Reverse Auctions and IT firms

Clients ask IT firms like Infosys, TCS to bid for low-end projects through reverse auctions - The Economic Times: "BANGALORE: Some outsourcing customers are asking software companies to bid for low-end back-office and application development projects through reverse auctions, adding to the competitive pressures for large companies like Tata Consultancy Services and Infosys.

For established outsourcing clients such as General Electric, as well as small- to -mid-sized firsttime outsourcers in the US, Europe and the Middle-East, reverse auctions are bringing down billing rates by up to 40% in some instances and 10-15% on average.

Unlike an ordinary auction where buyers compete to procure goods or services, in a reverse auction, sellers of outsourcing services are asked to compete with each other for a portion of a software or contact centre project.
As this auction using specialised software progresses, outsourcing firms try and outbid each other real time over the Internet, bringing down the rates rapidly during the process.

For example, instead of issuing a request for proposal, appointing an outsourcing consultant, and then going through various rounds of selecting an outsourcing vendor, clients ask tech firms to bid real time on the Internet. This helps them save on both time and procurement costs.

"Thank God, this is not a mainstream trend, and does not look like it will ever get there," said a sales executive at one of the toptier Indian technology firms.

Reverse auction in IT sector still a niche trend

He requested anonymity because he did not want to upset his customers. For now, reverse auctions are not going to affect profit margins of tier-1 Indian tech firms because it's still a niche trend and currency fluctuations will absorb most of the pricing pressures in the coming year.

"We saw some shades of this trend after the 2008 Lehman crisis, when banks and customers like GE put out a quarter of their budget for bidding through reverse auctions," he added. Phil Fersht, founder CEO of sourcing advisory firm HfS Research, said nearly 75% of projects with a total contract value of over $5 million have some element of reverse auctioning between outsourcing vendors.

"This is very much commonplace today as buyers become experienced at procuring IT labour for project work. I can see it only increasing in the next few years as long as there continue to be so many suppliers," he said. Partha Iyengar, vice-president and regional research director India at Gartner, said this trend is gaining visibility because of the economic slowdown.