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Saturday, 5 April 2014

Auctions II: Reverse-Auction Setting is not Optimal for You

A couple of days ago, on 2 April, we began to discuss auctions. Please read the first instalment if you haven't yet! It offers a useful introduction which will make this easier. We established that, unlike in one-to-one negotiation setting, auction settings include multiple buyers or multiple sellers. We concluded that participating in an auction — or auction-like — setting was not optimal because it made you and your competitors undercut each other. Now we'll discuss the why in more detail, and also the how.

Setting the ground for competitive procurement, which benefits the buyer

After repurposing two bullets from Wikipedia's article on requests for proposals, an auction:

  • informs suppliers that an organization is looking to procure and encourages them to make their best effort
  • alerts suppliers that the selection process is competitive

Sound familiar? You've probably heard the adjectives: best and competitive often enough. In fact, they have become de rigueur throughout the translation 'industry'. It also:

  • allows for wide distribution and response (this means that there will be quite a lot of competitors, not just two or three)

In summary, a potentially large mass of people is alerted that there is a need to compete, and encouraged to make their best effort. Best for the buyer, just to be sure.

Interlude — contests — a different kind of competition, but not totally different (though nicer)

In the translation 'industry', the competition sometimes comes down to a contest and rates are fixed or close it. This is not unlike civil service examinations, which have a long tradition going back e.g. to the mandarin examination in imperial China, or even DipTrans or sworn translator exams in which you gain credentials rather than direct work, and the pass threshold is based on how good you are in the abstract rather than relative to other people. Enrolment in professional associations is also similar.

Civil service examinations and similar state exams actually take competition further — sometimes you're graded against other people and only the top n% wins.

And then there are also contests. The whole point of them is that not everybody can win.

Contests resemble auctions, but we'll become paranoid if we exaggerate the similarity. In some cases what looks like an auction is more like a contest (which means not as bad). The difference is that contests have the potential to be elevating on a personal level rather than commoditising the procurement and taking the personality away.

The best effort — breakdown

Best effort is not limited to just best rates. There are also 'non-price factors' (or 'drivers'), but they are not necessarily as nice as non-price competition is in theory. Notably, non-price factors can still be very quantifiable (measurable), even quantitative in nature, and even outright numbers.

The best example of a numerical non-price factor is the role of deadline in some inquiries directed to multiple translators or agencies. If you recall, quotation forms often have a deadline field, where you're supposed to enter a deadline on your own. (Just to be sure, a deadline is not the same as a completion date, the vibe is different.)

Other distinctly quantitative non-price factors include:

  • years of experience, e.g. 4 or 12 (raw number)
  • number of words or pages in the field, e.g. 5000 or 250,000 (raw number or numerical range)
  • how many words or pages you can produce in a day cycle (range again)
  • sheer number of testimonials (translator directories often calculate this number and make it visible, even prominent)
  • number of credentials, memberships, publications, courses attended etc. (obviously sized up rather than actually counted, barring some really surreal procedure)

Sometimes these factors reflect necessities of the job or position — for example credentials, productivity, experience level can sometimes be reasonably necessary for the task — but they're often just a criterion to narrow down the large pool of people who will respond to job announcements.

Some less obvious and more debatable examples include:

  • degrees, in some countries, e.g. B.A. < M.A. < Ph.D.
  • software versions
  • multiple different CAT tools or office suites or other types of software or equipment

For each of these you could make a qualitative case, but the numbers game (or ladders) may prove too hard to resist. So even when it's not price competition, it's still based on numbers, or just as good. The blend of price and non-price factors can produce a different equation each time, meaning that a different weight is given to the price, so it's not only just about driving the rates as low as possible. But there's still an equation with a lot of basically numerical variables in it.

This said, not all quantitatively or even numerically driven recruitment equations necessarily hurt you. Or necessarily more than simply living in a market does.

Some people just like the transparency of such models. Others thrive on numbers. Yet others are strong on the numerical variables, such as well they have a ton of everything (experience, credentials, testimonials, types of software etc.), but in the latter case I wonder what they're doing competing on someone else's terms rather than trying to dictate their own.

Bottom line, in an auction-like setting you're basically competing on numbers or very similar types of variables, with a good chance that such a mode of comparison will not make you feel appreciated as a human being. There is a danger that your work may be commoditised, that something you put your soul in will be traded like coal by the wagonload.

