Reversal of Fortune

Four years ago, after hearing the buzz about reverse auctions, leaders of the Army's Communications-Electronics Command (CECOM) decided to give the high-tech procurement tool a try. In short order, CECOM set up two online auctions seeking bids from vendors to provide notebook computers and secure fax machines. After paying an average of 37 percent less money and weeks of time over traditional procurement methods, CECOM officials were sold.

Other federal agencies soon jumped on the bandwagon. The Postal Service, for example, used reverse auctions to lease 4,600 trailers designed to carry mail. Managers were delighted by the results-costs fell by more than 11 percent and procurement time dropped by 30 days. When the General Services Administration endorsed them and agencies showed frenzied interest, the future of reverse auctions in government seemed assured.

Fast-forward four years. Reverse auctions still are alive and well, but the initial exuberance has ebbed. Agencies have taken a step back, realizing that reverse auctions aren't the only procurement tool in the arsenal and that they aren't always appropriate. "In the government, sometimes we get carried away. We find something that looks good and we try to make everything fit into it, but deep down we all know that one size never fits all," says David Drabkin, deputy associate administrator for acquisition policy at GSA's Office of Governmentwide Policy. "Today, we know that reverse auctions are a good tool in certain types of acquisitions and in certain situations."

QUICKER AND CHEAPER

While reverse auctions aren't always the answer, they serve two important functions: buying off-the-shelf technology for the best possible price and negotiating the best deals on agency-specific products later in the procurement process. Reverse auctions are most commonly used to purchase standard commercial products-everything from automobile parts to PCs. Reverse auctions still make sense in cases like these, but only if the agency's needs are clear, says Alan Thomas, global account manager for the public sector at FreeMarkets Inc. of Pittsburgh, Pa. "The rules of thumb haven't changed," he says. "In order for a competitive negotiation to be successful, you need to have a certain number of suppliers to create meaningful competition. You need to be able to describe the service or goods you're looking to purchase in enough detail to get an apples-to-apples comparison."

"Reverse auctioning requires buyers to have a fairly precise understanding of their requirements," says Larry Allen, executive vice president of the Washington-based Coalition for Government Procurement, an industry association representing companies that sell to the federal government. "But when you get into a systems integrated solution, there needs to be a greater understanding of what a customer wants, and that comes through discussions with the customer. Reverse auctioning doesn't enable the give-and-take you might need for a more complex procurement."

But CECOM still uses reverse auctions to garner the best price on specified items, along with sealed bids and long-term contracts, depending on the situation. The organization conducted 38 reverse auctions in 2003 for items such as mounting brackets, transformers, small diesel engines and computers. That's almost a threefold increase over 2000, when CECOM conducted just 13 reverse auctions. Between 2000 and 2003, 107 reverse auctions, conducted with the help of software from Moai of San Francisco, saved CECOM $6 million. "When they are done, they are successful," says Edward Elgart, director of the CECOM Acquisition Center in Fort Monmouth, N.J. "They are easier to set up, and you know the same day you run the auction who the winner will be."

The reason CECOM doesn't conduct more reverse auctions, Elgart says, is that many buyers simply don't know how to use the tool. "As a result, they are either unaware of its existence or afraid to try it because it's different."

THINKING IN REVERSE

Even as the number of reverse auctions levels off, contracting and procurement professionals have become more proficient with online competitions and have discovered other uses for them. The Army Corps of Engineers, for example, recently experimented with reverse auctions as a way to find subcontractors for one of its prime contractors. Many organizations are using reverse auctions to award construction contracts-a concept no one expected would work. Other agencies have started using reverse auctions to negotiate prices later in the procurement process for customized goods and services. When used as a price negotiation tool, the reverse auction takes place after an organization has chosen its universe of contenders through another procurement process. Once all technical requirements have been defined and the only issue left is cost, contracting officers can use the reverse auction to get the best price.

These unusual uses of the reverse auction process require much more knowledge and expertise, Drabkin says, but they're well within the scope of the Federal Acquisition Regulation. Before beginning the actual contracting process, a procurement team must set its requirements and analyze the best way to achieve those requirements. "In the course of that discussion you should be talking about whether a reverse auction would be appropriate at either the beginning [for procurement of commodity items] or as a pricing technique. You would discuss it just like you would discuss how to satisfy your small business requirements or your environmental requirements," he says. "It's a very disciplined process that everybody in the acquisition workforce should be using."

BETTER TOOLS

Vendors have responded to the evolution of reverse auctions by creating products that are easier to use and more sophisticated. Ariba Inc. of Sunnyvale, Calif., for example, didn't even have its own reverse auction tool until about three years ago. The company introduced its first release of reverse auction technology in 2001. As Ariba discovered that organizations wanted to consider other options depending on their requirements, it began to offer more versatile supply management tools, including online procurement tools, says Emily Rakowski, Ariba's sourcing product marketing manager.

The growing popularity of desktop reverse auction software also has expanded the universe of online procurements. Desktop reverse auction software is more sophisticated, and therefore attractive, than it was a few years ago. In addition to market leaders Ariba, FreeMarkets and Frictionless Commerce of Cambridge, Mass., many more vendors have joined the game, including large companies such as Oracle Corp. and smaller vendors such as Global eProcure of Clark, N.J., Emptoris of Burlington, Mass., and Procuri Inc. of Atlanta.

Amanda Silverman, an independent consultant for the Postal Service's supply chain strategies group, says new desktop reverse auction software allows bidders to respond to auctions more easily and permits auctions involving smaller dollar amounts. In the past, a typical reverse auction at the Postal Service ranged from $1 million to $30 million. Today, a project as small as $100,000 can be auctioned. The Postal Service might even conduct a reverse auction for a purchase as small as $40,000, using FreeMarkets and Lean Logistics of Holland, Mich., a vendor specializing in auction technology for transportation. "We're still interested in doing larger auctions with [expenditures] of $35 million or more because we can derive a lot of savings," Silverman says. "But running auctions on smaller [expenditures] opens up a chance to compete the often overlooked smaller requirements in a more effective way than may have been done in the past."

As for the future of reverse auctions in government, the consensus seems to be slow and steady. "They will continue to have a place at the table, but I don't expect it to grow dramatically," the procurement coalition's Allen says. GSA's Drabkin agrees, but says the use of reverse auctions as a price negotiation tool may catch on more quickly as people become more familiar with the concept and the technology used to pull it off. "We'll have more intelligent contracting systems that will help remind people that this might be an option as they move through an acquisition," Drabkin says.


Karen D. Schwartz is a writer specializing in technology and business issues. She has written for numerous publications, including Business 2.0, CIO, Information Week, Electronic Business and Mobile Computing & Communications.
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