Reverse auctions: A bid for budget-conscious business

Sometimes a good idea gets even better with the passage of time.

Ten years ago, shaving nearly 15 percent off the cost of a procurement by using a novel approach to the bidding process was a good idea. A decade later, as agencies across the government are seeing programs cut and discretionary funding dry up, it seems like a great idea.

In 2002, Cathy Read, director of acquisitions management at the State Department, gathered her most forward-thinking contracting specialists — the ones who “were always looking for a better way to save money and do it faster” — and asked them to try a new approach to buying commercial IT products.

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Rather than soliciting quotes from companies and then picking the one with the best value, the department invited companies to bid against one another, driving the price lower and lower until one bidder emerged as the winner. It’s like an auction, except instead of bidding to buy products, companies are bidding to sell them — hence the name “reverse auction.”

The approach has paid off. State officials estimate they saved $33 million on more than 3,000 purchases in fiscal 2011, based on an independent government estimate. That’s a savings of more than 14 percent.

Proponents say other agencies could achieve similar savings, for a governmentwide total of billions of dollars a year. Given the current budget crisis, those experts say reverse auctions deserve a closer look.

“You can’t always do things the way you’ve always done them,” Read said. “You have to be lean on your feet, and you have to make do with what you have.”

Start small, think big

Reverse auctions are appealing because it’s easy to test the approach and see immediate savings — and imagine how much more savings they could bring to bigger projects.

In the beginning, Read had State auction off a few items to test the new method, and when she consistently found that the approach was saving money, she turned to reverse auctions more often over the years and with a wider array of commodities.

As time went on, the savings continued to increase and the competition for solicitations improved.

Even the department’s inspector general took note of the savings from reverse auctions in a report on spending under the American Recovery and Reinvestment Act of 2009. After reviewing a $13 million program to replace desktop workstations, the IG estimated that the reverse-auction approach had saved the department 7 percent, with greater savings being seen on other projects.

David Wyld, professor of management at Southeastern Louisiana University, has done extensive research into the benefits of reverse auctions. He has determined that $74.5 billion in federal acquisitions could be competed through reverse auctions, and his analysis of auctions conducted across the government demonstrated a savings of 11.9 percent. That means the auctions could bring an annual savings of $8.9 billion across the federal government, with $6.1 billion saved on Defense Department spending alone.

“To me, the real-world benefit is the cliché ‘faster, better, cheaper’ way of doing business,” said Wyld, whose findings were published by the IBM Center for the Business of Government in a report titled “Reverse Auctioning: Saving Money and Increasing Transparency.”

Saving more than money

However, this isn’t just about saving money.

Time is an equally precious commodity in government offices, and many federal officials and acquisition experts say the acquisition workforce doesn’t have enough hours in a day to do all that it needs to do. Both Wyld and Read said reverse auctions save employees the non-renewable resource of time.

Wyld studied how much time State saved by using reverse auctions and found that the department shaved off nearly a full workday from each procurement it conducted using reverse auctions. Specifically, the department saved an average of 475 minutes — or 7.92 hours — whenever it conducted an acquisition through reverse auctions rather than traditional procurement methods.

“If you’re going to be a buying shop today when budgets are being cut by 15 to 20 percent because money is an issue, then as a buyer, you have to look for better, faster, more creative ways to get your program office what it needs,” Read said.

Agency officials must consider tools like reverse auctions or they won’t be able to adjust to the ongoing need to reduce the cost of government operations, she added.

Nevertheless, the auctions are not simply a way to save a little time and money here and there. The approach also streamlines the negotiation process. Reverse auctions simplify communication and collaboration between buyers and sellers, Wyld wrote in his report. “The competitive bidding processes that took weeks or even months to complete can be compressed into days or even hours,” he said.

All those factors help increase competition and bring agencies closer to the true fair-market value of a purchase. State’s IG wrote that reverse auctions “have been found to be significantly less expensive per item than buying the items from comparable General Services Administration schedules.”

The flip side of reverse auctions

Reverse auctions do have their limitations. For one thing, “the expedited form of procurement won’t work without oversight,” said Robert Burton, former deputy administrator of the Office of Federal Procurement Policy (OFPP) and now a partner at Venable law firm.

Furthermore, procurement offices cannot turn over all solicitations to reverse auctions. The approach only works when the terms of the contract are clearly defined and there is little — or no — room for flexibility. In other words, it is best for common products. Burton warned against buying services through a reverse auction because such contracts have far too many variables.

However, Read said she believed it was possible to buy certain basic services through reverse auctions.

Furthermore, Wyld said the auctions could change the nature of the relationship between buyers and suppliers. Instead of establishing long-term partnerships, relationships might only last until the next competition. The potential for switching suppliers is a cost of doing business, and for basic items, it won’t matter much, he said.

“Copy paper is copy paper,” Wyld said. “Toilet paper is toilet paper.”

However, a reverse auction also might affect the dynamic between buyers and suppliers, with the suppliers feeling coerced into lowering their prices in order to join an auction, Wyld wrote.

Jaime Gracia, president and CEO of Seville Government Consulting, said the reduction in procurement spending has the potential to make competition fierce, which, in turn, forces companies to lower their prices to win contracts.

To succeed with reverse auctions, Gracia said agency officials must determine which procurements are appropriate for reverse auctions — and which are not — and they must make sure that those solicitations have very clear requirements.

