Procurement Methodologies Pulse Blog Are reverse auctions a win-win for both parties? The answer depends on who you ask, and as always, “the proof is in the pudding”. If done right, they can be a win-win for both buyers and suppliers. The online reverse auction is a cost-effective way in which a single buyer procures goods or services from multiple bidders using an online bidding platform. In this article, we will share a few tips to help demystify reverse auctions and maximize mutual benefits for both parties.
Most people are familiar with eBay auctions where a seller typically sells a good to the highest bidder. The well-known eBay auction platform facilitates private consumer transactions with multiple buyers competing for a single good from a single supplier. Switch the seller-buyer transaction and roles of an eBay auction and you now have something that is called a Reverse Auction. The online reverse auction bidders are anonymous to each other and compete in a fixed-duration, online transaction by sending decreasing offers in price until a specified deadline, in response to an invitation to bid or request for proposals. In online auctions the seller and buyer alike are anxiously monitoring the bid activity on their screens, hoping for a successful transaction. The same can be said for a supplier and public procurement staff engaged in a reverse auction.
Reverse auctions have been used in public procurement for almost two decades with varying degrees of success. For most buyers using reverse auctions, the main goal is to get the lowest possible price for a good or service in order to drive down procurement costs and achieve savings. Virginia’s Information Technology Agency notes in its 2018 IT Procurement Manual, Chapter 19.2.3 Benefits of Reverse Auctions, that buyers may realize average price reductions of 15% utilizing reverse auctions. Reported price reductions can range from 5% to 90%.
Large corporations and the federal government have been traditional users of online reverse auctions. According to The Government Accountability Office (GAO) 2018 Report on reverse auctions there are more reverse auctions providers since the last GAO review in 2013, including government providers in the marketplace. Eight providers conducted reverse auctions for agencies from FYs 2013 to 2017, with the majority conducted by FedBid Inc.
If you are a young procurement professional, you might already be a fan of this sourcing method. According to a 2017 Scout RFP white paper online reverse auctions have been increasing in popularity, especially among procurement and finance professionals between the ages of 30 and 44.
Below are a few things you should know to maximize your benefits when using reverse auctions in procurement:
Using the above guidelines can help you address some of the potential challenges noted by opponents of this sourcing method who argue that reverse auctions:
do not always guarantee the lowest price;
may encourage race-to-the bottom prices that are detrimental to both buyers, who may not get high quality and standards for the goods/services they acquire, as well as suppliers, who may have not assessed their cost appropriately;
can pose a threat to long-term supplier relationships, or
have no valid method to measure savings.
Are these real challenges, or just myths, stemming from a lack of understanding; or suppliers being apprehensive about competing in the reverse auction space? Poorly planned or administered reverse auctions could result in no competition, no savings, or soured relationships with strategic suppliers. What then should buyers know to make sure reverse auctions lead to a successful outcome and a win-win for both parties?
The conventional wisdom is that reverse auctions are not suited for all commodities and services. However, for some commodities, a combination of competition and collaboration may be employed, using a two-step reverse auction model, where the lowest bidders from the online reverse auction are invited to take part in negotiations with cost being one of the many factors considered for the final award. A recent Institute for Supply Management article: 3 Reasons to Engage in Reverse Auctions noted that reverse auctions have evolved into transactions where competing companies are now evaluated based on other parameters (including quality, service level and delivery method) in addition to the lowest price. Carefully considering when to use reverse auctions can go a long way for the public buyer who is looking to achieve savings for the customer agency or the enterprise.
For example, Virginia’s Code, Chapter 45: Public Procurement Act specifies that goods and non-professional services are appropriate uses of reverse auctioning in section § 2.2-4303. Methods of procurement. Categories for which reverse auctions should be used include construction, professional services, bulk purchases of commodities and aggregates used in road and highway construction and maintenance of structures.
Buyers and suppliers alike see the benefits of reverse auctions. The image below shows the most-recognized advantages for both parties participating in a reverse auction transaction.
Buyers and sellers should engage in reverse auctions as long as the right type of auction is chosen for the appropriate goods or services to maximize its benefits. Reverse auctions can be impactful and produce a mutually-beneficial outcome when they are not solely used to get the lowest price.
Do you have a success story to share about reverse auctions? What are the top three goods or services your public agency has recently used reverse auctions for? Email me at emoreland@naspo.org. We’d like to hear from you!