Reverse Auctions Come Under The Spotlight

Gavel with "Sold" Tag

For better or worse, the Veterans Affairs Department has, over the last three years, become a bellweather for technology and procurement trends. It has a big IT budget. CIO Roger Baker made news a few months back when he said VA would begin letting iOS and Android devices use the VA enterprise network, mainly as a boon to doctors and medical staff. He was one of the earliest to use a TechStat-like process to cancel IT projects that were going off the rails. VA is partnering with DOD to do pioneering work in development of a joint electronic health record that will eventually go with service members from enlistment to death.

That’s one reason why VA’s tangle with reverse auctions is so important in a governmentwide sense. As reported by Matt Weigelt in FCW, VA’s deputy assistant secretary for acquisition, Jan Frye, ordered a stop to reverse auctions. They were causing “perturbations” in VA’s supply chain, Frye said.

I interpret that as: suppliers are fed up and got up on their hind legs to bark back to a big customer about what they see as a singularly pernicious practice.

Reverse auctions have waxed and waned for the government for many years. They date in practice, if not in concept, to 1997 when they were specifically allowed by a Federal Acquisition Regulation change. A small industry sprang up around them to provide online environments supporting reverse auctions.

In those days, reverse auctions seemed like a good idea for buying things like PCs, where prices continually fell and yet the supplier base still looked spectacularly successful. This was the era of contract vehicles like Desktop IV when prevailing federal suppliers were GTSI, Zenith, CompuAdd, IBM, Digital Equipment Corporation, Compaq … you get the picture. Lots of suppliers in a wild, wild West of a market. Those big indefinite delivery-indefinite quantity contracts were supposed to get the best possible prices for large numbers of a particular product.

A couple of years ago a professor at the University of Louisiana produced a (to me, slightly goofy) study of reverse auction success at Customs and Border Protection. FedBid, one of the online environment suppliers to federal agencies, provided staff support for the study so the white paper is more a marketing document than anything scholarly. (In fact, the author talks about “FedBid’s unique competitive marketplace model” so the work is hardly scholarly.) But still, it does document savings CPB got by using reverse auctions.

Suppliers, whether they admit it publicly or not, hate reverse auctions. Why wouldn’t they dislike a race to the pricing bottom? Frye’s memo noted “a ground swell of complaints from our suppliers.” So maybe vendors are admitting it publicly. The Associated General Contractors of America has taken the position that use of reverse auctions for federal construction should be outlawed. Regardless, it’s pretty hard to see how a reverse auction would work in buying something with as many variables as construction. Maybe the furniture that goes into a building.

At the VA, Frye cited a number of problems, including the possibility that reverse auctions drive out small and disadvantaged business, at least as VA was conducting its auctions. And, Frye said, contracting officers were not giving enough oversight to what is going on in the FedBid-hosted auctions.

As an aside, local billionaires Steve Case and Ted Leonsis, both of one-time AOL fame, will invest $25 million of their Revolution Growth Fund into FedBid. The Forbes article headline is a little off, citing an investment in “eBay For Feds” when, of course, FedBid operates as the mirror opposite of eBay.

An undated VA blog entry quotes a procurement officer at Veterans Health Administration as saying reverse auctions have saved $2 million in supplies purchases since March 11. It cites an example of five suppliers bidding themselves down a total of 14 percent during an online auction for examination lights.

Where this is headed, I can’t say. Reverse auctions are legal and FAR-compliant. According to FedBid’s FAQ section, sellers cannot see who else is bidding or what their competitors’ bids actually are. All they know is whether their own bid is a “lead” or a “lag.” They do get to see once the agency makes it selection and the bidding is closed. So it does mostly preserve the sealed bid quality of traditional acquisitions.

But if suppliers believe reverse auctions are driving all the profit out of federal business, it’s possible more revolts will occur and the Office of Federal Procurement Policy would have to revisit the whole thing. In the meantime, it’s incumbent on federal buyers to set reasonable ceiling prices at the start of reverse auctions so sellers will continue to believe there is integrity in the process.

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About the author

Tom Temin has written 486 posts for Fedinsider.com

Thomas R. Temin - Editor in chief of FedInsider and brings 30 years of publishing experience in media and information technology. Tom is also co-host of The Federal Drive with Tom Temin and Amy Morris, a weekday morning news and talk program on WFED AM 1500 in Washington D.C.

One Response to "Reverse Auctions Come Under The Spotlight"

  1. A Cert | Best IT Certifications says:

    [...] VictoriaMHS students to raise Red Cross flagWhite House Crowdsourcing Section 508 IdeasNashville Awarded the Digital Government Achievement AwardReducing Contract Duplication, Reverse Auctions Come Under The Spotlight [...]

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