Study hails use of online reverse auctions

The expanded use of online reverse auctions is creating significant cost savings for taxpayers and major efficiency improvements for federal contracting officials, according to a survey released in late December 2010.

The study, the first of its kind, examined the recent expansion of reverse auctions -- a process in which contractors bid against one another by offering lower bids to drive down prices -- at the Customs and Border Protection bureau. Reverse Auction Research Center, an online research site, carried out the survey, which was funded by FedBid, Inc., the reverse auction marketplace CBP uses.

Conducted in the summer of 2010, the survey interviewed 37 contracting officials at CBP, among the most active federal agencies in utilizing reverse auctions. More than 90 percent of participants gave the tool high marks, citing lower acquisition costs, greater competition and a more streamlined buying process.

"Online reverse auctions offer a simple tool for government buyers to clear their desks of simple purchases for commodities and basic services, so they can focus their time and energy on more complicated purchases, direct interaction with their customers and sellers, and other value-added efforts," said David Wyld, a professor of management at Southeastern Louisiana University and the study's author.

The study found that CBP has spent more than $500 million in purchases through FedBid during the past four years. Direct savings on those purchases averaged roughly 10 percent annually during that time, peaking in fiscal 2009 when the bureau saved more than $19 million using the technique, the study concluded. Small and disadvantaged businesses won more than 90 percent of the CBP auctions during this period, the report said.

Diane Sahakian, assistant director of contracting operations at CBP, expects reverse auctions to "revolutionize" aspects of the federal procurement system. "This will change the way buying is done for commodities and simple services," she said. "Within two years, this will be the norm and the way things are done."

In each of the 15 categories surveyed, the contracting official said they preferred reverse auction to traditional procurement methods. Some of the highest grades were for categories such as time savings, managing questions from sellers and ease of use.

"The hidden value from most reverse auctions may not be the savings in money but the savings in time," Wyld said. "With flat staffing and ever-increasing responsibilities, most government procurement offices are being squeezed in a productivity vise, without enough hours in the day to manage the needs of the agency."

The survey asked respondents to quantify the time spent on certain aspects of the procurement process, including collecting bids and amending solicitations. In most cases, reverse auctions made the steps quicker and more efficient, allowing contracting officials to spend more time communicating with sellers and providing pre- and post-award support, the survey found.

"While not necessarily a 'bottom line' savings, the value … for the agency, for its procurement operations and its staff, and ultimately for the taxpayer, is the time freed-up to be repurposed in a better way," the study said.

The survey found that CBP used the auctions to purchase commodities such as information technology, vehicles and communications equipment. CBP also used reverse auctions to buy custodial services, administrative support, and maintenance and repair work.

Some procurement experts, including Dan Gordon, administrator of the Office of Federal Procurement Policy at the Office of Management and Budget, advise against using reverse auctions to procure services. In December, Gordon said reverse auctions often work best when price is the only evaluation factor, which is not always the case when purchasing complex services.

Other procurement observers argued agencies should expand their use of reverse auctions as part of their larger strategic sourcing initiatives.

"Reverse auctions are an effective and efficient means of realizing large savings on purchases of not only commodities, but highly defined services as well," said Jaime Gracia, president and chief executive officer of Seville Government Consulting. "Although current initiatives exist such as the General Services Administration's Federal Strategic Sourcing Initiative, which encourages adoption of industry best practices, federal buyers are simply not going far enough in leveraging their buying power to maximize price savings."