Reverse auctions make a bid for business

Reverse auctions may seem a consumer-centered technology, but savvy businesses are discovering that by allowing buyers, contractors, and service providers to bid prices down, they save more than just money.

"They save an awful lot of time," says Michael R. Kelemen, acting director of the US Army's Communications Electronic Command (CECOM) Acquisition Center in Fort Monmouth, N.J. "Sometimes time is the most valuable piece of the process."

The reverse auctions -- where interested parties bid a price down from the amount set by buyer -- are finding a foothold in industries where companies often send out RFPs (requests for proposals) or RFQs (requests for quotes) to garner bids on business contracts or supplies. As these processes move online, auctions are becoming a powerful weapon in the procurement arsenal.

"What's driving [reverse auctions] right now is the time efficiency you get out of using them," says William Brandel, research director for e-business at Aberdeen Group in Boston, noting that online reverse auctions can reduce the process from months to a few days. "Buyers, sourcers, and procurement agents are able to make their requests for service known to a much wider audience by combining reverse auctioning with matching engines and marketplaces."

Whereas buyers get a chance to open up their procurement requests and often snag a lower price, sellers participating in reverse auctions can tailor their bids to the bidding progress; this was not possible in a "sealed bid" submission process, where companies requested bids from suppliers by a certain time and opened them all at once, with the lowest bid winning the contract.

"A reverse auction keeps the industry posted of the prices while the [bidding] process is in progress, so there are no surprises, and industry can choose at any time to opt in or opt out," Kelemen explains. "They're not just giving us what they think is their best shot; many times their best shot could be better, but they don't have the chance to change it."

Phil Moore, vice president of sales at Egghead.com in Menlo Park, Calif., has seen the reverse auction work well, from a reseller perspective, when Egghead has participated in reverse auctions at FreeMarkets.com.

"It's really important for you as a supplier to do your homework and know the lowest you could possibly go on a particular deal and still make money," he says. "I think reverse auctions are the future. In terms of bidding and RFQs and so forth, they're clearly the way to go. It's easier, from a supplier standpoint, to do this rather than sitting down and typing up a 40-page response."

Linking small and large

Reverse auctions offer another benefit in that they somewhat level the playing field when it comes to bidding on business. Small companies can use reverse auctions to learn about the negotiation process and how to be competitive on the buying end.

"[Reverse auctions] allow the buyer to see a much larger array of suppliers they might want to work with instead of the one they've been using just because it was local," Aberdeen's Brandel adds.

The US Army first looked into auction technology in March 2000, creating an auction tool with Frictionless Technology that interfaces with the Army's Web-based application for awarding contracts and soliciting and receiving proposals. The tool also contains a "spidering technique" for finding items on the Web, as well as both reverse and forward auction capabilities, says Kelemen, who praises its capability of allowing smaller parties to bid for government contracts.

"We've procured everything from fax machines and computers to lumber and goats," he adds. "Farmers are very familiar with auctions because they're certainly involved with auctions all the time. They struggled a bit with dealing with a Web-based [auction] application, but they certainly understood the auction ideas."

Reverse auctions are also used by the US Marine Corps, Air Force, and Navy, and have been used overseas in London and Germany; other government departments are also beginning to use them. Since the technology was implemented, the Army has conducted about 30 reverse auctions and saved an average of 53 percent of the starting prices, Kelemen says. "I think the result has been the creation of the first Army unified e-market."

Bidding up the future

Egghead.com's Moore says reverse auction technology can greatly benefit educational institutions, government agencies, and large private-sector suppliers because "the bigger the quantity, the more sense it makes." Egghead.com uses NexTag's pricing engine in their online Volume Pricing Center to provide instant responses for larger-quantity product requests, an application of reverse auction technology that Brandel is seeing more often.

"It's sort of like a reverse auction becomes a reverse pricing tool. I see people just starting to become much more market-savvy, using these tools in terms of determining their own pricing as well as their competitors, which I think is a good thing," he explains, noting that companies can use auctions to see what price similar goods are getting on the market before setting prices on their own.

Kelemen expects to further enhance the Army's auction technology to make it more robust, as well as adding best value considerations for reverse auctions so that they will include a variable other than just the lowest bidding price.

"Industry likes the [reverse auction] product because they feel it's fair, open, and honest," he says. "I absolutely think it's going to revolutionize the way government procurement is conducted in the future, particularly as it applies to commercial items."

As the time-and money-saving aspects of reverse auctions catch the eyes of more industry players, Brandel expects companies to want the auctions to be able to tie into their overall financial and procurement systems or be included in procurement packages.

"At the end of the day, it's always good for the market to find what is a fair price," he says. "So if you believe in that, then these are all great tools for the greater good, for finding the fine balance of capitalistic forces."

Making sure reverse auctions are right for youAlthough reverse auctions have many benefits, implementing them incorrectly or at the wrong point can put relationships with partners and suppliers at risk.

* Make sure you understand not only how an auction will fit into the overall business process, but also whether it's the best choice for that particular negotiation or category.

* Observe several auctions before participating in one to get a feel for the bidding and process of a reverse auction.

* Make sure employees are educated about reverse auction process and strategies, because it may be a new experience.

* Do your homework ahead of time if you are bidding in a reverse auction. Find out how low you can go; avoid being swept up in "auction euphoria" and making a too-low bid that will not make money for the company.

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