Are reverse auctions a win-win for both parties? The answer depends on whom you ask, and as always, ‘the proof is in the pudding.’ If done right, they can be a win-win for both buyers and suppliers. The online reverse auction is a cost-effective way for a single buyer to procure goods or services from multiple bidders using an online bidding platform. This article will share a few tips to help demystify reverse auctions and maximize mutual benefits for both parties.
Most people are familiar with eBay auctions where a seller typically sells a good to the highest bidder. The well-known eBay auction platform facilitates private consumer transactions with multiple buyers competing for a single good from a single supplier. Switch the seller-buyer transaction and roles of an eBay auction, and you now have something called a Reverse Auction.
The online reverse auction bidders are anonymous to each other and compete in a fixed-duration, online transaction by sending decreasing offers in price until a specified deadline, in response to an invitation to bid or request for proposals. In online auctions, the seller and buyer alike are anxiously monitoring the bid activity on their screens, hoping for a successful transaction. The same can be said for a supplier and public procurement staff engaged in a reverse auction.
Reverse auctions have been used in public procurement for almost two decades with varying degrees of success. For most buyers using reverse auctions, the main goal is to get the lowest possible price for a good or service to drive down procurement costs and achieve savings.
The benefits of reverse auctions include but are not limited to:
- Lower purchase costs through increased competition;
- The potential to gain better savings then a present “target” amount;
- Time Savings through a reduced negotiation phase;
- Increased ability to meet deadlines thanks to having a set auction date; and
- Reverse auctions can also increase transparency for suppliers as they all have the same information at the same time.
Using the above guidelines can help you address some of the potential challenges noted by opponents of this sourcing method who argue that reverse auctions:
do not always guarantee the lowest price;
may encourage race-to-the bottom prices that are detrimental to both buyers, who may not get high quality and standards for the goods/services they acquire, as well as suppliers, who may have not assessed their cost appropriately;
can pose a threat to long-term supplier relationships, or
have no valid method to measure savings.
Are these real challenges, or just myths, stemming from a lack of understanding; or suppliers being apprehensive about competing in the reverse auction space? Poorly planned or administered reverse auctions could result in no competition, no savings, or soured relationships with strategic suppliers. What then should buyers know to make sure reverse auctions lead to a successful outcome and a win-win for both parties?
The conventional wisdom is that reverse auctions are not suited for all commodities and services. However, for some commodities, a combination of competition and collaboration may be employed, using a two-step reverse auction model, where the lowest bidders from the online reverse auction are invited to take part in negotiations with cost being one of the many factors considered for the final award.