by Meridith Levinson

Open Source Technologies Gives Auctioneer Bonhams Competitive Edge

Jul 15, 200614 mins
Open Source

Shortly after 10 a.m. on an April Sunday, eager auction-goers began bidding on more than 1,100 items—paintings, furniture, decorative pieces and vintage couture—that London-based auction house Bonhams had put up for sale in its Los Angeles showroom. An image of a Jules Lefranc oil painting depicting Parisian rooftops with the dome of Sacre Coeur cathedral in the background was projected on two Sony flat-screen TVs at the front of the room. “Let’s open the bidding for this item at $350,” announced the auctioneer, a rosy-cheeked woman with frosted blond hair. Immediately, a prospective buyer discreetly raised her paddle to bid on the painting, valued between $800 and $1,200. “Three-fifty in the back,” the auctioneer called. “Let’s go to four.” Another bidder raised his paddle. “Four hundred in the center of the room. Go $450,” the auctioneer called.

The bidding continued fast and furiously in $50 increments until the auctioneer hit $1,000, whereupon she began increasing the bids by $100. “Do I have $1,200?” the auctioneer asked. A man seated toward the back of the room waved his paddle. “Twelve hundred in the back of the room. Go to 13.” An art collector representing a buyer on the phone raised his paddle on behalf of his bidder. “Thirteen on the phone. Go 14,” said the auctioneer. The buyer who bid $1,200 raised his paddle to bid $1,400. “Fourteen hundred is bid in the room. Go 15,” the auctioneer announced. A hush came over the gallery. Was that it? Was the bidding out at $1,400? The auctioneer asked, “Any advance on $1,400?” The auction representative on the phone with the remote buyer (a Paris-based fine art dealer) whispered to his bidder that someone in the room bid $1,400. Did the dealer want to bid $1,500? Yes, and the rep raised his paddle. But the buyer in the room still wanted the painting too, and bid $1,600. The buyer on the phone bid $1,700. “I have 17 on the phone. Any advance on $1,700?” the auctioneer asked, her eyes scanning the room for last-minute bids. No movement. With a rap of her gavel on the podium, the auctioneer announced, “Sold for $1,700 to bidder number 2812,” and then she quickly moved on to the next painting.

And just like that, in two days, Bonhams showcased 1,138 and sold 930 lots of merchandise, which is nearly 80 percent more than the average number of items Sotheby’s puts on the block during one of its two-day sales.

The Nordstrom of Auction Houses

Selling more items at a lower cost is Bonhams’ strategy for competing with Christie’s and Sotheby’s—the number-one and number-two powerhouses respectively in the $6 billion art and antiques auction industry. The privately held Bonhams, which conducted over $400 million in auction sales in 2005, hopes to increase its small fraction of the market (currently 6 percent) by establishing itself as a midtier player and broadening its audience beyond the blue bloods who traditionally patronize auctions. Think of Bonhams as the Nordstrom of auction houses: It’s high-end, but your last name doesn’t have to be Bush or Bowles (as in Camilla Parker, the wife of Prince Charles) to shop there.

Although Bonhams has a long way to go before it poses a serious threat to Christie’s and Sotheby’s, it has made progress toward increasing its business. And IT—specifically a strategy of building an open-source infrastructure—has helped support and fuel that growth. Bonhams’ sales have grown from a reported $64 million in 2000 to more than $400 million. Its customer base has tripled to 1.3 million. With the art auction industry on fire again after a three-year downturn, industry watchers say Bonhams stands to gain market share as collectors who wish to capitalize on the surge put their pieces up for sale. The secret sauce behind Bonhams’ bid to grow and flourish is a homegrown auction management system, which runs on Linux and powers almost every aspect of the auction house’s business, including functions as wide-ranging as property management and CRM. Bonhams IT Director Roland Whitehead says he built this core system internally rather than install ERP and CRM applications in order to keep Bonhams’ costs down. The trading system, he says, has supported Bonhams’ growth from 200 employees and 200 annual auctions in 2000 to 800 employees and more than 700 auctions a year today without occupying the company with an expensive, time-consuming software implementation. By keeping expenses low, Whitehead says, Bonhams can sell its items at lower prices than the more exclusive auction houses do while maintaining a reasonable margin. “We have kept our processing costs so low that we are able to sell $10 items and make money off of them just as we will make money off multimillion-dollar items,” Whitehead says.

Auction Wars

Despite its revenue gains, Bonhams is still a distant third behind Sotheby’s and Christie’s in market share and auction sales. (Sotheby’s, for instance, earned $2.75 billion in auction sales last year.)

