In a time of unprecedented financial stress, state governments and state agencies should look to reverse auctions as an integral part of their procurement strategies.
Introduction
$13 million dollars. Even in government, where today we speak comfortably in terms of billions and billions of dollars, $13 million dollars is still a LOT of money. Through a recent reverse auction to procure electricity in bulk for state and local agencies, the State of Delaware is projected to save just that amount – $13 million dollars – over the course of the next three years (http://reverseauctionresearch.blogspot.com/2010/04/retail-electricity-agreement-will-save.html). This Delaware reverse auction experience was recently highlighted by Christine Vestal, a staff writer for Stateline (Shaving costs with reverse auctions: http://www.Stateline.org/live/details/story?contentId=479292).
Vestal provides a rather complete case for why all states – in this time of a universal budgetary “worst case scenario” – should look to reverse auctions as a way to better compete their spending and save money in the process to counter the “budget tsunamis” facing state governments. As such, her article should be recommended reading for all in procurement shops and in executive positions in state government to start thinking about how to use the reverse auction tool as part of your agency’s e-procurement and spend management strategies. However, as a recognized expert and consultant in this area, I must take issue with the three counter-arguments that Vestal tried to make as to why some state government procurement situations are not right for using reverse auctions.
Issue #1: My Procurement Spending is Too Small for Reverse Auctioning
Perhaps because of the success stories in the press about the use reverse auctions by Fortune 500 companies and large governmental buys, many public sector executives – both in the procurement area and at the executive level – believe in the myth that reverse auctions are only suited for multi-million dollar buying actions. Vestal furthers this misconception by stating that: “It (reverse auctioning) only works in a competitive marketplace where states can conduct large-volume purchases by aggregating the needs of many state agencies — as well as counties and cities, when possible.”
That is simply not the case anymore, as increasingly, reverse auctions can be employed effectively on small buys. Take for example the case of FedBid, a leading provider of reverse auction services to agencies across the U.S. federal government and beyond. This Vienna, Virginia-based reverse auction provider works with public sector agencies on spending events as small as $3000. Thus, when you challenge yourself to look at purchasing commodities, goods, and services down to this low dollar threshold, a far-larger percentage of your agency’s procurement spending will suddenly become adaptable – maybe even conducive – to competing the purchases through reverse auctions.
Issue #2: Reverse Auctions Only Work for Commodity Goods and Services
This is certainly a commonly-held myth in both the private and public sectors. Indeed, many executives believe that unless you’re buying tons of coal, thousands of 19-inch, flat-panel monitors, or janitorial services, you don’t need to even have reverse auctions on your procurement radar. Vestal’s Stateline article helps perpetuate this false notion. In fact, she quotes Brian Selander, who serves as Delaware Governor Jack Markell’s Chief of Staff as saying: “There are ups and downs to reverse auctions. The good news is that they work well on large-scale commodity purchases such as electricity and road salt.” However, Vestal adds her belief that: “The bad news is that in smaller markets, states have to work hard at recruiting, training and retaining vendors to participate in the auctions if states want to see significant savings.”
OK, where to begin. Let’s just establish one clear and proven fact. If one can effectively specify what is to be bought and how, when and where it needs to be delivered (be the matter a commodity product, a good, or a service), almost anything can be procured through a reverse auction! So long as you and your suppliers can make sure you are comparing the same apples (be they Fuji, Gala, or even Granny Smith) to apples, if the specifications and guidelines are made clear, there are really no limits on what percentage of your overall spend can be competed through auctioning. Bearing in mind that reverse auctions have proven to save anywhere from 5-15% consistent savings across a wide variety of goods, commodities, and services, the savings potential for using reverse auctions can be magnified with each percentage of your spend that is shifted to being procured in this manner. Furthermore, the labor intensive, arduous process that Vestal describes to make reverse auctions work is only true if one takes on the entire task of running the reverse auction in-house. Today, full-service reverse auction providers can do all the legwork for you – and perhaps quite honestly, better, faster and certainly cheaper than internally-operated reverse auctions, trying to use a part of a larger e-procurement system or some stand-alone reverse auction software packages out there.
Issue #3: My Procurement People Can’t Handle Reverse Auctions
Hmmmm. This final one is really interesting. To make this argument, Vestal cites the opinions of Bob Furman, who leads the State of Delaware’s procurement operations for state facilities. As paraphrased by Vestal, Furman believes that: “The real-time bidding process is not for everyone,” and that “not all government purchasing agents are up for this type of ‘electrifying’ experience.”
I don’t know about you, but “them’s sound like fighting words to me” if I am working in or leading a state procurement shop. Yes, there will be some cultural resistance to using ANY type of new technology (especially one that shows that maybe one could have been doing things better, faster, and cheaper in the past). Yes, there will be a need for training – and retraining – procurement staff in deciding when – and when not – to employ reverse auctions and how to best manage the process and the interactions with the supply base and with the reverse auction provider (or alternatively, how to best do the process in-house if one chooses that option). However, change, while difficult and taxing in any form, should be welcomed, not feared, and that is the role of executive leadership. Yes, we’re collectively facing a massive budgetary problem in state governments. But to dismiss a potential remedy for even part of the solution by believing that your employees can’t handle it portrays a very negative view of your staff and in your own abilities as a procurement and/or state-level executive to lead the change process.
CONCLUSION
It is clear that we have the “perfect storm” occurring is state budgets. Governors, legislators, and agency heads are quickly facing the cold reality that all in state government will have to do more with less – less money, less staff, and less resources – for the foreseeable future. With “Tea Party” protests and a general mood against raising taxes in most areas of the country, state governments and state agencies will simply have to look at everything they do to see where they can achieve cost savings – and often times – very quick cost savings.
This article explodes the myths that surround reverse auctions and have prohibited their more widespread adoption at the state and local government level. Thus, it is incumbent on those in state leadership to ask why not? Why is there not more of our state procurement dollars – in every area from roads, to health care, to colleges and universities – being spent through reverse auctions to make sure that, especially in a time of fiscal crisis, procurement dollars are not being overspent. As the Delaware example shows, saving $13 million dollars can help direct those savings toward reducing the state’s deficit and quite honestly, meaning that the state will not have make $13 million in cuts, reduce payroll by $13 million, or even raise taxes by $13 million. Magnify that by a 1000 by asking “if not, why not” questions, and reverse auctions could prove to be a significant tool in solving the budgetary puzzle facing state leaders.
Certainly, the success stories found across the federal government and in states like Pennsylvania and Indiana show that governments could collectively save billions and billions of dollars simply by making sure that they are paying the right price for the goods and services necessary to provide necessary services. Simply put, by not employing reverse auctions in their procurement processes, there is no way to ensure that they are maximizing the bang for the taxpayer’s buck.
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About the Author:
David C. Wyld (dwyld.kwu@gmail.com) is the Director of the Reverse Auction Research Center (http://reverseauctionresearch.blogspot.com/). He currently serves as the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a noted expert on reverse auctions and e-procurement topics, being widely published on the topic and a recognized expert/consultant in the area.
Originally published
13 Million Reasons: Why State Governments Must Make The Move to Reverse Auctions
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