Can agencies mine real value from reverse auctions?

Reverse auctions can be a powerful tool, but acquisitions experts say that agencies need to improve how they use this too often misunderstood process to foster more competition.

The experts agree: Reverse auctions are a valuable tool, but how agencies use that tool needs improvement.

The experts also agree that government acquisition officers must maintain control over the process, despite the temptation to hand off responsibility to a third parties.

At the “Reverse Auctions 2.0” Acquisition Innovation Forum last week, ASI Government and Compusearch brought together a panel of industry heavy-hitters: Barry Berkowitz, Commerce Department acquisition director; Rob Burton, former acting administrator of the Office of Federal Procurement Policy; Interior Department acquisition director Debra Sonderman; and ASI’s national security sector director Jim Hiles.

Also on the panel was Michele Mackin, the woman behind the December 2013 GAO report on reverse auctions that sparked much of the forum’s discussion.

Reverse auction issues

The GAO report’s findings are reflected in its title, “Reverse Auctions: Guidance Is Needed to Maximize Competition and Achieve Cost Savings.”

Among the report’s findings: roughly one-third of reverse auctions studied didn’t produce competition or, most likely, cost savings because they involved only one bidder or only a single round of bidding.

In fiscal 2012, the Army and the departments of Homeland Security, Interior and Veterans Affairs paid $1.7 million in fees to FedBid, which dominates the government market for reverse auctions, for single-round, single-bidder reverse auctions. The four agencies shelled out another $1.1 million in fees for multiple-round, single-bidder auctions, the report said.

Agencies think reverse auctions will bring cost savings – and in many cases they do – but the GAO’s findings troubled last week’s panel.

“(Reverse auctions) are a valid and widely-used acquisition tool,” said forum moderator Reid Jackson, Compusearch president and CEO, “but (the panel agreed that) as currently employed there are some major problems.”

Some of those problems, like the lack of competition, might be mitigated by better vendor education, Berkowitz said.

Other issues are deeper-seated.

“Who’s minding the store?” was an oft-repeated question during the discussion, speaking to the fact that some government acquisition officers cede too much control to third parties, like the market-dominating FedBid, when they ought to retain responsibility throughout the acquisition process.

“There’s a real concern about outsourcing (reverse auctions),” Jackson said. “(Acquisition officers) can’t just hand it off.”

Vendors, too, need to better adapt to reverse auctions.

“It is true that vendors do not like reverse auctions,” said Jackson during last week’s forum. “Being viciously pitted against one another is not a pleasant experience for anyone.”

Reverse auction upsides

There is some good news, however: despite fostering price competition, reverse auctions are not always a race to the bottom.

In about one quarter of reverse auction cases, the lowest price doesn’t get the contract, GAO’s Mackin noted, saying the stat was evidence that acquisition officers are evaluating bids based on more than price alone.

Many of the panelists emphasized the fact that reverse auctions are merely one tool among many available to acquisition officers.

“Reverse auctions are not a stand-alone thing anymore,” Jackson said. “They’ve become part of a larger sourcing strategy.”

Mackin also said that the tool can have multiple uses.

“DLA (the Defense Logistics Agency) comes to mind as doing things a little differently,” said Mackin, noting that the agency, which runs its own reverse auctions in-house, uses the technique as a “market research tool,” testing the waters to gauge prevailing prices without committing to contracts.

Key takeaways

Jackson summarized the panel’s suggestion into five broad points:

  1. Acquisition officers must stay in charge of the process, rather than merely floating a contract through a third party and calling it a day.
  2. Reverse auctions are only one tool among many.
  3. Reverse auctions can be part of a larger acquisition strategy.
  4. Reverse auctions are not a replacement for robust engagement and communication throughout the supply chain.
  5. Guidance is needed, and best practices are still evolving.

On that last point, Jackson and the panelists said that there is some movement within government to provide guidance, particularly by amending the Federal Acquisition Regulation, which is currently silent on the practice.

But those pushes could prove counter-productive.

A House Small Business Committee hearing in December found that reverse auctions limit competition and increase costs for taxpayers, and panelists expressed worries that the committee would push to incorporate limits on reverse auctions into the FAR, rather than working towards the comprehensive guidance the system really needs.