Going, going, gone - to the lowest
Reverse auctions cut costs for buyers and suppliers
by Sid Tafler
Coming soon to a purchasing department near you: web-based, real-time, fast-as-the-speed-of-light reverse auctions. The "Next Big Thing" in Internet technology, reverse auctions - where the prices go down instead of up - are designed to squeeze the best possible deal out of suppliers of goods and services to business and government, all between coffee break and lunch.
Reverse or downward auctions - part of a world-wide shift to electronic, web-based procurement and an even larger trend known as the auction economy - offer benefits to suppliers. Auctions level the playing field, increase opportunities and drastically reduce the cost of bidding for government contracts - costs like travelling to meetings, schmoozing clients and the blizzard of phone calls, faxes, e-mails and forms tied up in the tendering process.
If you haven't heard of reverse auctions in B2G (Business-to-Government) transactions, rest assured, you'll be hearing about them from purchasing agents or colleagues soon. If you're a buyer or seller of government goods and services, you'll probably be involved in one in a few months.
If you're net-worthy, you know about eBay, the mind-boggling web network of literally millions of simultaneous auctions of everything from pre-war pogo sticks to the family farm. And you may know about Mercata, a consumer site that features shrinking prices for goods like TVs and baby strollers, a kind of reverse auction where the number of buyers of a specific item determines the price.
At the business level, reverse auctions are already a multi-billion-dollar trade in the United States, involving everything from steel, chemicals and plastic, to car rentals, electricity, even part-time labour. Estimated total dollar volume this year is $79 billion, says Dick Shippee, director of communications for eBreviate, one of the major online auction sites in the US.
The General Services Administration, the giant purchasing agency at the hub of the $200 billion US government procurement market, expects to complete 100 reverse auctions by the end of this year. Savings have been substantial, reports Manny De Vera, an IT director with the US Federal Technology Service. The US Department of Commerce, for example, achieved a 10 percent reduction on a $350,000 order of computer network equipment.
"Some people see this as a new thing, but auctioning may be the world's second oldest profession," says De Vera. "Now the new technology allows us to implement the global economy, to link suppliers and buyers all over the world."
Savings realized from reverse auctions can benefit sellers as well as buyers, De Vera says. For example, a computer supplier will typically spend $30 to process a transaction, even for a single machine. If government departments get together and order 1,000 PCs through an e-procurement website, the supplier will save thousands of dollars in processing fees.
Using the example of an order of 1,000 PCs, here's how a B2G reverse auction works. A government agency somewhere in Canada consolidates all its requirements for personal computers for the next year. It posts its request on its e-procurement website, developed in partnership with a web-commerce company. A dozen potential suppliers respond. They all proceed through a period of qualification that deals with delivery, set-up, schedules, training and a list of other supply factors. Six make the final cut and are pre-qualified to bid on the contract.
On the scheduled day and time, say 10 a.m. EST, the two-hour auction begins with an opening price posted on the website by the government agency, based on previous purchases. The suppliers vying for the contract start bidding downward, knocking a few percentage points off the opening bid in the first few minutes.
As the clock ticks and successive bids cut the price, sweat beads form on brows across the country as suppliers' eyes ping pong rapidly from the auction site to their own databases. Ten minutes before the auction is scheduled to end, the bidding intensifies. A bid posted at 11:58 sends the process into 15 minutes of overtime. It's extended by another 15 minutes by a 12:13 bid.
Finally, the bidding ends at 12:30, and the low bidder is declared the winner - or maybe not. In a downward auction, the buyer may tell the bidders up-front that the lowest price may only be one parameter in deciding who wins the contract, so you may get the contract even if your bid is second best. That's what happened to Thinkpath of Toronto, which won a $12-million casual labour contract for IT support staff from EDS Canada in March due largely to Thinkpath's advanced web-based information service, part of the company's bid.
As you can see, the process is intensely competitive - and very fast.
It's also transparent - to those involved - and closed by Internet password to all others. And it's a far cry from the traditional sealed bid, which features secrecy at all levels until the winning price is announced at the end of the process. The transparency can be tough on suppliers, says Thinkpath executive VP Tony French, who oversaw the bidding for his company. In an online reverse auction, the specific bids are posted anonymously, but bidders' identities are often easily surmised. This increases the stress level for the supplier who just revealed to his competitors that he'd go 10 percent below his usual price, and twenty minutes later, 15 percent.
Suppliers need no special software, just an Internet connection and a browser - and nerves of steel. The Internet auction house, sometimes called an exchange or e-market supplies the software, infrastructure and strategic backbone behind the bidding. One of the biggest in the US is FreeMarkets, based in Pittsburgh, which boasts $7.6 billion in market volume and $1.5 billion in customer savings in five years of business.
In the near future, it is likely that the invisible gavel will determine hundreds of Canadian public and private procurement contracts. The electronic intermediaries may be the US-based e-procurement sites or soon-to-come Canadian sites set up in partnership with government.
Alberta is taking the lead in Canada, with plans for a massive e-procurement site with reverse auctions at the core, expected to go live by the end of this year, pending cabinet approval. A web-commerce partner will be chosen to help build the site designed to handle 20 percent of the government's $1.9 billion annual procurement bill - $400 million at a minimum. The entire public sector tab in Alberta is closer to $4 billion and the cities of Calgary and Edmonton and the University of Alberta have indicated a willingness to sign on.
"The business case is attractive," says Stan Hayter, a project manager with the Alberta Ministry of Innovation and Science. "We see reverse auctions as the key to the success of this project."
Hayter estimates the government will save seven percent on its procurement budget - items like office furniture, computers and supplies, but excluding major construction projects like schools and hospitals that are considered too complex for online bidding. But those e-procurement web-wizards may find a way to put those big items on the block as well.
Edmonton-based Information Systems Consulting Group (ISC), already in partnership with Alberta in its Internet-based billing service called iBillz (designed to eliminate paper billing), may have an edge over rivals for the e-procurement site contract.
And Alberta may just be the beginning for the ISC e-procurement site, says CEO Ashif Mawji. "We see this as a pilot project we will have to prove to be successful. We're looking at opportunities across Canada and the US."
Those opportunities are likely to be extensive, as e-procurement and reverse auctions spread across the continent at the speed of the Internet.
Sid Tafler is a Victoria-based journalist who has covered provincial governments in Quebec, Alberta and British Columbia. He is a former editor of Monday magazine.