Inversion of roles: Vendors/suppliers competing means the buyer reaps the premium, not you

This has probably become all but obvious by now, but let's nail it down: When you and several others in your class are competing, the bargain is the buyer's.

You and the other potential sellers don't just undercut one another a little. On the contrary, all of you are cut right down to your bottom lines unless all of you hold the line, which is unlikely to happen. This is free market at work, you can't force people to keep their prices up if they want to land the deal.

In other words, the buyer does not need to haggle, you are doing it for him

The buyer can sit back and watch the sellers do the haggling for him, among themselves.

When the buyer additional imposes a unique bidding rule, i.e. one chance to bid per participant, the sellers may even jump straight to their best effort.

The above saves the buyer the time, the exercise, and the need to develop any real haggling skills.

Another benefit — haggling with shadows (or with yourself)

By introducing the competitive model, the buyer can still reap almost the entire benefit of the bargain as long as you don't know that you're the only potential seller to respond or the only one who is a viable option.

It's almost as simple as telling you to be competitive and getting a discount. Again, with no haggling time consumed and no haggling skill required.

Yet another benefit — preselection

The buyer can even get the sellers to compete way before any concrete job materialises. Sometimes it is not even certain that any work will actually be there or how much of it.

The competitive atmosphere can get the sellers to fight tooth and nail over something that doesn't even exist. And we're getting close to:

Emotions working for the buyer's benefit — drive to win, distraction, loss aversion, Investor Syndrome

People like to win, nobody likes to lose, and those who have already invested much want to protect their investment, so they will keep investing a little more, even take small losses, to avoid losing the big deal they are after. Would you rather finally accept a lousy rate or lose the hours you've already put in analysing the task, assessing the workload, developing a tentative schedule, preparing a quotation for the buyer?

Perhaps more importantly, the whole thing with competing, competition and being competitive works as a distraction. It turns attention away from what a bargain the buyer is making here, and focuses it rather on finding ways to undercut your colleagues who might want or need the same job.

Plus, with some reputational cost exceptions, simply declaring someone the winner costs the buyer nothing.

Thus, all sellers end up competing for the chance to offer the buyer a discount. Every buyer, actually. There are many translation jobs, not only many translators, but since the procurement (recruitment) setting for each job is competitive, everyone ends up undercutting everyone for all jobs. The pay will end up lousy for all jobs rather than the workload being divided among people working for decent rates.

Between facts and emotions, vendor/supplier is less than seller

Participating in a reverse auction makes you no longer really a traditional seller any more. Thus, you are not that accomplished elderly gentleman proudly standing behind the counter of his own shop, often built with his own hands, whom you know from westerns.

On the contrary, you rather become the working bee carting its produce to the castle to await the lord's pleasure, either on the bee's own motion or having been summoned and unable to refuse. Unable if not because the lord has a jail and a headsman, then because some types or volumes of goods need a lord's capacity for demand and a lord's purse.

A more depressing analogy could be drawn with a troupe of dancers swinging to the left or the right in response to the motions of the lord's waving hand. This is what it looks like when buyers totally get their way and can be lining up their potential sellers just the way they want.

Selling you the job

Just as one says that the roles of the buyer and seller are inverted in a reverse auction, one could also say that in a reverse auction the buyer is selling you the job.

Selling it like a diamond

The job is sold to you as if it were rare goods, but it's more like with diamonds: it comes down to hype and controlling the supply. Diamonds are not rare at all, nor are they the most valuable gems are at all. The tradition of spending the worth of, say, a man's two salaries on a diamond for his betrothed, was allegedly inspired by a diamond-selling company, obviously not in a fit of altruism.

Effectively, you are purchasing a job in a setting in which the person or company with the job controls the setting. That setting is a treacherous ground, and it plays with your head. Translation jobs are commonplace, as are translation clients and translation intermediaries and resellers. This is not a negative comment, just a fact. On the other hand, auctions are made to look like you're being offered a unique opportunity not to be found elsewhere etc.

... Sometimes showing you the bling but still asking for — or requiring — a signing-up discount! 

Like you should be so happy to work for them and their profitable company that you'll gladly take a cut in your own profit to allow them to make even more of those lovely quarterly figures.

Make no mistake, we're talking about the buyer's profit as business, not about saving humanity

If you care so that everybody or at least many people and companies can afford your translations, then your prices are affordable, not competitive. In an ideal world, your lower translation rates would lead to lower consumer prices. People would pay less for home utensils, entertainment, education, holidays perhaps.

