As the astute reader may have guessed from our last post, the doctor is not a big fan of reverse auctions in the private sector. In many cases, he cringes at their mention — because the savings are typically one-time, short-lived, and come with a hefty virtual price tag that is sometimes greater than the initial savings (which doesn’t materialize for months or years to come).
But reverse auctions have their niche, and that niche is the public sector. The unique (and typically illogical) spending constraints often make reverse auctions a perfect fit, and where the public sector is concerned, anything that can reign in rampant government spending gets a go ahead in the doctor‘s book. As per our last post on reverse auctions where we noted that old is new, but one-time is still just one-time, while the relative lack of spending constraints in the private sector will result in the realization of most (if not all) of the benefits of reverse auctions in the initial use, the public sector will realize the most significant competition and price benefits again and again. (It’s sad that this is the case, but given how slow policy and process changes in government agencies, we must work with what we have.)
And in the public sector, where the utter lack of anything resembling best practice supply management process and technology is often the norm, these benefits, at least initially, can be almost as significant as the benefits decision optimization brings leading edge private companies. As per Wyld’s results, which were based on an in-depth examination of reverse auctioning at the Department of State:
- there is a proven savings factor of 11.9%
(at the Department of State, which reverse auctioned over 613 M of spend over 4 years)
- which could be applied to 75 Billion of annual spending that is appropriate for auction-based procurements
- and this yields an annual expected savings of 8.9 Billion
Furthermore, this savings potential is fairly consistent in the implementation of reverse auctions around the globe. South Korea expects to save about 10.5% annually. The UK Office of Government Commerce sees similar savings opportunities on their addressable spend. And a recent study from researchers affiliated with the United Nations that meta-analyzed reverse auctions across four different government entities in the US and Europe reported an average savings rate of 12.1%.
And these savings will materialize again and again. Public sector organizations will continue to see:
- downward prices
Not only is the public sector guaranteed demand, but it is demand that is typically guaranteed to increase over time in most categories and markets. As a result, supplier organizations will continually vie to profitably produce those products cheaper in an effort to win those lucrative government contracts which they know will be coming around again.
- real-time market pricing
Pricing will always be up to date each time the event is run.
- time savings
Since potential suppliers come and go more frequently, and since contracts continually change, the time savings are significant as much of the work required to implement the changes can be automated.
- increased number of suppliers
Every year, new suppliers will throw their hat into the ring for government contracts as they reach a size where they feel they can effectively compete.
- sustainable cost savings
Since government organizations must continually put categories out to bid, since past performance typically can’t be used to tip the scales one way or another, and since long term contracts can’t be cut on future offers, all savings must be measured against average market price. Since an auction will generate the best market price, the public sector government organization will save every time.
In short, if your organization is a public sector procurement organization, and it does not have an e-Auction platform, then your organization should get one today. The cost is minimal compared to the savings, accountability, and accolades that will materialize upon its proper utilization.