Reverse auctions not so smart
December 22, 2004
By Canadian Consulting Engineer
Construction organizations in the United States are speaking out against Online Reverse Auctions. The practice has...
Construction organizations in the United States are speaking out against Online Reverse Auctions. The practice has developed as a means for procuring both goods and services in the past decade since the growth of the internet. Experts are now warning that because the auctions focus on finding the lowest bidder, the process can result in all the problems that go with that kind of cut-rate approach.
In an online reverse auction, a single buyer requests bids for goods or services on the internet, and sets a fixed deadline. During the rounds of bidding, competitors can see each other’s bids, but they don’t know the parties. Usually the lowest bidder wins. Apparently some contractors participating play a bidding game where they don’t submit their lowest bid until they see what the other parties are bidding.
While the process might appeal to those who see it as a savvy, e-business development, others warn that it is more suited to purchasing commodities than services.
Two researchers who formerly used online reverse auctions named Bob Emiliani and David Stec of the Center for Lean Business Management now speak out against them: “Fundamentally, reverse Internet auctions are a technology-assisted form of power-based bargaining. It’s a zero-sum purchasing tool where the buyer gains as a result of the supplier’s loss and that is by design…. Suppliers are forced to drop their prices quickly in a reverse auction, and it all comes out of the supplier’s margin. That’s going to create hard feelings.”
Emiliani adds: “Sometimes suppliers look to get even by retaliatory pricing — charging more at a later date…. The whole process is oversold and it under-delivers. Buyers often go back to the original suppliers and more collaborative ways of managing costs.”
LTC A.J. Castaldo, who is responsible for contracting for the U.S. Army Corps of Engineers, wrote a July 2004 report to Congress on online reverse auctions. Entitled “Final Report Regarding the U.S. Army Corps of Engineers Pilot Program on Reverse Auctioning,” he concluded that auctions are a generally inappropriate means for procuring services and should only be used in exceptional cases. He did, however, find that the method had value in procuring commodities.
He noted that because “construction encompasses one-of-a-kind projects built under one-of-a-kind conditions,… online reverse auctions have no valid benchmark. They can only address theoretical savings, which have no bearing in the real world.”
Castaldo also found that the auction process is time consuming and “isn’t as simple as the traditional sealed bid method.”
Source: Mark McLaughlin, Nehlsen Communications, Moline, Illinois.