5 Things You Should Know About Reverse Auctions
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.