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.