Reverse auctions need more scrutiny to curtail the win-lose situation

proxibid.com

Reverse auctions are back in the news yet again this week, highlighted by recent testimony before the House Small Business committee, in which the discussion revolved around the proper use of reverse auctions, and potential to harm both the government and industry without clear guidance and policy. 

This is nothing new. Government Accountability Office (GAO) reports were critical of the process, in addition to criticism by the Small Business Committee’s Contracting and Workforce Subcommittee, which held a joint hearing with the Veterans’ Affairs Committee’s Oversight and Investigations Subcommittee.

Firstly, I think reverse auctions are a great tool to save money, increase competition (especially for small businesses), and speed up procurement times. However, there is one caveat: when used appropriately.

On that note, one of the best articles on appropriate usage came from Stan Soloway of the Professional Services Council, who advised the proper use should come through simple commodity buys where requirements are not to any level of sophistication that warrant another buying method:

…Reverse auctions and strategic sourcing, along with the precipitous rise in low bid buying and efforts to create standardized labor rates that ignore how high performing businesses have to be run, reflect a broader and disturbing tendency toward commoditizing both people and capabilities. This trend assumes that the ability to do something minimally or adequately equates to doing it well, let alone exceptionally well. It understates the critical importance of historic performance and ignores the reality that high quality professional services and technology are highly nuanced and constantly evolving….

I have written about this issue in the past (click here), and the GAO report started the salvo of calling into the question the use of reverse auctions through disturbing findings at the center of testimony provided by Michelle Mackin, Director of Acquisition and Sourcing Management at the GAO:

…Competition and savings-two of the key benefits of reverse auctions cited by the agencies we reviewed-are not always being maximized… because not all reverse auctions involve what we refer to as interactive bidding, where vendors engage in multiple rounds of bids against each other to drive prices lower. We found that over a third of the fiscal year 2012 reverse auctions had no interactive bidding-and agencies paid $3.9 million in fees for these auctions…

Of course, one of the main issues with reverse auctions is the transparency and oversight of the process and the contracts themselves. Dan Gordon said in his hearing that this function is "inherently governmental." He also stated:

…FedBid has an organizational conflict of interest. They control the data. They control the information," said Gordon. "They have a financial interest in having as many reverse auctions as possible, regardless of whether the procurement is suitable for one…

The vast majority of reverse auctions are run through FedBid, the Vienna, VA, based company that got a slap on the wrist after an inspector general report from Veterans Affairs exposed major issues with ethics and business practices.

The most troubling issue is the negative consequences that happen more often than not to small businesses, as the race to the bottom continues to put undue pressure on companies that are already struggling to survive in this hyper-competitive federal market.

I hope that reverse auctions get a thorough review, because I feel it is doing more harm than good to both the taxpayer, and the firms that are using this practice in hopes of winning federal business.