collection, which is worth more than $20 million, at next week’s auctions in New York.
He did not split the collection - which includes an important Cézanne landscape, an early Picasso street scene and a rare van Gogh view from the artist’s Paris apartment - between the two houses, as sometimes happens. Nor did he decide to abandon the auction process and sell the paintings through a private dealer.Instead, he resorted to an ancient method of decision-making that has been time-tested on playgrounds around the world: rock breaks scissors, scissors cuts paper, paper smothers rock.
In Japan, resorting to such games of chance is not unusual. “I sometimes use such methods when I cannot make a decision,” Mr. Hashiyama said in a telephone interview. “As both companies were equally good and I just could not choose one, I asked them to please decide between themselves and suggested to use such methods as rock, paper, scissors.”
Well as a process it’s certainly honest, open and transparent.
Add comment August 18, 2008
Better procurement and integrated design
I read a good feature in my old university magazine with Prof Ann Dowling from Cambridge University’s Engineering Department who is working with MIT to come up with a very quiet plane: the SAX-40 (Silent Aircraft eXperimental).
But what stood out from a procurement perspective was not all the clever stuff that goes into designing a near-silent aircraft (if you are interested it might be ready by about 2040). What stood out was the design process:
Dowling’s team designed the whole plane as a single, integrated piece of work, including the engines, and built a sufficiently complex computer model of how it would fly to enable them to design out the noise – a far cry from the conventional approach in almost all walks of engineering life. Cars, for example, are currently drawn by graphic designers, handed off to engineers to build, and then handed off again to an engine specialist tasked with making a propulsion unit to fit in a pre-ordained space.
The trouble with this conventional approach (and plane design is essentially no different) is that noise is very ‘cheap’ in efficiency terms: it’s easy to design a lot of noise into a blueprint for a machine without even noticing. That’s because, as Dowling explains, ‘the energy in sound is trifling. An entire Cup Final crowd, cheering and shouting for ninety minutes, generates about enough energy to boil a kettle.’ But integrated design can take accidental noise into account, and car manufacturers are starting to sit up and take notice.
What does an engineering design story have to do with procurement? How about switching out “noise” for “cost” so you have a sentence that reads something like this: “it is easy to design a lot of cost into a blueprint for a machine without even noticing.”
It is a commonplace amongst procurement circles that procurement needs to be involved earlier on in projects in order to add the most value. So it’s heartening to see how other areas, like engineering, are proving that integrated teams deliver better results.
3 comments August 13, 2008