Making the case for innovation

Experts say now is the time to sell agencies on reverse auctioning because senior officials are desperate to find ways to conserve their resources.

“Agencies are looking under trees and in the couch for any spare change,” Gracia said.

OFPP has issued memos calling for agencies to use innovative procurement tools, including reverse auctions. Recently Dan Gordon, outgoing OFPP administrator, urged agencies to consider the approach.

To make the case to their bosses, Read said procurement officials should start small and document the results. From the beginning, she kept detailed notes on the reverse auctions that State conducted. She can cite dollar amounts, volumes and percentages by fiscal year.

“You can see the metrics are very important to really understand if we have savings and success,” she said.

However, she said that although innovative contracting specialists will likely embrace reverse auctions, instituting the approach agencywide will take time. “Change management issues in a federal government agency are always a bit of a challenge,” Read said.

Wyld, too, said reverse auctions should be implemented with care. However, he added, “hill by hill, staffer by staffer, people will change after hearing firsthand stories of savings.”

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Reader comments

Mon, Jul 16, 2012 michael

can you do a reverse auction for a service you already have a contract for?

Wed, Jun 27, 2012 Wash DC

Interestingly enough I just used the Fedbid site to post a requirement that I had originally already quoted directly to my customer as a GSA schedule quote. The total size of the requirement as quoted originally is roughly $890k. Now that this on Fedbid the customer will be shelling out an additional $26.5K to source the sames items that were quoted directly. How exactly is that saving money? How is this responsibly using our tax payer dollars? For my part I have never seen Fedbid save the customer money and I believe that the "proposed savings" are not real.

Thu, Mar 8, 2012 Saving!

There is no real resultant savings. Each level of management will shave off part of the saving(!) as awards, bounues, promotions, etc. until the supposed savings has been wiped out (and then some).

Mon, Dec 26, 2011 Eric Sullivan West Palm Beach, FL

Is the main selling point - the savings - being understood, documented, analyzed, and communicated accurately to senior officials and other decision makers? Or might the savings really be much less if any at all? First, the article makes clear that the State Department based the calculations of its savings on an Independent Government Estimate (IGE). It is widely the case in the federal acquisition community that IGE’s for commodities (the primary substance of reverse-auctions) are typically based on a single commercial quote to provide the items required. Thus, IGEs for these items are neither independent nor do they originate within the Government. That doesn't make for a good benchmark for estimating savings. Second, and much more importantly, calculating savings off of an IGE does not equate to real savings. To calculate the real, realized savings of reverse-auctions, one needs to compare the savings from reverse-auctions to what would have been saved in the absence of reverse auctions. There needs to be a valid benchmark. Calculating savings off of an IGE and indicating that the use of reverse-auctions saved a certain amount as if that entire amount is new savings that would not have otherwise been realized ignores the fact that standard procurement methods other than reverse-auctions typically already save a significant amount off of the IGE due to the benefit of competition requirements! To demonstrate real savings, the outcomes of reverse-auctions need to be compared to a benchmark showing procurement outcomes and savings in the absence of reverse-auctions. This has not been done anywhere in the Federal Government to the best of my knowledge, nor do the studies mentioned by Professor Wyld calculate savings based on a benchmark that demonstrates real, realized savings. Third, there is no accounting for the potentially costly impact of the fees charged by companies like FedBid. Companies like this, which provided the tool for the State Department, impose a fee up to 3% on sellers when the winning bid is below the IGE. Any smart business is going to account for this fee in their bids and pass along the cost to the Government, thus resulting in instances where the Government pays up to 3% more than they otherwise would have due to this fee. Thus, these fees will offset any savings and the question of whether any real savings are being realized cannot be answered unless a benchmark to procurements in the absence of FedBid is used. Making matters worse, companies are now accounting for an additional fee up to 3% in any quotes they provide to the Government and that are then used as an IGE. The result: up to 3% higher prices less any savings from reverse auctioning. In sum, the real value of reverse-auctions is not understood because the real, realized savings of reverse-auctions have not been documented, let alone analyzed and then used for decision-making. Federal Computer Week would be wise to explore this further.

Thu, Dec 15, 2011 clem munno

Back some years ago, auctioning was not a permissable approach for the Government to acquire goods. As Gocvernment employees were hired who did not have acquisition skills (like contract law, negotiations and contract managment) some people turned to reverse auctioning so that they could get things done and "think" that they were saving money. As you may note above, the IG used GSA pricing to show that money was saved through reverse auctions. GSA pricing is very high. They get their prices by asking vendors what their most favored commercial customers are and the prices they charge them. They generally ask for 5 to 8 percent off those prices and make award at that. GSA does not even use three year purchase trends regarding how much business is put through a contractor's schedule and renegotiate larger discounts. There are contractors who sale between $500M and $1B dollars through their schedules and do not offer any greater discounts. However, when you conduct a well, planned competitive acquisition using skilled contract specialists (not many of those around)you can get discounts of 30% to 55% off commercial products. State Department made themselves look good because they created the facts and told a good story. However, if you truly investigated what they purchased through reverse auctions and compared them to something besides GSA schedules, you would find little if any savings and I didn't see any discussion on the quality of goods purchased and the reputation of the vendors they were purchased from. The first thing contracting people need to learn is "you never get anything for free." You don't get high quality, performing products cheap.

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