Reverse auctions win a bid for acceptance

Reverse auctions win a bid for acceptance

Reverse auctions are 'now considered a best practice for one of the types of e-procurement tools.'

A year ago, reverse auctions were the new kid on the block, so to speak.

The general idea: Turn the auction model upside down by having one buyer and many sellers. The buyer is a government agency with a contract to award. The sellers are manufacturers, resellers or service providers'prequalified by the agency'looking to win the contract.

Bidding during the auction, hosted online by a third-party provider, drives the price down rather than up, until it stops at the best available deal for the goods or services in question.

The idea drew a lot of interest after the Naval Supply Systems Command held the government's first reverse auction on May 5 of last year. It also drew some concerns, among them that the auction model focuses too much on price and not enough on best value, and that vendors would balk at the idea of entering into a competition that might force them to sell products at a loss.

But a year later, the reverse auction has settled in as a useful method for buying some types of goods and service.

'I think it's now an accepted procurement tool. People are learning how to apply it,' said Manny DeVera, deputy assistant commissioner for service development at the General Services Administration's Federal Technology Service.

FTS, in fact, has become a provider of reverse auctions, hosting them through its Web site, at Buyers.Gov, which also offers aggregate buying and a service for getting price quotes quickly. The site was launched last September, joining the ranks of commercial auction providers such as Free Markets Inc. of Pittsburgh.

'We've done about two dozen auctions now,' DeVera said. 'It seems to be taking off. We're past the initial stages of: Is it legal or illegal? It's now considered a best practice for one of the types of e-procurement tools.'

Since NAVSUP's maiden voyage, which saved an estimated 28.9 percent on what turned out to be a $2.4 million contract, reverse auctions have steadily caught on.

Everyone wants in

The military services have been the biggest users, but other agencies, including the Energy and Commerce departments and IRS, have joined in. Meanwhile, the size of contracts negotiated this way has grown.

Last September, the Defense Finance and Accounting Service held what was the government's largest reverse auction to date, saving $2.2 million on desktop PCs, notebook PCs and printers with an original cost estimate of $10 million.

Then in May, the IRS held a reverse auction for 11,362 desktop PCs and 16,354 notebook PCs. The prebid pricing started at $130 million. When the auction closed, the price was down to $63.4 million.

Reverse auctions generally are used for commodities and some services, whether in the federal market or at other levels of government. Many states use the method for high-volume buys of such things as highway maintenance supplies.

DeVera said about half of Buyers.Gov's auctions so far have been for information technology products. In late July, the site hosted an auction for high-end servers.

'It's going to be a major part of procurements, even those that require complex price negotiations,' DeVera said.

'The first year and a half or so was people understanding it, addressing the policy issues,' he said. 'Now we're getting into the practicing, learning mode.'

As for the vendors, DeVera said reverse auctions do make bidding more competitive, but there have been no complaints so far from suppliers. 'They're learning that it's an easy way to bid,' he said. 'Learning the tools is very simple.'

It's 'true competition and dynamic pricing,' DeVera added. 'If people understand it, they'll realize they're really getting competition. The suppliers are going to be forced to sharpen their pencils, and we're going to get better market pricing overall.'

About the Authors

Kevin McCaney is a former editor of Defense Systems and GCN.


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