19.2 Reverse auctions
19.2.4 Guidelines for using reverse auctions
When considering the use of a reverse auction, agencies should carefully consider the following guidelines:
- Think beyond price. While buyers may feel good about getting the lowest price, ultimately it is the greatest value that matters. Price is only one element of the buyer's value equation. Buyers should also consider quality, reliability and supplier's value-added services. These considerations should be built into the prequalification criteria and specifications.
- Use reverse auctions only when appropriate. Reverse auctions are appropriate for IT transactional situations characterized by one-time purchases, typically for common commodity products available from multiple suppliers. Reverse auctions are generally not appropriate for sourcing of differentiated parts and components where suppliers may need to have specialized capabilities and few suppliers can meet quality and reliability standards.
- Understand the hidden costs of reverse auctions. Savings from the first few reverse auctions an agency conducts can overstate the eventual savings. There is a big difference between the savings measured at the time the auction closes and the savings measured at the end of the transaction. Buyers should account for both direct and indirect losses that may arise during the course of the procurement cycle. Pilot auction programs may project that the agency will achieve much higher savings because suppliers may engage in "loss-leader pricing" (A loss leader is a product sold at a low price (at cost or below cost) to stimulate sales) to get the buyer's business. These prices may not be sustainable because suppliers will look for opportunities to raise prices or add hidden costs once they have won the business.
- Agencies which do not have sufficient time to detail their specifications and develop their prequalification criteria should think twice before utilizing reverse auctions. The specifications and prequalification of suppliers protects the agency by only allowing suppliers who can provide the exact product needed to participate in the reverse auction.
- There is insufficient competition among suppliers. Reverse auctions only work in highly competitive markets where there are multiple suppliers who can provide the same commodity.
- Agencies should require a clear and concise statement of requirements for all products or services being procured through a reverse auction.
- Agencies may require that all auction sellers submit initial price proposals.
- Suppliers' identities must be protected.
- Suppliers must give permission before their prices may be disclosed.