By Steve Kelman

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A return to normalcy for reverse auctions?


This has been a tumultuous year for a buying practice that had been making steady progress in the government marketplace for a decade -- the use of reverse auctions to save money while generating management information on purchases.

There were two sources of tumult. The more dramatic one grew out of a Veterans Affairs inspector general report, which alleged inappropriate behavior involving both VA contracting officials and Fedbid, the leading provider of reverse auction services to government. (Since I have long served on the Fedbid Board of Advisors, any comment I might make about these allegations would doubtless be taken with a grain of salt, so I will refrain.)

The second source was the General Services Administration's entry into reverse auctions with a home-grown government product intended to compete with Fedbid. While having one provider with such a dominant position in the market was certainly not healthy, murmurings that GSA might itself seek to become a monopoly provider created doubt and uncertainty among agency customers or potential customers.

As reported by late last week, Office of Federal Procurement Policy (OFPP) Administrator Anne Rung has issued a memo called "Effective Use of Reverse Auctions" that, I hope, will help the reverse auction ship emerge from stormy weather and resume its forward voyage.

The memo has a positive tone towards reverse auctions. The first section of the memo is called "The value of reverse auctions," and states, "Multiple benefits have been identified in connection with the use of reverse auctions." It goes on to note price reductions brought forth by intensive, real-time competition, as well as very significant small business participation. I would add to the benefits speeding up the procurement process compared to older methods such as getting three bids over the phone. Auctions also create a paper trail of bids useful for audit and management information purposes.

The next section, "Getting the best results from reverse auctions," starts by noting that not everything is suitable for reverse auctions. The memo mentions that for an item to be suitable, there should be substantial competition available in the marketplace for the product or service one is contemplating buying. It adds that auctions are most suitable "when requirements are steady and relatively simple and might otherwise be acquired using either a sealed bid or achieving best value through 'low price technically acceptable' source selection criteria."

On that second observation, I partly agree and partly disagree. It is important the government have a good requirement for what it is buying, and to provide a good description without, unless necessary, specifying a narrow range of solutions. I can also see some value to a stable requirement, but there might well be items suitable for reverse auctions -- e.g. IT -- where requirements change quickly.

Above all, I believe the suggestion the item be appropriate for low bid is too restrictive. At a minimum, the government should be able to do an auction for the price component of a source selection and then look at quality offline, making a standard best-value choice incorporating auction and non-auction data. More ambitiously, there is no reason not to allow participants to bid menus of price and (quantifiable) non-price factors, such as warranty. This is technically feasible, though unfortunately none of the current reverse auction services now offer such a function.

Finally, I would emphasize more than the memo did the value of reverse auctions for second-stage competitions under larger category management contracts. This could maintain competition over time and make it easier for government to benefit from spot-market price reductions.

The memo has a number of other useful suggestions for how agencies can learn to get more value out of reverse auctions. This includes checking data about the number of bidders and price trends, to see impacts of how the agency defines its requirements and other features (such as how long the auction period is) on auction success. The memo also recommends, in the spirit of OFPP's recent 360 Feedback memo, that agencies solicit feedback from vendors who have bid or contemplated bidding -- especially when an agency is just getting started with auctions.

I am hopeful this memo signals a return to normalcy for reverse auctions. The tumult of the last year has not been good for taxpayers, since reluctance to use reverse auctions it created reduces savings opportunities. Competition between Fedbid, GSA, and any other providers who enter this marketplace is (in my personal opinion) a good thing. And agencies not using this tool should now, thanks to the OFPP guidance, be considering it.

Posted by Steve Kelman on Jun 10, 2015 at 6:56 AM


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