GSA Announces New Reverse-Auction Platform

GSA (General Services Administration) announced Tuesday the launch of a government-managed reverse auction program. GSA expects the new program will deliver savings for federal agencies on everything from office products, equipment and services. The GSA estimates that agencies will save about 17 percent on their purchases. The GSA also believes that the program will make it easier for small businesses to compete for the Government's business.

In a reverse auction, sellers compete to win business from various Government agencies. Prices will typically decrease as the competitive auction progresses. The reverse auction concept has a number of anticipated benefits including;

• Shorter processing times
• Driving prices down
• Improves transparency and collection of data
• Allows for small business set-asides

Reverse auctions have been used for a number of years now by a lot of companies including Fortune 500 companies. The success has been somewhat limited for many companies. One company complained that its purchasing team was not fully engaged in the process. Others blamed supplies for not buying in to the concept. That's understandable we guess. If reverse auctions work well, supplies are going to find increased competition and lower costs.

From an internal control standpoint, it should be easier to design protections against supplier kickbacks and other forms of improper activities with reverse auctions than with traditional procurement. The "human" factor in deciding who to buy from is replaced by very objective criteria - lowest price wins.

You can learn more about GSA's reverse auction process here.

UPDATE (July 15, 2013):

Does the Government compete in reverse auctions? We came across this posting:

I recently heard from a contractor regarding an experience he had with reverse auctions. A federal agency was conducting a reverse auction using FedBid and he decided to compete (FedBid, Inc., provides a service whereby federal agencies can conduct reverse auctions). Although he submitted several bids, he ultimately lost the reverse auction. When he checked to see who had won, he was surprised to see that the federal agency that was in need of the required items was the low bidder. In other words, the federal agency was submitting bogus bids in an effort to get the contractor to reduce his bid price. The federal agency then contacted him and offered to purchase the items from the contractor at his lowest bid price. Feeling that he had been duped, he told them to get lost.

The tactic employed by the federal agency, called phantom bidding, is not new. Many view the practice as unethical while others see it as a legitimate tactic. In regular auctions, the legality of seller participation in bidding varies from state to state. For those states that allow it, sellers typically must disclose that they reserve the right to participate in the bidding. 

In any case, should the Federal Government be allowed to place phantom bids in reverse auctions? Would your answer be different if the disclosure of the practice was required prior to the reverse auction?

You can read the entire posting and the comments here.