FedBid fights back against reverse-auction critics

Reverse auctions have absorbed a fair bit of criticism recently and FedBid, as the reigning king of the reverse auction space, has taken a few blows – but the company’s president, Joe Jordan, is fighting back.

A December 2013 GAO report highlighted the fact that roughly one-third of FedBid’s reverse auctions involved only one bidder and/or one round of bidding – no competition there – and that federal agencies were paying FedBid millions every year to facilitate the competition-free auctions.

In March, a panel of industry insiders decried sloppy acquisition practices surrounding reverse auctions, and on Monday the New York Times ran “’Reverse Auctions’ Draw Scrutiny,” a less-than-favorable look at reverse auctions and, by necessary association, FedBid.

Investor and sports business mogul Ted Leonsis, who sits on FedBid’s board of directors, quickly penned a defense Monday, and FedBid’s president of public sector Jordan struck back Tuesday, saying critics aren’t presenting data in the right context.

“It was disappointing that (the Times article) didn’t present a more holistic analysis of the benefits of and questions raised by reverse auctions,” Jordan told Washington Technology.

For instance: FedBid’s auctions may draw no competition nearly one-third of the time, but Jordan said that number should be compared to traditional procurement methods.

Pulling data from Federal Procurement Data System, Jordan’s team found that, while FedBid auctions produced single-bidder purchases 27 percent of the time in fiscal 2012 (for the four agencies studied by GAO), the rate of single-bidder purchases produced by traditional procurement methods was 10 percentage points higher (for those same four agencies).

Jordan calls this “the FedBid Effect.”

Does FedBid earn its fee?

“(Agencies using FedBid) save money and increase small business awards,” said Jordan, adding that FedBid’s management of reverse auctions “frees up time for acquisition officers, which can be plowed into complex procurements.”

That’s a linchpin of Jordan’s case: FedBid can effectively supplement procurement practices by handling routine acquisitions, all at a cost-savings for agencies.

But does that make FedBid’s fee worth it?

The Times article made much of FedBid’s up-to-3 percent fee, which netted the company $13.4 million off of $828 million in contracts for the four agencies GAO studied in FY2012.

The Defense Logistics Agency, by comparison, runs its own reverse auctions in-house using Procurex software. DLA paid Procurex a mere $288,000 in fiscal 2012, while awarding $25 billion through reverse auctions, the Times said.

But FedBid isn’t taking agencies for a ride, Jordan said – FedBid earns its fee through active support and management throughout the reverse auction process.

“Other reverse auction tools (such as the one used by DLA) are self-managed,” Jordan said. “You’ve got to account for labor hours, IT support, all of that.”

FedBid has two teams working out of its Vienna, Va., offices: one team of about 60 dedicated to supporting government buyers and another team of roughly 150 working with FedBid’s nearly 70,000 suppliers.

The teams grow by another 100 or so temporary employees during the fourth quarter of each fiscal year, Jordan said, when contract award numbers spike.

FedBid’s teams act as auction shepherds, watching for things like “too good to be true” prices (which could indicate a seller who won’t deliver) or unrealistic target prices and offering buyers and sellers guidance throughout the process.

FedBid also uses a patented system that deploys an agency’s target price as a “ghost bid,” which can lead to savings in a single-bidder scenario as the seller, unaware that they are the only bidder, competes against the agency’s target price.

“We save our customers 11 percent on average, and that savings includes fees,” Jordan said. “The fee is performance-based; we only get paid if the agency thinks we’ve provided excellent value.”

That is to say, agencies don’t pay FedBid unless they award a contract. If no suppliers meet an agency’s criteria for a bid, that agency is free to withdraw without paying, meaning FedBid provides a bit of free market research for government buyers.

Furthermore, Jordan said, FedBid will sometimes reduce its fee -- occasionally eliminating it altogether, though he didn't say how often it happens.

When arbitrating reverse auctions, FedBid receives bids from sellers and then tacks on its own 3 percent fee (with a $10,000 cap) before showing the complete price to the would-be buyer.

If FedBid's fee would push a seller's bid over the buyer's price ceiling, however, FedBid will cut the fee to keep the bid viable, Jordan said.

Shrinking share, growing market

FedBid dominates reverse auctions; the GAO reports that FedBid facilitated over 99 percent of the reverse auctions listed on FedBizOpps in fiscal 2012.

However, reverse auctions account for a scant 1 percent of the roughly half a trillion dollars in annual federal contract awards.

If reverse auctions gain in popularity – Jordan ballparked the technique would be appropriate for 10 percent to 15 percent of federal acquisitions – FedBid has virtually nowhere to go but down in terms of market share.

Jordan’s not worried.

“Our biggest challenge (going forward) isn’t a particular competitor,” Jordan said. “It’s getting people to embrace change.”

Jordan said he could see the dollar value of reverse auction procurements “doubling or tripling in the next five years,” supplying FedBid with steady growth opportunities even if competitors make inroads.

"I love competition," he said, welcoming newcomers to the reverse auction space with a chuckle.

Facilitating competition is, after all, his job.

Limited, but potent, potential

“I ended up here because I saw reverse auctions as such a useful procurement tool,” Jordan told WT.

Prior to joining FedBid in January, Jordan served as the administrator in the Office of Federal Procurement Policy, in which capacity he said he saw the potential value of reverse auctions.

Jordan used FedBid-supplied price data to build datasets for RFP-EZ, a tool to help small businesses win contracts, and the ease of working with FedBid was “kind of an ‘a-ha! moment.’”

The average value of a FedBid contract is $40,000, and 78 percent of contracts awarded through FedBid go to small businesses.

Many contracts are not suited for reverse auctions, Jordan said, due to issues of size or technical capacity, but for the $50 billion or so in annual procurement that is ripe for reverse auctioning, Jordan said he’s confident the practice can support small businesses and maximize value for agencies.

So who’s against reverse auctions? Big, entrenched businesses who don’t want to see their existing relationships with agencies threatened by price competition, and some on the Hill who may have an incomplete understanding of the technique, Jordan said.

Going forward

The Federal Acquisition Regulation banned reverse auctions until 1997; now it’s silent on the practice, and Jordan said that silence is a good thing.

“Anything not specifically banned in the FAR is to be allowed,” Jordan said, stressing that the open language promotes innovation and worrying that pressure on the Hill could lead lawmakers to regulate the practice in purely restrictive, not productive, ways.

Problems exist, Jordan acknowledged, saying the incidence of non-competitive auctions is troubling.

“But we run the danger of making the perfect the enemy of the good,” he added.

On the whole, he’s confident that reverse auctions are a tool for good – and as one of the relatively few tool-makers in the game, FedBid is poised for great things.

“Myth-busting still needs to happen; we have to continue to legitimize reverse auctions,” Jordan said. “But I see tremendous opportunities for growth in reverse auction volume.”