But that relationship is not so direct, and between you and the consumers ending up using your translation or something being affect by it there are often entire chains of business companies whose mission is to maximise the profit for the shareholders. And for maximising the profit for shareholders the executives will rake in a nice incentive bonus.

On translation-related message boards we talk about two things: large translation companies asking for lower and lower rates, and the same companies boasting their high profit margins. Let's connect the two facts. We are not saving any damsels in distress here. There are people in the world who really need pro bono services of the same kind as those provided by you.

The bidder's costs: winner takes all, no return for non-winners

Whether the auction is regular or reverse, participants other than the winner are usually not paid for the costs they incurred in participating. In your case as a freelance professional, this includes your time. Time which you could spend working.

Unless you either win or at least receive some valuable feedback which helps you win next time or go compete elsewhere with more success (or stop competing in auctions), you get nothing if you don't win.

Actually, the winner doesn't get any refund, either

The buyer expects to compensate the winner for the goods or services bought, not for the cost of selling! In a buyer's mind, the cost of selling doesn't deserve to be compensated, just like — where working by the hour — you don't bill the client for the time spent writing the invoices or especially convincing the client to hire you.

The buyer expects to compensate you for the goods or services at fair market value or below, often much below. The pay does not include any allowance to reimburse you for the cost of participating in the auction.

In the buyer's mind, not even simply getting the job is supposed to constitute the consideration (commercial equivalent) of your investment of time and sometimes even money in the auction process. The mere chance of getting the job is supposed to be the consideration.

And just to be sure — the auction process has already made sure that your profit is as low as possible. Probably lower than in non-auction jobs that don't require jumping through so many time-consuming hoops.

In fact, you are indirectly reimbursing the buyer for the buyer's cost of running the show

The buyer will typically want to recover the costs of organising and processing the auction. While the the money will — of course — not be coming out of your pocket, and you certainly don't have any claim on the buyer's money which you haven't earned yet, the fact that the buyer has engaged in a costly auction process means that there will be less money in the budget for your pay.

The taste of victory in vigorous competition may be bitter overall

Like we noted above, since you are competing and the price is something very obvious to compete on, in a highly competitive setting your pay is often not going to be satisfactory, possibly even way outside your normal comfort zone, if you really get carried by adrenaline.

Initially, you will be energised by the excitement of actually winning, but after some time the reality will eventually set in, and you can very much end up being the battered winner doing an onerous job at poor rates.

And the winner doesn't even always win

In the absence of a specific promise — or pressing need — to award the job to whomever proves the most attractive or least unattractive seller, the buyer can always call it off if the offers aren't good (i.e. low) enough.

Notably, this will happen when you compete for a job which already has a closed budget. For example because it is being outsourced by someone who has already had to quote a low price just to get it. Auctions follow auctions sometimes.

Since the buyer controls it, you're up for buyer-designed goods and services and terms and conditions and everything else

A reverse auction could simply see multiple sellers of very similar goods competing for the buyer's order, such as when someone passes from one cab to the next in a line, loudly asking how much for the ride. However, reverse auctions are frequently connected with buyer-designed goods or services. This means products or services which fit a particular need or purpose.

In the translation 'industry', it is about translation, but the buyer may want to design the way you're going to provide it, and especially the business and legal terms on which you provide it. It would be misleading to call that bespoke or tailored translation. Bespoke is when a tailor cuts the material for your exact dimensions, rather than an approximate range, so that it lies well on you. This may also involve a custom design, true, but designing the way in which the tailor is to organise his work, answer phones and be held liable (and hold you harmless etc.) is something else.

In short, if you get your jobs in auction-like settings, you're likely to end up with buyer-designed terms and conditions of providing your professional services.

You don't get paid for exceeding the expectations

Buyer design specifications sometimes leave you with less opportunity to shine and negotiate a premium simply because whatever unique assets and propositions you have to offer were not taken into account when designing the specification. The specification was likely designed with the average participant in mind, and the buyer's own idea of the goods or services in mind, often a fuzzy one, with the buyer often being clueless about the nature of the services procured. This is another cause which makes you earn less than you otherwise could, or be respected less than you should, or have to process requests which should never have been made.

