Reverse auctions (RAs) have been part of the public procurement landscape since the year 2000. Private corporations have been much quicker to implement this tool and, through trial and error, establish best practices that can vary based on the type of business and the types of purchases being run through the system.
Any given entity can apply a multitude of variables to the reverse auction process that can allow for the bidders to receive more or less information during the bid. As public entities began to pass laws and adjust procurement codes to allow for RAs, these variables have been largely ignored. This oversight leaves it up to the discretion of the purchasing agent to make a myriad of decisions for each auction, some of which could potentially compromise the sealed bid process and all of which can have an impact on the success of the reverse auction. Private industry does not face the same challenges as the public world. Private entities simply assess whether or not they have the lowest and best price, and they can change the rules or the process to favor a certain vendor. They may, in fact, use the formal bid process as a starting point to negotiations. These options are not available to public entities, thus making the application of a modern procurement tool like the reverse auction more complicated.
Further complicating the landscape is the consistent effort of vendors, and their service organizations, to attempt to categorize their own industries in such a way that the reverse auction tool would not be appropriate for procuring their services. Specifically, the construction industry has often been successful in convincing governments that their services and projects are far too complicated to be run through the reverse auction process. Experience, however, has proven that the key components to a successful auction are the competitive landscape (the ability for multiple vendors to deliver the same product under the same parameters) and the pricing format that the procuring entity requires. As such, there are almost no limitations on what can be sourced via reverse auctions, including the following examples:
- Raw materials (such as road salt, mulch and sand)
- Processed goods (such as aggregate, chemicals, and polymers)
- Business services (such as landscaping, janitorial services, printing, and bus services)
- One-time capital buys (such as cell towers, construction projects, vehicles or equipment)
Benefits of Reverse Auctions
Reverse auctions ultimately deliver each supplier’s best-and-final offer in a much more efficient manner than the traditional paper bid/down selection process. However, they participate as just one important part of a comprehensive and sound sourcing process.
When implemented correctly, reverse auctions support the goal of strategic sourcing to significantly reduce the cost of purchases, thereby lowering budgets without impacting employee headcount, quality or services offered. Public entities can also gain the following benefits of reverse auctions:
- A supplier funded model that can be implemented at no direct cost
- Greater insight into true market value or pricing
- Increased savings from a more competitive bidding event
- Less time spent negotiating best-and-final pricing
Successful Implementation of Reverse Auctions
The trend for reverse auctions is steadily increasing in both the private and public sector. Analyst firm, AMR Research, predicts a compound annual growth rate of 12% through 2010 for revenue from sourcing applications. However, running auctions is still a relatively new and unfamiliar process for many organizations. Thus, it is important to sell the concept internally to the buying organization. Internal reverse auction goals and strategies should be developed and aligned with specific purchasing groups and departments within the buying organization.
Suppliers are obviously a key component to a successful sourcing event, and reverse auction events are no different. It is important to ensure that suppliers know how they can benefit from the transparency, efficiency, and reduced sales cycle times of reverse auction procurements.
Reverse auctions are a tool that sourcing organizations can use to bring about significant success if executed alongside a well-defined sourcing strategy and process. Careful thought and planning must precede an auction event in order to achieve a healthy competitive environment that delivers double-digit price compression. Organizations that have succeeded in using the tool have the following commonalities:
- A strong mandate with systemic policies that support the use of auctions
- A well-defined process for the use of auctions
- A centralized internal or external point of contact experienced with reverse auctions to drive the adoption through best practices and to minimize pitfalls