A real-time reverse auction can be a significant source of savings — both in time and money — for public procurement teams. They’ve been recognized as a legitimate public tendering format in the US since 1997 and used in federal and state procurement since 1999.
However, over twenty years later, reverse auctions continue to be underused in the public sector.
What is a Reverse Auction?
Unlike a traditional auction where buyers compete to see who will pay the highest price for goods or services, a reverse auction is an online, real-time purchasing technique in which suppliers present successively lowered bids during a scheduled period of time. While ordinary auctions see bidders competing to win a product or service, in online reverse auctions, two or more suppliers compete to win the procuring organization’s business.
Reverse auctions are used to obtain the best price for goods or services by encouraging competition among multiple suppliers. They are conducted using automated reverse auction software.
A reverse auction will typically occur at the end of a thorough bidding process. Their success relies on clear specifications and a good understanding of the market. Like any other purchasing process, a reverse auction process is not a silver bullet! But used judiciously and strategically, many reverse auctions offer significant benefits to your procurement function.
What Can You Achieve Through a Successful Reverse Auction Process?
- Cost savings. In the first round of a reverse auction process, initial savings are typically around 20% (although savings of 64% and higher are not unheard of!) Whether or not you see significant savings every time, using a reverse auction ensures that you are achieving the best market price at a given time.
- Market intelligence. The process gives buyers insight into where suppliers stack up in competitive markets, as well as the strengths and weaknesses of certain suppliers.
- Reduced procurement cycle times. Reverse auctions allow teams to compress the timelines of lengthy negotiations, and reduce the administrative burden of the entire process for both buyers and suppliers.
- Transparency and fairness. Reverse auctions provide all suppliers the same information at the same time. For suppliers, there is less guesswork on pricing. For organizations, there is a reduced opportunity for bias, or the influence of a persuasive salesperson to impact the decision.
- Thorough documentation. Reverse auction platforms ensure all bids are recorded and cannot be manipulated, ensuring a thoroughly documented decision.
3 Common Myths About Reverse Auctions
Anyone who has experienced the adrenaline rush of participating in an auction — whether in person or vicariously through popular shows like Storage Wars — knows that the rapid-fire competition and the promise of getting a good deal are hard to resist.
Reverse auctions provide that same thrill in public procurement. Reverse auctions can be a highly effective tool for public sector procurement teams to achieve lower purchase costs and save time on lengthy negotiations. However, they are not widely used thanks in part to some pervasive myths.
Let’s take a look at the truth behind three common misconceptions:
Myth: Reverse auctions are a form of bid shopping.
There’s no question that bid shopping is an unacceptable practice in the world of public procurement. However, the two are not the same.
Bid-shopping occurs when the buyer seeks out a lower price from a supplier by privately revealing another supplier’s price (without that supplier’s knowledge or consent). In contrast, reverse auctions give all suppliers access to the same information at the same time. For that reason, reverse auctions are a fair and transparent practice (The Procurement Office).
The benefits of this transparency extend to suppliers, too. Suppliers report that reverse auctions provide an even playing field and take the guesswork out of pricing that often occurs in a traditional bidding process.
Myth: Reverse auctions favor larger suppliers.
There’s a lingering concern that reverse auctions shut out smaller players. In fact, the research disproves this: in a survey of reverse auction activity at four agencies, the United States Government Accountability Office found that 86% of auctions awarded (valued at more than $22 million) went to small business (Government Accountability Office).
Reverse auctions are used to help small suppliers compete due to the low barrier to entry and greatly reduced time investment. And when you consider that eBay has been around since 1995, concerns about suppliers’ technical ability to participate in an online auction process are receding.
Clear and proactive communication with all suppliers, large and small, is a necessary prerequisite to a successful auction that produces many competitive bids submitted. Teams can take the following steps to assuage fears about supplier participation:
- Clearly communicate to potential suppliers how the process will work, from posting to award, and the logistics of participation;
- Choose a simple and easy-to-use reverse auction software platform;
- Consider holding a practice event to ensure suppliers are comfortable with the software;
- Answer questions to minimize the unknowns; and
- Be available during the auction by direct phone and email, in order to address any questions as they come up (NASPO).
Myth: Reverse auctions are an unsustainable practice for cost-cutting.
Another pervasive misperception is that reverse auctions yield unsustainably low prices, resulting in a short-term gain that backfires in the long run. However, both private and public sector reverse auction activity shows significant time and cost savings over successive years.
Massive cost savings, such as this school board’s 64% savings on their hamburger patties contract, are certainly possible with reverse auctions in their first use, as you can expect a large margin to be cut off the purchase price. In subsequent uses, you cannot expect the same magnitude of decreases, or your suppliers would soon be out of business. Nevertheless, if used judiciously, competitive bidding through reverse auctions ensures that buyers get the best possible price at that moment through real-time market pricing (Reverse Auction Research Centre).
Reverse auctions are a proven tactic for procurement in the long-term — not as a golden ticket, but as a complement to your overarching procurement strategy.
Ready to Learn More About Online Reverse Auctions?
Euna Procurement offers many strategies for integrating electronic reverse auctions in your procurement process. Talk with one of our experts today to learn how you can leverage a reverse auction through procurement tech to achieve more competitive pricing offers.
