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

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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. 

Reverse Auctions: Where Are The Cost Savings?

Photo by artworldsalon.com

Reverse auctions are back in the news this week, highlighted by a Government Accountability (GAO) report critical of the process, and 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 earlier this week as well.

The title of the hearing, Contracting Away Accountability – Reverse Auctions in Federal Agency Acquisitions, was a good indication of what Congress thought of the procurement tool.

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.

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…

Further disturbing news in the report and testimony from Mackin was that many federal users did not understand that fees were associated with the reverse auction platform, most notably through the use of FedBid, a Vienna, Va.-based company that offers the most popular tool. FedBid charges a fee of 3 percent of the winning contract, not to exceed $10,000. However, FedBid can, and sometimes does, offer discounts on those fees.

…”We were, frankly, a bit surprised to learn that agencies didn’t know how much they were paying FedBid in fees. They didn’t know how much duplicative fees–for lack of a better word–they were paying when they were using a schedule contract, for example, for a reverse auction,” said Mackin…

Some agencies, such as the Department of Veterans Affairs (VA), are now trying to capture and track fee data, but it remains an illusive goal. VA had halted the use of reverse auctions last year, as according to Jan Frye, deputy assistant secretary at VA’s Office of Acquisition and Logistics, who said in a keynote at the April 26 Coalition for Government Procurement 2012 Spring Conference:

…“I’m not against reverse auctions, but I’m concerned that sometimes we don’t know what we’re doing when we set about to do reverse auctions”…

Apparently the doubt remains, as the VA has once again halted the use of reverse auctions this week, further pointing to issues on the use of this technique at the VA, and especially when it comes to construction contracts.

Also disturbing in the testimony from GAO was that more than one-third of auctions reviewed by the GAO in their report had only one bidder, and over half of auctions were used to procure items from pre-existing contracts.

…There’s a notion, said Mackin, that reverse auctions result in the lowest price. But at times the final price exceeded the government estimate and agencies may have been able to get a better price through other mechanisms…

GAO auditors also found issue with FedBid’s savings calculation across the four agencies GAO analyzed, which according to Mackin, was an estimated $98 million in 2012.

…”We have questions about the accuracy of these savings. For example, if there was no interactive bidding, agencies perhaps could have gotten a better price using other mechanisms,” she said. “Also, the target price or government estimate may not be sound. For example, we found over 1,000 cases where the winning bid actually exceeded the government’s estimate even with interactive bidding.”…

Some of the most insightful testimony came from construction firms, who denounced the use of reverse auctions. Nigel Cary, president of Cox Construction Co., discussed the negative effects of using reverse auctions  for complex construction projects, and further stated agencies are hindering competition on specific contracts due to issues with unrealistic requirements for unrealistic prices.

“Reverse auctions ignore best value,” he said. “It’s unfortunate and misguided that each agency learns the lesson on their own.”

Not to be outdone was Louis Celli Jr., director of the legislative division of the American Legion, who shared the message with the Committee on how his members feels about reverse auctions, as he stated that his members believe reverse auctions “unfair, deceptive and fraught with cheating.”

What is the path forward?

It seems that reverse auctions are a “love them or hate them” proposition. The vast majority of small businesses I know who actively use reverse auctions have negative attitudes toward the use of this tool, for the same reasons highlighted in the testimony. The overwhelming feedback is that they are being used for the wrong procurement (e.g. wrong requirements for the wrong price point), and not necessarily think that reverse auctions in and of themselves are a negative procurement method.

What do we do about this issue? Some solutions that were offered at the hearing included increased oversight and training, and passage of H.R. 2157, which prohibits the use of reverse auctions on construction contracts which are specifically suitable for awards to small businesses. Mackin also stated that the Office of Federal Procurement Policy (OFPP) has also agreed that new guidance is needed.

Nonetheless, I think construction contracts are the wrong requirement for reverse auctions, as sealed bidding is a preferred method to ensure best value, and ensure the right vendor, with the right requirements, at the right price.

Further, OFPP guidance, along with oversight, is clearly needed, as reverse auctions seem to be doing more harm than good. 

We’ll see what comes of this, but I hope reverse auctions do not go away entirely, as I am not a fan on taking tools away from the procurement process. We just need to do a better job of using the right tool for the right job.

Your Taxpayer Dollar$ at Work: Volume III – Muffin Edition

This week's news of the absurdity of waste, fraud, and abuse across government comes from the Department of Justice (DOJ) Office of the Inspector General (OIG) Audit Division. Their report, titled Audit of Department of Justice Conference Planning and Food and Beverage Costs is a follow-up to a previous September 2007 which examined expenditures for 10 major DOJ conferences held between October 2004 and September 2006. That audit found that DOJ had few internal controls to limit the expense of conference planning and food and beverage costs at DOJ conferences. This report highlights the same story, and little to no corrective actions by DOJ to mitigate this waste. Makes you think fondly of the $50 hammers and $500 toilet seats of Defense back in the 80s, doesn't it?

