R.McMillen:

To the best of my knowledge, no Federal agency has done "reverse auctions" as described in the USA Today article. (By the way -- what the commercial sector calls "reverse auctions," we in government have called simply "auction" or "auctioning.")

As for its legality, FAR 15.306(e)(3) says that in negotiated procurements an agency may not reveal an offeror's price without that offeror's permission. So, an agency can reveal an offeror's price if it gets the offeror's permission. That being the case, here is how it would work:

Suppose that an agency is going to buy a commercial item. The agency issues an RFP which says that the evaluation criteria will be: (a) acceptability of the offer, based on (i) assent to the terms in the RFP and (ii) eligibility; (b) product quality; (c) past performance; and, (d) price.

The RFP also says that the agency will:

(1) use a tradeoff process (FAR 15.101-1) in order identify the most highly rated offerors and to establish a competitive range;

(2) conduct discussions with offerors in the competitive range whose initial offers were not acceptable because of failure of assent;

(3) solicit non-price proposal revisions from offerors in the competitive range whose initial offers were not acceptable because of failure of assent;

(4) establish a final competitive range that includes only those most highly rated offerors whose offers are acceptable;

(5) issue an amendment to the RFP that (a) discloses the prices of all offerors in the competitive range (but not the identities of the offerors) and (b) solicits final proposal revisions from all offerors remaining in the competitive range; and

(6) award the contract to the offeror in the competitive range who proposes the lowest price (FAR 15.101-2).

(Note: FAR 15.101 allows agencies to combine the tradeoff process and the lowest price technically acceptable process in this way.)

The RFP says that offerors must grant permission to disclose their prices in this way in order to participate in the source selection.

If the agency is set up for electronic commerce, it could post the prices and receive the final proposal revisions through its website, or even by e-mail.

If all the offerors in the initially-established competitive range submit acceptable offers, then the agency can skip steps (2), (3), and (4) above.

Voila!

I think that agencies should use the procedure that I have described above only for the purchase of commodities in a commercial market -- items for which quality can be adequately specified and evaluated. I would not encourage the use of this procedure to buy services or government-unique items, such as military items for which such intense price competition might damage the industrial base.

Now I know that some of those reading this will believe that what I'm suggesting is unwise and/or heretical. I can already hear one reproach: "This will hurt small businesses!" Maybe; but from the sound of things in the trade journals, small businesses had better get tough, because worldwide e-purchasing is going to make markets competitive like never before.

Will an agency's disclosure of prices and use of this (reverse) auction technique discourage firms from competing for the contract? I don't know. But if the articles about the growth of e-purchasing and reverse auctions are true, then how will the use of this commercial practice discourage competition for long?

In any event -- what I have described is legal. The best way to find out how well it works is for someone to try it.

By R.McMillen on Friday, March 10, 2000 - 10:43 am:

I find this concept interesting. However, I'm not familiar with how the process would work within the federal sector. Does anyone know where I may find a discussion paper on its legally and/or guidance on the steps on doing one? Also can anyone guide me to any specific agency contact who is considering doing one for further information?

By Stan Livingstone on Tuesday, February 29, 2000 - 05:44 pm:

My agency is considering it. We've talked with some others that are just getting into it.

The one problem everyone encountered is establishing the base of qualified companies to participate. You don't want to let just anyone access the system. A rather large up front investment is then necessary to identify and select the players. You really need to determine if this is offset by the potential savings through the auction process.

The requirement to publically advertise upcoming business opportunities and the need to deal with every interested party in some manner doesn't affect the private sector. That is what makes the federal sector different and this process more of a challenge to implement.

We plan to watch what happens with a couple of agencies first. This should be interesting.

By Brian Fisher on Tuesday, February 29, 2000 - 03:14 pm:

I think that auctions and reverse auctions might be useful methods for certain commodities in certain circumstances. For example, a reverse auction procurement for small-dollar, low-risk, commercially available expense items (e.g., office supplies, maintenance supplies) might present a perfect opportunity for the Government to extract maximum savings from the procurement. However, a comparison of schedule contracts might present essentially the same opportunity, without the hassle and potential risks (for both parties) associated with the auction technique, and without the risk identified by Peggy.

In any event, I do believe that the reverse auctioning concept should be explored further to determine whether it is a tool that should be added to the contracting officer's toolbox, and in which instances it might be most effective.

By Peggy Richter on Tuesday, February 29, 2000 - 11:36 am:

I think the law of diminishing returns is going to start rearing it's head on this sort of thing. A company can only go so low on it's price before you start having an impact on say, quality and reliability. Yes, one can "shave" profits, but the airline reliability, safety and satisfaction rates indicate what happens in a "price war". A
reverse auction is, essentially, a faster paced, small scale price war. Companies that can't compete will of course fall by the wayside. Some will be inefficent, bad quality or overpriced companies or ones with other defects. But what happens when you've reduced the number of suppliers to a small handful willing and able to "deal" with a "price war" and large enough to manage to handle something so volatile? My guess is something like OPEC will come into being. Or a single-source supplier. How many aircraft manufacturers were there in the US in say, 1960? How many are there now? When it's down to one or two companies that can make something, does anyone seriously think they will "play ball" this way?
As long as the product desired is one that is relatively easily obtained / manufactured by multiple sources, this system will work - as soon as it isn't, it won't.

By Vern Edwards on Tuesday, February 29, 2000 - 01:35 am:

Two recent newspaper articles describe how commercial firms are planning to cut their purchasing costs by using business to business (B2B) e-purchasing techniques. The first article,
"E-purchasing saves businesses billions," appeared in USA Today on February 7, 2000. The second, "Carmakers to buy parts on Internet," appeared in The New York Times on February 26, 2000.

The USA Today article said:

"Perhaps the most dramatic weapon e-buyers are starting to wield is the reverse auction. Reverse auctions are a kind of backward e-Bay that force suppliers into cutthroat bidding wars to sell everything from electricity to xylene.

"Suppliers are screened over six or eight weeks for integrity and quality. But once the auctions begin, they can be over in as little as 90 minutes.

"Reverse auction bidding starts slowly, then ends in a frantic rush, putting enormous pressure on suppliers... .

"With each last-second bid the deadline is often extended another minute, so time doesn't run out on suppliers willing to go ever lower.

"In the end, companies don't always buy from the lowest bidder. Some intend to stay with a preferred vendor from the start, but conduct auctions just to get their prices down... .

"[S]uppliers have little choice but to play the game. They sold $3 billion of goods and services through reverse auctions in 1999, and that will grow to $70 billion this year and $1 trillion by 2004... ." The article said that two years ago IBM bought $1.5 billion online. It plans to spend 90 percent of its $45 billion purchasing budget online this year.

According to The New York Times, General Motors, Ford, and Daimler-Chrysler are going to establish their own auction e-Bay type site to buy parts. Both papers said that businesses will cut their purchasing staffs as a result of the Web sites. USA Today predicted that purchasing staffs will be cut by 25 percent over the next two years.

Should the government develop and use reverse techniques and web sites like the ones being developed in the commercial sector?