Technology

Reverse Auctions Help Agencies Save Money

Agencies are going online where vendors outbid each other to provide goods and services for the lowest possible price.
by | July 5, 2011

From 2005 to 2008, Maricopa County, Ariz., supplied bulk flour for its eight jails, which used 5.5 million pounds over the course of those three years. During that time, the price of bulk flour spiked from 16 cents per pound to 38.5 cents per pound. This price increase made sense to Maricopa County Procurement Supervisor Matt Bauer because the price of flour closely follows gas prices due to distribution costs. But in 2008, when gas prices plummeted from $4.25 per gallon in Arizona to less than $2 per gallon, the flour prices didn't follow suit.

"I talked to a couple of vendors and they said that I was pretty much paying more than if I went to the grocery store," Bauer says. Some vendors (other than his own) told him that if he rebid the contract, he could likely secure flour at 32 or 33 cents a pound. While six cents per pound really doesn't sound like much, Bauer could save tens -- if not hundreds -- of thousands of dollars.

After attempting to negotiate with his vendor, he ultimately cancelled the contract and bid a new one through a different kind of procurement. Called a reverse auction, bidders attempt to outbid each other by providing a service or an item at a lower cost.

Done online, reverse auctions are creating significant cost savings in the public sector. In the nearly two years since Maricopa County began using reverse auction technology, it has saved more than $2 million on items like flour and peanut butter, to name a few. As more governments go online to try out reverse auctions, they're realizing that the savings can be great, but it doesn't mean savings are guaranteed.

There are a few reverse auction companies offering software and/or online services to governments, such as FedBid and BidSync. Using BidSync, for instance, agencies like Bauer's define and upload their RFPs, RFQs and RFIs into the company's online marketplace. If an agency is submitting a fairly complex RFP, it can search the online service to see if another department has something similar. If so, it can copy that RFP, modify it to fit the agency's needs and post it.

If there are questions about the request, there's an online business conference feature where the agency can post answers for everyone to see. The vendors and suppliers then submit their bids against that request.

Bidders' offers can be viewed in real-time by the agency and their competitors. Typically most of the activity occurs in the last five to 10 minutes of the bid, says Shash Cates, product manager at BidSync. As suppliers make competing bids during the final minutes, additional time is added to the clock -- five minutes per bid. This gives competitors another chance to bid lower. At the auction's end, the system can tabulate all the bids based upon criteria the agency has determined in advance. The option and decision to award a bid is completely up to the issuing government agency.

In its first reverse auction, Maricopa County received its first flour bid on day one. It was for half a cent less than the contracted price of 38 cents per pound of flour. On the final day, with five hours left, the second bid came in at 34 cents per pound. By the end, there were four different bidders and eight total bids. The final bid came in at 20.5 cents per pound -- a savings of nearly $1 million over three years for the county, Bauer says.

"From then on we just started trying out other things we thought would do well," he says. "We did beans and we almost saved $400,000. We did inmate shoes and we saved about $30,000 or $40,000. We also did some on peanut butter -- we buy a ton of peanut butter -- and we saved $170,000."

In a reverse auction, an agency doesn't always choose the lowest bidder. For example, the lowest bid for a field roof coating project at Chase Field, home of Major League Baseball's Arizona Diamondbacks, came in at $397,000. But Bauer says that after further assessment the county realized that the winning vendor couldn't actually handle the job, so a company that bid around $500,000 actually won. (In the end, however, even that vendor didn't work out. The entire contract had to be rebid -- and not through a reverse auction. The ballpark decided to handle the rebid itself, Bauer says.)

This particular auction was a lesson for Bauer. Reverse auctions work best with commodities, but "not so well with things where you really have to worry about the quality," he says. Commodities (like flour) work well because any flour vendor is going to offer the same product. When it comes to services, as was the case in the roof coating, specifications and quality of workmanship can differ.

The Connecticut Department of Administrative Services performed its first reverse auction in mid-June and had similar challenges. The department was going to purchase six payloaders (a type of tractor that the Department of Transportation uses) this year and six the following year. Four different bidders went from $133,000 to $115,000 on the contract. In the days following the auction, the department's contract specialist evaluated the written responses in terms of these vendors' qualifications and how they meet specifications.

"Unfortunately, our four bidders failed to meet the specs in a matter that was sufficient," says Director of Procurement Services Carol Wilson, adding that the department will have to re-bid the contract and loosen up on some of the specifications. "It was a great exercise. We saw ... how the auction works, but we learned how rigid the specifications that the Department of Transportation required, and how that can have a negative effect on the result."

Despite initial challenges with reverse auctions, Maricopa County typically does about 10 to 12 of them each year, Bauer says. "Most of the time when we do these reverse auctions, we end up saving a significant amount of money," he says, "especially with the food."

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