Business model innovation: E-auctions
A recent report by Frost & Sullivan suggests that the mega trend of connectivity and convergence has stimulated innovation in business models, e-auctions being an innovation example within the construction industry.
Frost & Sullivan’s recent construction industry research (Business Model Innovations in the Building Construction Industry, 2020) suggests that the Mega Trend of connectivity and convergence—driven by 5G, cloud systems, IoT, data analytics, and AI-based software—has stimulated innovation in business models, with an emphasis on co-creation and collaboration.
E-auctions are one example of this innovation playing out today.
What are e-auctions?
Also known as electronic reverse auction bidding (ERAB), an e-auction is an online third-party bidding service that is underpinned by the model of “one buyer to many sellers” that compete to lower the prices of their products/services for a pre-set cut-off time.
In traditional online bidding, contractors can edit their bids until the last hour, but the bid price is revealed to other bidders only at the time of the bid opening. In ERAB, however, each bidder’s price is displayed on an ongoing basis to other bidders. Bidders may modify their bids based on the price quotes submitted by other bidders.
However, the bidders’ identities are not revealed. The primary drivers for this form of online bidding in the construction industry are increasing competition, low margins in construction projects, and the rapid uptake of advanced information technology (IT) solutions in the construction sector.
Advantages of this model include:
- Immediate cost-savings to clients and suppliers.
- No intermediaries are required to submit a bid.
- The online platform replaces a costly, post-tender bid clarification process.
- Project bids are done electronically in an encrypted format through a secure network.
- It improves productivity where project plans and documentation can be easily obtained and accessed online.
- It simplifies negotiations for the selection of suppliers/sub-contractors/service providers and for price settings.
- There is increased transparency, as bidders may be required to disclose their prices.
However, there are certain challenges in leveraging this model:
- It is highly dependent on bidder participation.
- Too few bidders would result in little competition.
- Too many bidders (high competition) may either discourage suppliers from bidding or cause contractors to submit unrealistically low prices that result in poor outcomes.
- Possible judgment errors made by suppliers during the e-auction may lead to reduced work quality, lengthy negotiations, and disputes within the industry.
- There are “grey areas,” such as differing local conditions, codes, or labour markets.
Companies that currently leverage e-auctions include Absolute Auctions & Realty Inc., Bidadoo Inc., Frey & Sons, and Don Smock Auction Company Inc.
Over the long term, Frost & Sullivan believes that value will be co-created by building industry participants in the network. It is this “knowledge exchange” that will drive the proactive production of goods and services, thus bringing changes and innovation to business models in the industry.