THE BELTWAY AND BEYOND

Reverse auctions need regulatory guidance

Stephen M. Ryan

Auctions used to be a dirty word in federal procurement, but the Internet buying model, touted in TV ads by one-time Star Trekkie William Shatner, has a certain appeal.

In fact, the latest weed to take root in contracting for information technology products is the so-called reverse auction. Post requirements for a given commodity, add some technical leveling, and set up a Web site where the vendors engage in a bidding war for a limited period. The lowest bid wins, and savings mount when several agencies aggregate their requirements for a single auction.

The Army, Navy, General Services Administration and others are running pilot programs of reverse auctions. The Senate version of the Defense Department authorization bill contains language urging the entire DOD to conduct reverse auctions and report back to lawmakers by March 1. Everyone seems to be on board.

Yet reverse auctions represent a fundamental clash of important public-policy values. The problem is that reverse auctions are antithetical to the principle, so carefully crafted during the 1990s, of using best value and past performance.

A reverse auction by definition must result in an award based purely on price. It does not permit differing technical evaluations of competing products because then the bids would have to be weighted.

How well a company performed in other contracts doesn't matter when price is the only issue.

I find it intriguing that the first reverse auction conducted by the Naval Supply Systems Command was for recovery sequencers, the brains of ejection seats used in several warplanes. The Navy claimed the resulting price was approximately 29 percent lower than previous buys'a pretty good savings.

But my former boss, retired Sen. John Glenn of Ohio, used to joke on the rubber- chicken circuit about being strapped in his Mercury capsule on top of a giant booster rocket, both of which had been made by the lowest-price bidder.

It is indeed ironic to have such a critical safety item as the product for a prototype reverse auction. I hope, for pilots' sakes, these sequencers really are commodities with equal quality and dependability.

Leave it to case law

Based on comments from its staff, the Office of Management and Budget likes the notion of permitting agencies to experiment and letting case law determine how things finally work out. Still, this is an idea that might need to yield to more definitive guidance.

The Federal Acquisition Regulation Council could help agencies by providing some written guidance as to when reverse auctions ought to be used. Such guidance should focus on volume purchases of truly commodity items. The regulations should also warn agencies away from purchasing specialized IT products and services this way.

But even FAR guidance would be insufficient. For example, are PCs truly commodities? They are interchangeable, but quality levels vary. When I bought a home PC, I chose a trusted brand name. I drew on the company's customer service and warranty.

Similarly, for agency buyers it's not enough to require a minimum of boilerplate terms and conditions, ignoring past performance and a record for service and warranty compliance.

I doubt mere price advantage would make up for poor quality and service. FAR guidance could help here, too.

If the Office of Federal Procurement Policy is even thinking about drafting reverse-auction regulations, it should do so in Internet time. A lot of damage could occur in, say, 18 months.

Federal contract law is not clear on the legality of reverse auctions, although it appears that a legal challenge to them would fail.

Recent case law focused on the potential impact of an interruption in Internet access during a reverse auction. The short answer is that if a vendor can prove its service provider went down during the auction, it is likely to get a second chance to bid.

Policy and law have yet to be sorted out. In the meantime, sellers and government buyers alike are dazzled by the potential savings in reverse auctions, as well as the chance to apply cool new technology to an old process.

Stephen M. Ryan is a partner in the Washington law firm of Manatt, Phelps and Phillips. He has long experience in federal information technology issues. E-mail him at SRyan@Manatt.com.

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