Bonhams achieved its third-place status largely through a series of mergers and acquisitions that coincided with the economic downturn in the United States. The art auction market, which was scorching during the late 1990s, took a turn for the worse in 2000 when the U.S. equity markets imploded. Suddenly, all those Internet tycoons who were rich on paper no longer had the funds to invest in Rothkos and Pollacks for their postmodern offices.

During that downturn, Brooks, a small yet highly profitable auction house that specialized in classic cars and motorcycles, went on a buying binge. Robert Brooks, the founder and chairman of the eponymous auction house, wanted to give Christie’s and Sotheby’s a run for their money and set out to acquire all the auction houses in his path. He started in 2000 with Bonhams, which the Bonham family had been running since 1793. In fall 2001, Bonhams & Brooks merged with Phillips, then the third-largest auction house, to form Bonhams 1793 (the Phillips name was lost in the shuffle). In August 2002, Bonhams 1793 acquired Butterfields, which was the largest West Coast–based auction house, and now has salesrooms in San Francisco and Los Angeles under the name Bonhams & Butterfields.

What all of these companies that Brooks acquired had in common were financial troubles. Bonhams’ auction sales were stagnant. Phillips had all but collapsed under the weight of its previous owner, the French luxury goods conglomerate LVMH, which spent hundreds of millions of dollars between 1999 and 2002 in what was ultimately an unsuccessful attempt to compete with Sotheby’s and Christie’s at a time when they were embroiled in a price-fixing scandal. And eBay, Butterfields’ previous owner, nearly put the fine art auction house out of business by driving its customers to the Web.

The challenge then, in addition to restoring all these companies to profitability, was to get them on one common trading system. “You cannot have four different auction systems with four different accounting processes, four different administration processes, and four different ways of handling goods and keep a handle on the business,” says Malcolm Barber, Bonhams’ CEO of U.S. operations.

Why Bonhams Built Its Systems In-House

Bonhams’ management team wanted a user-friendly trading system that would provide accurate sales, stock and customer information and would make the production of catalogs easier.

Whitehead decided to build the system in-house because, having worked with packaged applications like SAP, which Sotheby’s uses, and Siebel, which Christie’s uses, he didn’t think they were flexible enough. He knew those packages would require heavy customization, and with that customization would come increased maintenance fees, which Bonhams couldn’t afford. Given Whitehead’s training as a Naval architect and product designer and the half-decade he spent from 1986 to 1992 using computers to develop World Cup racing yachts, he felt he had the know-how to develop a lower-cost system that would be more targeted to the auction industry than shrink-wrapped software.

“The cost of tailoring such [enterprise software] packages is so high. If you have the right mind-set, the right skills and the right tools, you can develop a solution at a fraction of the price [of the packaged applications] that is significantly better, and that is what we’ve done,” says Whitehead.

Bonhams’ IT director also wanted to build a single system that encompassed as many activities and business processes in which the auction house engages as possible so that he wouldn’t have to patch together a bunch of disparate systems. So the system he built also includes functions for print production, managing and valuing the properties that Bonhams puts up for sale, and customer relationship management.

Whitehead, who has hired IT staff from Sotheby’s and Christie’s, notes that his competitors have to integrate a bunch of systems to get the functionality they need because one packaged system doesn’t do it all. In fact, Sotheby’s expenses grew so high by 2003 that the company outsourced the management and maintenance of its mainframe systems and laid off six IT workers as part of its cost-cutting effort, according to a report from Wedbush Morgan Securities. By contrast, Bonhams’ IT costs have dropped from $3.5 million in 2001 to approximately $1.6 million today because it’s running fewer systems and using open source. Whitehead says his Linux servers are so reliable that he needs only two systems analysts to support them.

Whitehead’s decision to build Bonhams’ core trading system in-house flies in the face of conventional IT wisdom. “The default best practice across the industry is, it’s better to buy than build,” says Randy Heffner, an analyst with Forrester Research. Heffner says most companies choose to implement packaged software because they don’t want to spend time and money on an activity that isn’t a core competency. Bonhams chose to swim against that tide.

The Open-Source Stack

Whitehead and two developers began building the system, dubbed A3, in May 2001, well before Brooks’ acquisition spree was complete. The IT director first had to decide which database software would form the core of A3. He opted for software and development tools from vendor Progress for two reasons: They were less expensive than Oracle at the high end of the market, and more scalable and reliable than Microsoft at the low end. He also liked the software because it provided a single programming language for three separate activities—coding the database, programming the business logic and writing the programs that deliver content to the Web. “That means less [for developers] to learn, fewer errors and less time spent debugging code,” says Whitehead. Whitehead originally wanted to deploy Progress on a distributed computing architecture using Sun’s Solaris operating system; running A3 on a bunch of small servers rather than one large server would prevent it from crashing if the system was hit with a barrage of transactions. But Whitehead discovered that the cost of licensing technology from Sun for that kind of distributed computing architecture was prohibitive. So instead he chose to go with Linux. And IBM, eager to enter the Linux market, made Whitehead an offer he couldn’t refuse on its X series servers. Whitehead also uses Apache Web servers, Tomcat, the open-source version of the Java servlet, FOP, an open-source typesetting system, and many other open-source applications.

