Third-party e-auction hosts provide standard spreadsheets for bidding banks to enter a combination of variables that affect the price of a p-card program: rebate percentage, payment frequency, service fees, etc. Once a bank fills in the fields and submits a bid, the software automatically calculates the net present value of the whole proposal and ranks it among the other bidders.

In the case of Whirlpool's auction, total price was determined by two variables: the rebate offered (expressed in basis points) and the size of the signing or retention bonus the bank was willing to pay, Luongo says. FreeMarkets converted the two variables to the net present value of the entire bid. "We offered the business in different packages to see which combinations brought us the best prices. The first package, all of our card business, brought the most activity," Luongo explains. "That one had five overtimes." If a bid comes in during the final minute of the auction, the auction is extended for another two minutes to prevent a bidder from slipping in a winning bid in the final seconds, he explains.

In the end, Whirlpool's treasury wanted more than simply a less expensive deal, and the cyber event did not result in contracts being mailed to the lowest bidder. "It got the pricing out of the way," Luongo explains. "We had each bank's best price, but we did consider more than price, and the banks that got the contracts were not necessarily the lowest bidders."

The reaction of Whirlpool's banks was mixed. "Some had done e-auctions before. Some had never heard of them. Some refused to participate on principle," Luongo reports.

Card services are a natural candidate for e-auction because each bank offers quite similar services and the decision is price-sensitive, Luongo says. But the bidding doesn't have to be over price; it could be for time or some other element, he says. Not every service could be auctioned, but a lot of treasury services would be eligible. "The potential is there," he insists. And the sponsor doesn't have to be a Fortune 500 company, but it does have to have a big account. "A real estate development company might be much smaller than we are but have as large a travel program," he points out.

Customized deals that involve a lot of legal language aren't likely to be auctioned, but auctions could be used for a majority of treasury services. "It's critical that companies that use e-auctions do it in the context of strong relationship management and use it only for the most commodity-like services," Skerritt says. "Explain what you're doing to your banks, and don't let it damage your important relationships," she advises. Almost any cash management service can be a commodity to some companies and a customized service to others, she adds.

At $130-billion General Electric Co. in Fairfield, Conn., the company had been auctioning its standby letters of credit and bank guarantees and has just started to auction its commercial paper placements in Japan. But rather than a one-time event leading to the awarding of a long-term contract, these are repeated deal auctions held on GE's Web site. Every time GE wants to buy standbys or guarantees or sell CP in Japan, the order is posted and the top bidder gets that particular order, explains Lynda McGoey, manager of trade and project finance. Rather than bid against each other repeatedly until the lowest price is reached, the participants present a single bid, she says. Only banks that GE wants to use are invited to participate.

While GE is not making claims of spectacular dollar savings, it is claiming that both it and its banks like the new system because it is highly automated. Instead of faxing paper back and forth and manually keying completed deals into systems, the whole thing is done through the exchange of electronic documents. It's the first time such a system has ever been used for trade finance, and it's another of GE's Six Sigma projects to pay off, McGoey claims. No bank has declined to participate, she adds.

Tired of using each bank's proprietary system for buying L/Cs, GE asked the banks' software provider, SunGard Banking Systems, to adapt the software for corporate use and e-auctions, McGoey says. So, SunGard retooled its system and now is selling it to corporations.

In Japan, GE uses three dealers and a digitized auction process to issue its CP, reports Steve Velluto, managing director for short-term funding. "What we were doing before was way too paper-intensive for GE," he says. GE presents the deal–the amount and maturities of the CP to be sold–on its Web site. Dealers have 90 minutes to present and modify their bids, he explains. Then the winner is notified, and the losers are told what the winning bid was so they can see why they missed getting the business and by how much, he explains. Like the L/C auctions, bidders like the process because it is so automated, he adds.

Not only does GE save by getting the best prices on its L/Cs and CP, but it saves on head count. "Our portfolio of L/Cs and guarantees has practically doubled over several years, but the same staff of two handles it all–something we could never have done without the automation that goes with the e-auctions," McGoey says.

What worries some bankers is the fact that e-auctions are actually fun to participate in. "It was like watching a soccer game that went down to the wire," reports Mark Fleming, a Comerica Bank vice president in treasury management sales. About a year ago, Comerica participated in its first e-auction, bidding unsuccessfully to get the purchasing card business of a company Fleming won't name. "You watch it happen second by second on the screen. You can see that you're first one second, and the next second you might be third. They let you know when there are 30 seconds left, so you have time for one last shot."

PNC executive vice president James G. Graham agrees. "It was a heart-pounding experience that lasted all of 45 minutes," he says, recalling PNC's first e-auction last summer when the Pittsburgh-based bank won p-card business.

There are also a couple of advantages to e-auctions versus RFPs, Fleming claims. "You get to see exactly where you stand during the bidding and where you finish. Nobody is kept in the dark." But he concedes, "It was more work for us. We had to install software and go through some training." The auction determined only the price. The company then took a couple of months to weigh other factors like service before awarding a contract to one of several bidders, Fleming explains

But what about profitability? "Banks have to prepare carefully and identify the price points they can offer, then take the emotion out of the process and remain very disciplined," observes Vernon Lucas, vice president and sales officer for Wachovia Treasury Services in Charlotte, N.C. "Clearly, price is the main driver and undercuts the relationship somewhat," he notes. Wachovia participated in one e-auction for disbursement services in which 12 banks were bidders, he reports.

One necessary e-auction criteria for bankers: The piece of business has to be fairly lucrative. On the other hand, the buyer doesn't need a sterling balance sheet or to be free of bank debt. The auction in which Comerica participated was held for a company with "plenty of debt," and Comerica, as a member of the company's credit syndicate, was happy to e-bid because it had been trying to sell the company a p-card program, Fleming notes. "I'm not sure e-auctions will sweep the industry," he says. "We've heard that some banks refuse. It is also more work for buyers as well as us. At this point, it's still a large-company phenomenon."

That may be wishful thinking on the banks' part. Let's face it, a 300% savings may be worth doing a little extra work.