Bid for savings: Reverse auctions
Seconds tick by. Vendors submit bid after bid in real time, battling it out to win the business of the campus procurement office. The opposite of eBay, this reverse auction format results in the price going down with each bid.
The campus department puts a specified commodity or service up for bid on a digital platform and gives vendors the chance to earn the business by submitting the lowest price possible.
“The auctions typically last 40 minutes to several hours,” says David Wyld, founder of the Reverse Auction Research Center. A professor of management at Southeastern Louisiana University, Wyld leads the center in researching the benefits of reverse procurement auctions for the private and public sectors of all industries.
Some events have a firm ending. Others are extended by two minutes each time a vendor bids in the last seconds of the auction. In the latter format, the auction ends when two minutes have passed and no additional bids have come in.
“In a classic reverse auction format, the bidder who offers the lowest price wins,” Wyld says. “However, purchasers can also make a final decision on factors like past performance, creditworthiness or proximity to the campus.”
Not only have reverse auctions proven to save institutions over 40 percent on goods and services, but there is a level of transparency not found in the traditional RFP process.
“Vendors can see exactly what their competition is offering,” says Wyld. “The prospect of a bid protest is virtually eliminated, because universities will have a record of who bid what [and] when that is difficult, if not impossible to contest.”
Bid protests are not that common in higher ed, but when they do happen, they take a great deal of administrative and staff time and focus, Wyld says. Bid protests happen in traditional RFPs when an unselected vendor feels the purchasing institution was somehow biased in their vendor selection and files for a review of the selection process.
Experts expect reverse auctions to become more mainstream in the coming years.
“Across the board, everyone is looking for cost-cutting strategies,” says Cindy Sisloff, president of eBridge Business Solutions, a reverse auctions provider. “Reverse auctions are the fastest way to cut costs without cutting services.”
Running a reverse auction allows procurement staff to find out what the market price on a good or service actually is, says Sisloff. “You may have gotten a great price last year, but the market changes often and a reverse auction can help you get the best price for today’s market.”
Using proprietary software to run auctions
The University of California system, like many institutions, has reverse auction software built into a proprietary procurement suite, in this case UC Supplier Registration and Sourcing.
“We ran our first reverse auction to purchase tax-free ethyl alcohol,” says Andrew Clark, the sourcing analyst for campus procurement and contracting at UC San Francisco and UC Berkeley.
The two campuses use 25,000 gallons of ethyl alcohol in their research centers annually. They had previously been spending $400,000 per year for it. After a reverse auction and subsequent reconfiguration of their supply chain through their new supplier, the campuses now spend $125,000 per year. “We knew we wanted to do more reverse auctions immediately,” says Clark.
UCSF has since held six reverse auctions for laboratory plastics, office supplies and dry ice, saving between 6 percent and 40 percent off previous contracts. Besides the savings, reverse auctions make procurement fun—the months spent researching products and putting together specifications are made worthwhile in real time, says Clark.
“The procurement team and some members of the department gather in the same room to watch the auction happen live online,” he says. “It’s truly a team-building event to see the price go down and down.”
Besides the team-building element, there are other benefits to having the entire procurement team there to watch the live event—for one, problems can be dealt with efficiently.
“We had a vendor who kept bidding in the wrong unit,” Clark says. “We sent them a note through the tool, but he still kept doing it wrong. Fortunately, we had enough people present that someone could call him and walk him through how to do it correctly.”
The key to running a reverse auction in-house is maintaining frequent contact with invited vendors prior to the auction, says Jack Zencheck, chief procurement officer at Yeshiva University in New York City.
“The bidders often will not understand the technology or the process of a reverse auction,” he says. “To make sure you get access to all of the best vendors, offer to walk them through the system in advance.”
Watching bids come in is a fun experience, agrees Zencheck. “A supplier I thought was going to be really aggressive wasn’t bidding at all. Then he came in at the last second with a great price. That was exciting to watch.”
If it’s good enough for the federal government...
At Georgetown University in D.C., reverse auctions were used to purchase radio equipment for the Department of Public Safety and IT hardware for the School of Business. The procurement team decided to use a third party, FedBid, to run the auctions.
