Building an open source-based infrastructure has helped Bonhams compete with the auction industry superpowers

Reader ROI

• Why Bonhams chose to build an inhouse system instead of licensing enterprise software
• How IT gave the auction house new leverage in the marketplace
• How agility translates to customer satisfaction

Shortly after 10am on an April Sunday, eager auction-goers began bidding on more than 1100 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 $1200 (all dollars are US). "Three-fifty in the back," the auctioneer called. "Let's go to four." Another bidder raised his paddle. "Four hundred in the centre of the room. Go $450," the auctioneer called.

The bidding continued fast and furiously in $50 increments until the auctioneer hit $1000, whereupon she began increasing the bids by $100. "Do I have $1200?" 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 $1200 raised his paddle to bid $1400. "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 $1400? The auctioneer asked: "Any advance on $1400?" 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 $1400. Did the dealer want to bid $1500? Yes, and the rep raised his paddle. But the buyer in the room still wanted the painting too, and bid $1600. The buyer on the phone bid $1700. "I have 17 on the phone. Any advance on $1700?" 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 $1700 to bidder number 2812", and then she quickly moved on to the next painting.

And just like that, in two days, Bonhams showcased 1138 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.

IT Fuelling Growth

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 mid-tier player and broadening its audience beyond the blue bloods who traditionally patronize auctions.

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 home-grown 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' cost s 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 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 US. The art auction market, which was scorching during the late 1990s, took a turn for the worse in 2000 when the US 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 post-modern 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 late 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 US West Coast-based auction house, and now has salerooms 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 US operations.