Whitehead is a strong proponent of open source because, he says, it’s such a reliable operating system. “The cost benefits of deploying on Linux are dramatic,” Whitehead notes, adding that running A3 on Linux costs less than half of what it would cost to run it on Solaris.

With the architecture in place, Whitehead and his programmers began developing a framework for storing and displaying information in A3. The framework establishes the user interface for A3 and manages all the business rules that dictate how A3 works. The application has programming logic for all manner of activities, from authenticating users to tracking properties, mining customer information and producing reports on sales activity. The application interface is stored in a database so that developers can reuse it quickly and easily when working on enhancements to A3.

Whitehead originally planned to launch A3 in the summer of 2002, but the pace of acquisitions and the need to build the acquired companies’ processes into A3 slowed down the project. A3 went live six months after originally planned, in January 2003. Whitehead has said that A3 cost approximately $800,000 to develop.

Agility for Customer Service

Whitehead says the way the system has been designed makes adding new features a breeze for developers because they don’t have to write a lot of new code. Forrester’s Heffner agrees. “There are ways for enterprises to design applications that are flexible by doing good design and analysis up front, like it sounds like Bonhams has done,” he says.

The ability to add new features to A3 quickly helps the company provide better customer service, Whitehead says. For instance, last March a customer asked one of Bonhams’ appraisers to provide him with a report detailing the value of his collection in a different format than the auction house usually provides. The customer wanted the pictures of the items in his collection in a different order, and he wanted more information in the report. The appraiser told the IT department what the customer wanted. Within an hour, one of the developers produced the appraisal just as the customer requested and added the extra functionality to A3 that would allow appraisers to customize the formats of other appraisal reports. All the developer had to do was modify an existing query and produce a new report layout that could be processed into the required format. Unlike making changes to a packaged application, no big change documents had to be written up, and no consultants needed to be retained.

A3 has also sped up the creation of catalogs, which play a key role in encouraging people to attend auctions. Carolyn Mani, who’s in charge of Bonhams & Butterfields’ Sunset Estate auctions, says it took only a week and a half to create the catalog for an 1,100-item auction that took place in Los Angeles last April. She says publishing catalogs using the old DOS-based system under eBay took twice as long. “With the push of a button, A3 sends the entire [catalog] file in Word form to our desktop publishing system. A3 also publishes it to the Internet simultaneously, so even before I have a printed catalog, my sale is online with photographs and descriptions,” says Mani.

Bonhams can even react more quickly to changes in regulations. Earlier this year, the British government passed a new law called the Droite de Suite, which guarantees that living artists earn a percentage of the sale price when their work is resold (say, if a collector who purchased it in a gallery decides to auction it). Within 24 hours of the law being enacted, Whitehead’s team wrote functionality into A3 that would release proceeds from the sale of a work to the artist.

Bonhams’ top executives seem impressed by all this newfound IT agility. “When we ask things of IT that will help us drive the business forward, they come up with answers pretty quickly,” says CEO Barber. And when he wants to know what goods have been consigned, which are ready for sale and how each department within the company is doing, Barber turns to A3. “When you’ve got offices all over the world, it gives me a comforting feeling that I can get an overview [of the entire business] very quickly,” he adds.

Auction Fever

At the Los Angeles estate sale in April, Bonhams’ “sell more for less” strategy was very much on display. While heated bidding drove up the prices on some items, including a sterling silver flatware set that was valued between $2,500 and $3,000 but sold for $6,500, plenty of items went for a song, including a Federal cherry bedside table appraised for as much as $600, which sold for $80. Ellen Sinaiko, who attended the estate sale with her miniature Dachshund, Ernie, says it was one of the best auctions she’s ever attended because it was affordable and because the customer service was so good. She says she spent about $900 on furniture, costume jewelry and a collection of tobacco jars.

“Truthfully, I was bidding because it was so cheap. It was such a bargain,” she says. “Where else could I get four Pennsylvania Dutch dining room chairs for $80?”

Sinaiko adds that she’s attended Sotheby’s and Christie’s auctions, but prefers Bonhams’ events because they’re more hospitable. “The people who work there are so friendly. They really make you feel like you’re welcome in their house. You don’t get that feeling at most auctions like Sotheby’s and Christie’s,” she says. “They really have a big attitude.”