“FedBid runs reverse auctions for the federal government,” says Curt Topper, associate vice president for purchasing, contracts and accounts payable. “We knew they could bring us a vast number of suppliers who had already proven successful at a high level.” And having many vendors participating is key to a successful reverse auction. Institutions should make certain there is sufficient competition for the commodities put up for auction, or the price will not be any lower than if a traditional RFP was bid out, Topper says.
Institutions who use FedBid get access to 70,000 vendors, without spending any money.
“The vendor who wins the business is charged the fee,” says Louis Schiavone, senior vice president for state, local and education at FedBid. “So it’s risk-free for colleges and universities.”
In FedBid reverse auctions, there is an average of 10 to 12 vendor participants, who each make an average of five bids. The minimum bid spend, or amount of money universities will be paying for the good or service for which the auction is set up, is $3,000, which allows even small institutions with small buys to participate.
“It is incredibly rewarding to see any university be able to make an investment back into education with the money saved,” says Schiavone.
Using reverse auctions to procure energy
Energy has been emerging in recent years as a commodity that can be affordably purchased through a reverse auction.
“We had been a part of a consortium for energy procurement,” says Rich Cardamone, executive director of business affairs at Harrisburg Area Community College (Pa.). “But we realized we could get a cheaper rate for our five campuses by going through World Energy Solutions’ reverse auctions.”
Cardamone had access to the terms and conditions of all participating vendors prior to the day of the auction, so he and his team could focus solely on the prices being offered during the auction. Including the 21-bid, hour-long auction, the energy procurement process took only four-and-a-half hours to get to signed contract.
Defining expected increases or decreases in energy consumption over the course of a contract is crucial when creating a reverse auction.
“We knew we would be doing sustainability projects that would decrease our energy usage over the course of 2012-13,” says Jennifer White, director of sustainability at Colby-Sawyer College in New Hampshire. “We detailed that in our reverse auction specifications, so bidding vendors knew up front.”
The staff at reverse auction providers such as World Energy Solutions can help procurement officers determine factors like expected usage, best length of contract, type of energy desired and the right vendors to invite to the auction.
“We did not know how to run a reverse auction, but having a partner to walk us through made the process simple,” says Douglas Atkins, vice president for human resources and assistant treasurer at Colby-Sawyer.
The money saved funded solar panels to generate electricity onsite, furthering Colby-Sawyer’s commitment to sustainability.
World Energy managers facilitate calls between the purchasing university and potential vendors prior to the auction, says Phil Adams, CEO of World Energy. They will also run up to 12 hour-long auctions for a single energy purchase.
“We’ll run auctions for different contract lengths or terms, such as a one-year contract or a maximum sustainability contract,” says Adams. “This way the university can see the lowest price available for all of their options, and then select the vendor and contract type that best suits them.”
Starting from scratch
Reverse auction novices may want to turn to groups like E&I Consulting, whose team can run reverse auctions with their partner Procurex. If the institution has proprietary reverse auction software, E&I can serve as an advisor.
“Some people who are new to reverse auctions are resistant because they do not want to learn something new when they are already so busy,” says Ralph Maier, eastern region vice president for E&I Consulting. Maier is a leading reverse auctions and procurement expert; before joining E&I, he served as chief procurement officer at the University of Pennsylvania for nearly six years.
Because the reverse auction process takes up less time than a traditional RFP, procurement offices will end up saving time long term.
Most suppliers are happy to participate in reverse auctions because even though they are losing out on margin, they know they are offering a best-in-class contract, Maier says.
They hope they’ll see more business their way in the future because the purchasing university will appreciate getting great service at a low price. And Procurex has a training site for suppliers who may be new to reverse auctions.
Procurement officers should be ethical with reverse auctions, cautions Maier. “There have been times when the purchasing institution will use a reverse auction to test the market, and then go back to the incumbent and tell them if they can match the lowest price, they will stick with them.”
Bidding suppliers feel misled in this situation. Incumbent suppliers should be invited to the auction and participate like all other vendors, Maier says. “If an institution chooses to purchase a good or service in a reverse auction, even the incumbent supplier should have to bid.”
Overall, reverse auctions are one of the best ways to generate ROI and leverage buying power to reduce the cost of products and services, says Maier. “When the goal is to save money and put funds toward the key missions of the university, reverse auctions are a must have in a procurement officer’s toolbox.