Bidding for savings: Reverse auctions gain new favor

This may be the season for reverse auctioning—especially at a time when agencies are scavenging to survive because money is so scarce.

The online bidding process where price is driven down by companies competing for the work could leave an agency’s acquisition workforce with more time and the department with more money, according to a new report.


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“Reverse auctions are indeed coming of age in both the private and public sectors, as organizations are rapidly discovering that [the reverse auctions] can be a ‘faster, better, cheaper’ method of procurement,” wrote David Wyld, professor of management and director of the College of Business’ Strategic e-Commerce/e-Government Initiative at the Southeastern Louisiana University in Hammond, La., in a report released Oct. 20.

The report was released by the IBM Center for the Business of Government.

Based on his analysis, Wyld writes that using reverse auctions for appropriate commodities and selected services could save the government between $7.5 billion and nearly $15 billion annually. Reviewing past auctions by federal agencies, the competitions have saved 11.9 percent per purchase. He writes that percentage could yield as much as $8.9 billion across the federal government. The Defense Department alone could save $6.1 billion, according to the report.

Wyld lays out a few more benefits of the technique:

  • Competition increases, particularly among small businesses.
  • The auction brings agencies as close as possible to the true, fair market value for a purchase when settling on a price.
  • Negotiations that might have taken days or weeks to produce price concessions become immediate pricing decisions in the auction environment, with each decision to bid—or not to bid—a lower price.
  • Reverse auctions, especially those conducted through a third-party provider, can significantly reduce the time required for procurement employees to make purchases.

However, reverse auctions have their limitations too, as Wyld notes. The auctions can change relationships between the buyers and suppliers.

  • A relationship lasts as long as the next competition. The potential for switching suppliers and associated costs are simply a cost of doing business.
  • A reverse auction may adjust the dynamic of a relationship between a buyer and the supplier. Wyld writes that the auction may make a supplier feel coerced into doing business. The buyer’s buying power will force companies to join in the auctions with lowered prices.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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Reader comments

Sat, Nov 5, 2011 Geoff Edwards Vienna, VA

In response to the Seller performance comment, companies registered with FedBid are vetted through available Federal resources such as the CCR and the EPLS. Additionally, FedBid employs ongoing monitoring of seller performance to ensure that the end user receives their required goods/services and to maintain the integrity of the marketplace. Together, these measures have consistently resulted in a very low rate of seller issues. Please contact me with any issues that you have encountered so that they can be addressed with both the seller and the buyer. Thank you. Geoff Edwards, geoff.edwards@fedbid.com.

Tue, Nov 1, 2011 SPMayor Summit Point, WV

I shared this article with a couple of industy associates. One of the responses I got follows: My biggest problem with all of this is their assumptions of savings. Total fantasy. The 12% comes from FedBid product buys, and are largely based on GSA list (and/or procurement officer estimates of what they expect to pay). Its been years since anything sold at GSA list, and a long time since anyone made as much as 12% margin on products. No way could prices drop by 12% of what they would have been with a simple competitive bid process and/or negotiated pricing..

Similarly for savings on negotiations. Prices are currently set by negotiation only when there isn’t adequate competition. When reverse auctions are used in these circumstances (and they frequently are), either the government pays more or the vendor agrees to bid the pre-negotiated price.

In all of the abov the auction fee, typically 2-3% depending on agency commitment, comes out of the taxpayer’s pocket.

Tue, Nov 1, 2011

but the debt keeps growing! Where is the savings??

Tue, Nov 1, 2011 SPMayor Summit Point, WV

Like any tool reverse auctions have to be used wisely.Benefits and limitations need to be considered.The impact on local small business needs to be considered when reverse auctions are used by local installations for local needs on a county-wide basis.Auctions do not provide an effective means of judging best value, limiting,in my view,the use of the tool for professional services. Greater emphasis must be given to the responsibility determination than has become customary to assure the bidder/offeror is a capable and assured provider of the auctioned goods and services. Additionally, consideration needs to be given to how the fees not infrequently associated with third party auction providers will be paid and distinguished from other fees such as IFF and CAF.Let us not be mezmerized by the shiny promises of the well intentioned who have yet to work in the fields of labor.

Tue, Nov 1, 2011 Jim Detroit

We have seen the FedBid reverse auctions fail frequently as the low bidder bid below cost, then cannot provide the goods or services they quoted. We have had buyers from FedBid come back to us months later asking if we can hold the price we bid for an item when the winner failed to deliver.

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