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Are Reverse Auctions A Way For Government To Save Money?

New York State through law and regulations  imposes procurement requirements that local governments must abide by. One of the recommendations of Governor Cuomo's Mandate Relief Redesign Team is to allow local governments to conduct reverse auctions electronically. As I was not familiar with utilizing reverse auctions in government, I did some research into the topic.

In a typical auction, the seller puts an item up for sale. Multiple buyers bid for the item, and one or more of the highest bidders buy the goods at a price determined at the conclusion of the bidding.

As Wikipedia explains in a reverse auction, a buyer puts a contract out for bid, either using specialized software or through an online marketplace. Multiple sellers offer bids on the item, competing to offer the lowest price that meets all of the specifications of the bid. As the auction progresses, the price decreases as sellers compete to offer lower bids than their competitors. Bidding performed in real-time via the Internet results in a dynamic, competitive process. This helps achieve rapid downward price pressure that is not normally attainable using traditional static paper-based bidding processes.

About ten years ago Pennsylvania became the first state to utilize a reverse auction, which resulted in saving millions of dollars on road salt for winter storms. In 2010 Delaware used a reverse auction for a state electricity contract that resulted in saving $13 million over 3 years. Connecticut, Maryland, Massachusetts, New Jersey, Ohio, Pennsylvania and Texas all have used the reverse-auction process to save millions of dollars on their power bills. Indiana, one of the biggest users of reverse auctions, continues to save millions on road salt and a range of other products, including work boots for state troopers, televisions for inns located in state parks and heavy equipment.

Christine Vestal, of Stateline in an article about reverse auctions reported “There are ups and downs to reverse auctions,” says Brian Selander, chief of staff to Delaware Governor Jack Markell and a former private-sector procurement expert. “The good news is that they work well on large-scale commodity purchases such as electricity and road salt,” he says. 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.

The National Association of State Procurement Officials cautions that the bidding process only works in certain markets. In Minnesota, for example, reverse auctions proved successful in purchasing snowmobiles, walleye fingerlings, and traffic safety equipment. But for printing services, motorcycles, muskellunge fingerlings and fishing nets, it didn’t work as well.

As reported in Governing.com in the nearly two years since Maricopa County, AZ  began using reverse auction technology, it has saved more than $2 million on items for its eight jails like flour, peanut butter,beans and inmate shoes to name a few. The Louisville, Kentucky sheriff's department cut its ammunition-purchase costs by 22 percent using a reverse auction, according to the Kentucky League of Cities.

I am interested in hearing how reverse auctions have worked for others.

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Comment by Tim Brett on December 29, 2011 at 8:36am

INPUT (Now GovWin from Deltek) did a report on this back in 2004. Since then, I havent seen much change. Id be happy to send a copy of the report to anyone that is interested. When we did the report, as of FY 2005, 32 states had legislative authority to use reverse auctions. Of those 32 states, only 13 states had used reverse auctions to procure goods, while 19 had not used reverse auctions. States considered to be "early adopters" currently using the procurement process include: Massachusetts, Minnesota, Pennsylvania, Texas, and Wisconsin.

 

Minnesota was considered a leader among states using reverse auctions at that time, the first to buy software and conduct auctions, at an annual cost of $70,000. Since June of 2001, Minnesota had spent a total of $30,482,191, realizing a total savings using the reverse auction method amount to $3,245,556 (10.6 percent). Commodities that have been purchased using reverse auctions have included vehicles, electronic devices & accessories, printing jobs, paper products, raw goods and uniforms.

Texas, which had conducted 225 reverse auctions when the report came out, had not been so fortunate with savings generated from using reverse auctions. Since FY ‘03, Texas had spent a total of $177,033,091 and had saved $2,685,728 (1.5percent). In FY ‘04 alone, Texas conducted 165 reverse auctions totaling $93,789,864. The total savings amounted to -$825,761(-.8 percent), which was attributed to using the reverse auction process for commodities that proved to be unsuccessful.

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