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A new and controversial procurement tool has been making the rounds at federal agencies over the past four years. Billed as a means of driving product prices to the lowest possible threshold, reverse auctions have promised agencies tremendous savings compared to traditional procurements, and in many cases they've delivered. Reverse auctions work in exactly the opposite manner from traditional auctions. Rather than one seller taking ever-increasing bids from a group of buyers, reverse auctions gather sellers and let them bid against one another in a competition for a single buyer's business. If you've purchased airline tickets on Priceline.com, you've participated in a reverse auction. Among the first federal users of the reverse auction was the Army Communications-Electronics Command (CECOM), which learned of the technology inadvertently. While attending a seminar last year at the Massachusetts Institute of Technology on the use of the Internet as a business tool, officials heard about reverse auctions in use in private industry, says Edward Elgart, former director of the CECOM Acquisition Center. Intrigued, CECOM officials sought the expertise of reverse auction software providers and eventually formed a partnership with Frictionless Commerce of Cambridge, Mass., a startup that never before had conducted business with the federal government. Federal agencies have ventured into reverse auction territory, but they've done so cautiously, determined to get the best value, not just the lowest price. Reverse auctions are designed to bring sellers down to the lowest price the market will allow. That's theoretically great for buyers, but many federal purchasers have expressed their concern that the government could end up with a stock of goods bought solely on the bottom line, rather than for their overall quality. Prior to 1997, federal agencies were prohibited by the Federal Acquisition Regulation from using reverse auctioning. Office of Federal Procurement Policy officials felt the ban was not in the government's business interest since many companies already had seen dramatic savings from using the tool. Once the FAR was changed to eliminate the restriction, agencies were free to consider reverse auctions as a new method of procurement. To combat the problem of subjugating value to price, CECOM designed a reverse auction model that would allow bidders to be evaluated on a number of subjective quality factors, not just the bottom line. The program allows buyers to incorporate such variables as warranties, quality guarantees, discounts and other measures. CECOM selected Frictionless Commerce to provide the software to test a reverse auction for a single secure fax machine last May. CECOM purchased Frictionless' Web-based software because employees could use it with less than a half hour of training. The company licenses its software so that agencies can buy it and then set off on their own into the auctioning process via the Web, which eliminates the cost of building additional infrastructure. The software performs two functions. First, it surveys the marketplace over the Web to help contracting agents pick products to buy. A second function conducts the reverse auction. The auction software also allows agencies to build in best-value elements and auditing features that document which bids came in when. It saves that information for further review. These two features are attractive to federal procurement departments, says Eric Levin, the company's vice president of marketing. Frictionless was able to offer other features, as well. The reverse auction tool enabled CECOM to search the General Services Administration's electronic catalogs-from which it could already directly purchase products-to determine which products were best suited for traditional purchases and which lent themselves to using the new technology, says Levin. Reverse auctions combine the "dynamic pricing" aspect of traditional auctions with efficient desktop technology that is simple to use, say proponents of the technology. Most important to the Army is the ability to implement new business practices necessary for a wider range of e-commerce activities, such as reacting quickly to changing market conditions for products. The pilot also brought together diverse parties, says Matthew Meinert, the chief of CECOM's electronic commerce/paperless office contracting office. The Electronic Reverse Auction Project Team, which led the effort, included experts from CECOM as well as representatives from the Army Materiel Command and the department level. Bucking tradition, the project team let acquisition professionals, not technology developers, design and lead the reverse auction project from conception to choice of software. "That drove the techies nuts," Meinert recalls. Merging the pilot with the Army's business Web pages, says Elgart, made the reverse auction software available to all other Army contracting activities, which can set up and run their own reverse auctions. The Army picks up the licensing fee, which covers the entire service. Meinert adds that the Army is proud of the way it brought the Air Force and Marine Corps into the reverse auction program as partners, a kind of collaboration that is rare among military services. After its initial purchase through reverse auctioning, CECOM acquired laptops and personal computers. The agency then bought electronic components for the Patriot missile at a savings of more than 30 percent off the usual purchase price, says Elgart. He reports that CECOM has saved between 15 percent and 50 percent off prices on the federal supply schedule when using reverse auctions. Meinert says that since the pilot-which consisted of 10 auctions-CECOM has saved $2.2 million by using reverse auctions. To date, the Army has conducted 41 reverse auctions. The significant savings CECOM achieved via reverse auctioning helped it win a Business Solutions in the Public Interest Award, says Steven Kelman, one of the judges, who is former administrator of OFPP and now Weatherhead Professor of Public Management at Harvard University's Kennedy School of Government. But the award wasn't based on savings alone, Kelman adds. In fact, many judges were skeptical about applicants touting reverse auctions simply as a means to achieve big savings. "Many of the judges were very uneasy about auctions as a general matter, and most of the judges were uneasy about price-only auctions," says Kelman. Judges wanted to see initiatives "that didn't just shave a few pennies off the government's administrative cost," but found new ways of structuring the government's business practices, says Kelman. No judge wanted to endorse reverse auctions as a procurement vehicle in all cases, he adds. What made the difference for CECOM was its focus on best value as an essential element of reverse auctioning. CECOM's aggressive play to get Frictionless, which had never before worked with the federal government, also impressed the judges. By eliminating expensive, drawn-out procurements, reverse auctions attract more small businesses to the government marketplace, says CECOM's Meinert. Further, he adds, vendors say they prefer the openness of reverse auctions. In traditional solicitations, businesses have no idea what their competitors are bidding. But during reverse auctions, firms can see their competitors' offers, which are listed under made-up screen names to protect bidders' identities. Meinert says some small contractors-mostly those that have outbid larger suppliers-now are interested in using the Army's tool to conduct reverse auctions for their subcontracts, as well. Frictionless Commerce reaped the benefit of Army's small business leaning and is now targeting the federal government for its products. The company hadn't previously tapped that market, says Jeff Weil, the firm's vice president of services and support. "Clearly there's some advantage in our software to the federal government," he says. Other agencies also have experimented with reverse auctions. The Postal Service used the tool to lease trucks, the Naval Supply Systems Command bought recovery sequencers for aircraft seats, and the Marine Corps has tried reverse auctions to procure lumber. CECOM even used the tool to buy goats, says Frictionless' Levin. "There were guys in their barns logged onto AOL bidding," he says. Reverse auctioning exceeded initial expectations, says Elgart. He believes the software CECOM chose is simple to use, and because it's licensed, the Army continues to reap the benefits of upgrades and innovations in the private sector.
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