Reverse auctions losing bid for broad use

Perhaps the most successful federal example of a reverse auction came in 2000, when the Defense Finance and Accounting Service (DFAS) needed 6,200 computers and a few hundred more laptop PCs and printers.

The General Services Administration opened the acquisition to a reverse auction, in which companies try to underbid one another to get the contract. At the end of the process, DFAS had bought its desktop computers, 200 laptop PCs and nearly 1,000 printers at a savings estimated at more than $2.2 million compared with what it likely would have spent under more conventional procurement terms, said David Drabkin, acting assistant commissioner for acquisition at GSA’s Federal Technology Service.

Indeed, the DFAS case seemed to open the door for widespread reverse auctions, Drabkin said. “Reverse auctions were de rigueur for government contracting,” he added. “Everybody was getting involved.”

States got into the act, too. Pennsylvania conducted reverse auctions through Ariba’s FreeMarkets.com to buy coal to heat state office buildings and aluminum to manufacture license plates.

Then the technology bubble burst, and reverse auctions rapidly declined. Now, federal agencies don’t use the procurement tool to the degree that they could, Drabkin said. But that attitude might be changing.

Part of the problem is that some agency officials apparently believe reverse auctions aren’t allowed, Drabkin said. However, “there is no prohibition currently in the [Federal Acquisition Regulation] or in any statute to using reverse auctioning as a tool in government procurement,” he said. “In fact, when you look at the FAR Part 1 we wrote in 1993, [there is] some very helpful language that says if it’s not prohibited, it’s permitted.”

To boost federal agencies’ use of reverse auctions, GSA recently signed a five-year contract with online marketplace FedBid to provide such services.

Reverse auctions work only for some commodity buys, Drabkin said. The approach doesn’t work well for integrated solutions. “It does work very well with off-the-shelf types of purchases, items that can be characterized and quantified,” he said.

Such purchases include computers, peripheral devices, laptop PCs and other products that some agencies order by the truckload, including lower-tech supplies.

Brendan Walsh, FedBid’s co-founder and vice president, said the company’s first year of operation — 2002 — was weak because the technology bubble had just burst.

Now he sees new, more focused light at the end of the tunnel. Since then, the company has facilitated more than 17,000 online reverse auctions for a variety of federal agencies.

Typical buys are worth $2,500 to $100,000, with FedBid receiving a maximum 3 percent fee. Walsh is in the process of expanding the company’s offices to accommodate the growth. He identified the other major factor limiting agencies’ use of reverse auctions: vendors’ reluctance to participate.

“We’ve heard from a few sellers who don’t like to compete,” he said. “Typically, they see themselves losing some contractual or other advantage they may have over their competitors.”

When conducted correctly, reverse auctions can be efficient and quick, said Max Peterson, who has participated in many reverse auctions as vice president of federal sales at CDW Government. But he sees no strong benefits for giant IT suppliers like CDW-G.

In fact, by focusing solely on the best price, the buyer might not get everything he or she expects, such as brand-name products, prompt delivery and compatibility with existing technology, he said.

“CDW sells $6.3 billion worth of [information technology] equipment — that’s an awful lot of leverage when it comes to volume and prices,” Peterson said. “So we scratch our heads when somebody else comes in with a much, much lower bid. That’s when we wonder, is the buyer getting an apples-to-apples comparison?”

Hubler is a freelance writer based in Northern Virginia.