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.”