Online Reverse Auctions for Procurement of Services

Online reverse auctions, in which a buyer seeks to select a supplier and suppliers compete for contracts by bidding online, revolutionized corporate procurement early this century. Shortly after they had been pioneered by General Electric, many companies rushed to adopt reverse auctions but the adoption soon slowed down due to the negative effects of auction-induced competition. Today, as firms continue to experiment with the reverse auctions, it is important to understand how the interplay of the auction context, the service characteristics, and buyer-supplier relationships affects auction outcomes and the success of the auctioned projects. \nThis PhD dissertation investigates online reverse auctions in service industries (e.g. software development, building construction). The differences between services and products (services can be more difficult to describe and require more intensive communication) challenge theories that try to explain auction outcomes. We study several aspects of auctioning service contracts: the buyer’s choice between auctions and negotiations; the contract allocation decisions in auctions; the heterogeneity of buyers’ procurement behaviour; and the effect of auction outcomes on buyer-supplier relationships and project performance during the project execution.\nSome of the key findings are: 1) that the buyer’s repeat exchange interaction with vendors as well as the satisfaction with a vendor’s past performance lead to the buyer’s preference for using bilateral negotiation to allocate the next project; 2) that there are five buyers’ tactics that allow to increase the likelihood of contract allocation; 3) that the outcomes of online reverse auctions can aggravate project managers’ role constraints and that project managers can use relational exchange competences to overcome these constraints. \nOverall, buying services through online reverse auctions is quite different from buying products. This thesis makes the first steps to develop theoretical knowledge to account for that difference.