Of course politicians and the media jumped on the story for easy press, zeroing in on the $16 muffins and nearly $10 cookies served to attendees at one event. Emily Ingram of the Washington Post created a good competitive landscape of the muffin offerings in Washington, and only at government conferences will those prices apply. What is even worse is that DOJ officials basically stated they thought they were addressing the issue:

...Justice officials did not dispute most of the findings. The department did not offer an official to speak by name, but a spokeswoman who was not authorized to comment publicly said the agency “agrees that excessive spending of the types identified in the report should not occur” and has taken steps to prevent it. She said conference costs have been cut this year as part of an effort to curtail non­essential spending, though she could not specify an amount. 

Justice Department officials gave auditors a variety of explanations for the expenses, saying consultants they hired to help plan events had valuable knowledge and that the department had done its best to control costs. Officials from one Justice office said they thought they were saving money by serving muffins and other snacks instead of full meals...

You're not saving money DOJ, you're wasting it needlessly.

The OIG recommendations are pretty straight forward: itemize costs and ensure you have adequate price analysis to ensure "best value." These controls need to go much further by commoditizing these expenditures, of course itemizing all costs (both direct and indirect), and ensure no surprises and real best-value. There are many other quality, yet reasonable, venues that can accommodate these functions other than the Ritz Carlton.

Adequate market research must be conducted, lessons learned applied, and opportunities for strategic sourcing and leveraging the buying power of the government must be utilized. Further, perhaps this is an opportunity to consolidate BPAs across government and further leverage buying power, in addition to possible using reverse auctions to drive down prices. Cost savings of these types of expenditures are really low-hanging fruit, akin to eliminating free coffee or soda in the break room, which makes this report even more shocking at the level of waste rampant in government.

We obviously have a long way to go in reducing spending, although a thorough spend analysis of these commodity-type of expenditures could probably find millions, if not billions, in needless waste and efficiencies. The opportunities to save money are everywhere. Just look in the snack basket apparently.

Reverse Auctions: A Tool to Realize Real Cost Savings

As Government continues to leverage its buying power through continued fiscal pressures, one process that is not getting enough attention is the use of reverse auctions. Reverse auctions are an effective and efficient means of realizing large savings on purchases of not only commodities, but highly defined services as well. Although current initiatives exist such as the General Service Administration’s (GSA) Federal Strategic Sourcing Initiative (FSSI), which encourages adoption of industry best practices, federal buyers are simply not going far enough in leveraging their buying power to maximize price savings. To achieve maximum efficiency, the Government should begin to create holistic strategic souring initiatives that include reverse auctions as a mechanism for cost savings, since programs such as FSSI are simply catalog buys to bidders that have been pre-qualified, and mimic the GSA Schedules program. Further, many Program Managers and other acquisition officials I have spoken to state that they do not always get the best prices by using these types of pre-negotiated arrangements, and thus buy either directly from vendors or execute procurements outside these initiatives. The result is ineffective buying and the continuation of not maximizing efficiencies to the detriment of the taxpayer.

Reverse auctions are by definition a structured competitive bidding event where competition can be maximized to help drive the price lower over the course of the event. One common reason I have heard for the poor adoption rate is technology barriers, which is a frankly a disingenuous reason. The benefits of potentially significant cost savings, enhanced transparency, increased collaboration, increased competition all outweigh any barriers that seem to be artificially created by Federal organizations. If the Office of Management and Budget (OMB) and the Obama Administration are serious about Open Government and accountability, then enhanced adoption of reverse auction should be further explored.

Another stumbling block to adoption is the issue of transparency, as the risk adverse nature of Government creates issues that should not exist through fear of protest that seems to be paralyzing acquisition decision-making. The reverse auction process is Acquisition 2.0 in motion, as reverse auctions create a structured and automated negotiation process with transparency at its core, since the process depends on vendors creating a clear and documented process for creating the pricing structure and the subsequent contracted price. It is the openness of the process that should be embraced, since the reverse auction allows for real time pricing feedback, and also allows acquisition officials to have real time visibility into the negotiation. This type of structure and the transparent process creates and enhances competition, reduces complexity, enhances collaboration, and ensures compliance with the acquisition policies and regulations.

It is these types of procurement methods that should be embraced, and will need to be further explored to help create holistic strategic sourcing initiatives for realizing true cost-savings by adjusting processes, ensuring leadership drives change, and breaking the endemic status-quo culture of Government. Successful examples of reverse auctions already exist through both Defense and civilian agency use, so lessons learned are available for use and need to be expanded upon to help with widespread adoption. As OMB continues to issue guidance on improving federal acquisitions and government management in general, reverse auctions need to be part of this process of continuous improvement and increasing accountability to the taxpayer.