Buyer design with footwork done by you

Sometimes instead of complete buyer design — which would mean some work to do for the buyer — you may be tasked with filling in descriptions of how you're going to meet this or that condition, or even doing data entry footwork such as filling the buyer's questionnaire with data from your CV, which the buyer also requested.

Wasting time and money for the buyer's convenience

You may be asked to prepare a lot of paperwork up front which the buyer will only need from the winner. Setting the sellers to compete against each other and shoulder all the costs, sort of like puppies will fight for crumbs, can have a demoralising effect on buyers who are basically getting their way in everything.

This is not uncommon in the translation 'industry' with all the questionnaires and forms you need to fill in without even knowing if you will ever actually get even a single job from that particular source. Questions and forms which more often than not repeat things which are in your CV or in the e-mail exchange, and infrequently ill-design or outright clueless.

Caveats and silver linings

  • To some people competitive and best are just words, uttered or written without deeper thought.
  • People from some countries are influenced by the crude style of their legal regulations and quality standards which makes no distinction between literary works and construction works.
  • Not everybody is laid back or can afford to be. Some companies still engage in very formal and carefully recorded communication. Some have no choice, e.g. owing to the nature and source of their financing.
  • Buyer specifications often save a lot of time and stress by answering before you discover the need to ask. Plus, you can't have the best of both worlds, you can only find some balance between clients who don't know what they want and clients who know it too well.
  • Asking you for a competitive rate in a one-to-one setting is not necessarily an attempt to get you to compete against shadows. Possibly, the buyer cares about the price but also wants to avoid the costs and hassle of an auction, thinking you may appreciate avoiding them too (along with the uncertainty of the outcome). And he has a point there.
  • It's hard to steer totally clear of commoditisation. Many translators themselves offer their work to clients using commoditised language, as if they were selling some merchandise. Possibly you do as well, for example if you refer to yourself as Translations instead of Translator. There is a slight degree of commoditisation of your work in things like that.
  • Always see the difference between contests and auction, healthy competition and unhealthy competition. Be realistic about the unhealthy elements — you can't totally avoid them, and you're probably introducing some on your own in the way you write or talk to your potential clients.

Recap

Reverse auctions are for the benefit of the buyer, not you. The auction mechanic with its competition language uses psychology against you, notably distraction, loss aversion, desire to win. It makes sure the benefit of the bargain goes over to the buyer, often saving the buyer the need to engage in the haggling, which the bidders will do for him. Competitiveness can be used as a magical word to make even a single buyer drop his prices without going through the real process of competition. Even if you win, it may be a Pyrrhic victory, resulting in you working below your bottomline, or even taking a loss.

What's next?

In Part 3, we'll focus on RFP's, i.e. offering your services in tenders, or why you don't want to (in case you don't already know). In Part 4. 3 we'll talk about how to control the damage, turn the mechanics to your advantage or leave them behind.

7 comments:

  1. This all sounds like a great argument for just not participating in reverse auctions at all. To hear you describe it in these terms, I think I'd feel impure if I participated in such a thing. It almost smacks of prostitution.

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    1. Hi, Cara! :) Well, I was trying to keep the tone in check, since I mostly wanted this to be informative, but if you're trying to put a message across then it sometimes takes a bit of force. I do not wish to say it's impure, but it certainly can be demeaning. It does reduce translation to commodity status, whereby you're basically peddling products instead of exercising a profession, but the relationship with the translator's own status is less direct. Still, as a supplier of translations you probably don't have the same status as does a member of a respected profession (doctor, lawyer etc.).

      Also, you can never fully avoid auction mechanics. Even if the recruitment/procurement process is not expressly an auction, there will still always be some auction elements. I think auction mechanics are basically inherent in any sort of competition and, by definition, you have competition whenever you have more than one potential seller the buyer can go to.

      Thus, we can't really avoid getting at least a little dirty — but it isn't perhaps always really *that* dirty.

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    2. Well, it feels 'cleaner' to me if people are coming to look for the translator via word-of-mouth, viewing that person from the get-go as 'the expert', the 'consummate professional', the 'miracle worker', the one 'in a class by themselves' or whatever, so that they are pretty much set on hiring the person, and the only question is how much they should budget for that purpose. To me, that sounds like a forward auction rather than a reverse auction :)

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  2. Additional read, covering many of the things I mentioned here and very illustrative:

    http://www.inc.com/magazine/20070501/salesmarketing-pricing.html

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