Feds Shift Reverse Auctions Into Gear

Feds Shift Reverse Auctions Into Gear

Steve Kelman

By Nick Wakeman, Staff Writer

After 281/2 minutes had elapsed in the Navy's first reverse auction, Capt. Kurt Huff thought he might have to start looking for another job.

With just a minute and a half left in the planned 30-minute auction for ejection seat parts, only two bids had come in. Not the stellar start to a new acquisition method that Huff, director of contracts at the Navy Inventory Control Point in Philadelphia, had wanted.

But things can change quickly in a minute and a half.

The three vendors began submitting bids to beat the deadline, and Huff watched as the price dropped.

With bids continuing to come in, the auction went into overtime, going beyond the original 30-minute limit. As long as the bidding continued, the Navy could extend the length of the auction.

In the end, the auction lasted about 50 minutes and saved the Navy about $1 million.

"It was quite an exciting event," Huff said at an Aug. 2 General Services Administration conference on government auctions.

Since that May auction, the Navy has conducted two others. One for shipboard berths saved $2.8 million over five years. The results of the second, for mobile MRI services, are not available yet. A third auction is planned for ship camels, which are large pads that protect boats and docks.

The Navy's positive results are what others in government and industry are hoping for as reverse auctions, in which prices are bid down rather than up, become the next big thing in government procurement.

"The government is just starting to wet its feet," said Michele Dyson, chief executive officer of CISGlobal in Silver Spring, Md.

CISGlobal is one of several companies that GSA has tapped to provide auction services to government agencies as part of its Buyers.gov pilot program.

Commercial companies that have tried auctions are saving 20 percent to 30 percent, Dyson said. "This is the future," she said.

Other companies in the pilot are Affiliated Computer Services Inc. of Dallas, Electronic Data Systems Corp. of Plano, Texas, FreeMarkets Inc. of Pittsburgh and KPMG Consulting of New York.

FreeMarkets has been running the auctions for the Navy, but those auctions are not part of the GSA pilot.

In addition to the GSA pilot, the start-up FedBid.com of Germantown, Md., was launched in June, creating a site where government credit card users can aggregate their purchases and get better prices through an auction process.

The company has run several auctions and has more than 200 vendors signed up to sell through the site, company officials said.

The Navy also is developing its own contract for reverse auctioning services.

The companies lining up to sell auction services to the government build their businesses around four basic payment models:

? Charging a percentage based on the value of the auction;

? Charging a fee based on the amount of money the government saves;

? Charging a fixed fee;

? Selling the agency a license for the auctioning software.

"A lot depends on how much service you want," said Stephanie Ambrose, program manager for governmentwide programs at EDS. "We can do everything and run the auction for you, or we can train the agencies and they can run the auctions themselves."

While it is difficult to calculate the potential market for providing online auction services, EDS sees such promise in both the government and the commercial markets that it has set up a subsidiary, eBreviate, to pursue the auction and online sourcing business.

FreeMarkets, which has been selling online auction services in the commercial market for five years, uses a fixed-fee approach. The fee is based on factors such as what is being auctioned, the volume and the complexity of the auction.

At FedBid.com, the payment method is a percentage of the total value of the product purchased. The rate is less than 1 percent and is paid by the company that wins the auction, said Phillip Fuster, chief executive and president of FedBid.com.

Fuster claims that the vendor that wins the auction makes back FedBid's fee by the savings realized in lower credit card and other fees.

ACS, which has partnered with Volumebuy Inc. of Tarzana, Calif., and SupplierMarket.com of Burlington, Mass., on its Buyers.gov team, also is using a transaction fee as its business model, company executives said.

Charging a licensing fee may cost an agency more over the long run, because the agency likely will be paying the licensing fee even when the software is not being used, said Raj Raghu, program manager for ACS' B2GExpress.com team.

Charging according to the amount the agency saves also is problematic, he said. "Savings are a nebulous thing," Raghu said.

Determining the baseline can be difficult and then, after the first year, the rate of savings drops, he said.

Vendors that want to sell through an auction and customers that want to buy need to be educated about what an auction can do ? and what it cannot, said Ted Carter, director of public sector business for FreeMarkets.

"We don't see it as a panacea for everything, but there are broad applications," he said.

Auctions can be used to buy everything from commodity products like coal to more complicated purchases such as call center services, Carter said.

The attraction for the government is that it is a way to achieve savings painlessly.

"No one gets laid off and you don't have to do a major restructuring," Carter said.

But others worry that auctions put too much emphasis on price, which runs counter to the trend in recent years of making procurements based on best value and not just the lowest price.

"We have to be careful," said Col. Jeffrey Parsons of the office of the assistant secretary for acquisitions in the Air Force. "We have built up trusted relationships with our vendors."

Margins, especially in the information technology field, are very tight, and auctions will squeeze them even tighter, government and industry officials said.

"We want a healthy industry and they need to be able to have the margins to invest for the future," said Ken Oscar, acting administrator of the Office of Procurement Policy at the Office of Management and Budget.

But auctions and procurements based on best value are not mutually exclusive, according to the companies trying to sell auction services.

Nearly all of them can calculate parameters such as past performance, warranty features, delivery schedule and other criteria besides price into how the winner of an auction is picked.

Also, an auction can be just one part of a procurement.

"A reverse auction is a tool that allows us to get price component of a best-value decision," said the Navy's Huff.

Though the GSA pilot is focused on information technology products, Steve Kelman, a former OMB official and now a Harvard professor, said other areas would make better auction markets.

"I'm befuddled by the early emphasis on IT," he said. Blanket purchase agreements and the GSA schedule already are bringing the government very low prices, he said.

Executives are taking a wait and see approach at companies like GTSI Inc. of Chantilly, Va., which has built its business on selling commodity products to the government.

"We are somewhat dubious, but we are also experimenting with it," said Joel Lipkin, senior vice president of customer sales support at GTSI.

The company has participated in auctions, but Lipkin said he doesn't think auctions for commodity products will bring the government more savings.

"I absolutely believe the Web is the future for commodity procurement, but I'm not convinced that reverse auctions are going to be the most effective way to do it," he said.

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