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Reverse Internet Auctions:
A Better Way to Buy?
November/December 2003
By: Kimball H. Carey
VIEW OR PRINT ARTICLE IN PDF FORMAT
Question: What do the following items have in
common?
Give up? A quick surf of the Internet shows that all of
the above items have been purchased within the last
two years in reverse Internet auctions. What is a reverse
Internet auction? In a nutshell, a reverse Internet
auction is a procurement procedure by which a volume
buyer (such as a corporation or a governmental agency)
posts specifications on the Internet and invites vendors
to bid against each other for the opportunity to supply
whatever it is the buyer wants to buy. The auction is a
buying event, rather than a selling event, and the
competing bidders drive the price down, rather than up.
Does the reverse Internet auction make sense for
government procurement? Many states - including
Pennsylvania and Minnesota, two “early adopters" -
seem to think so, as does the federal government, which
is also leading the way on reverse auction procurement.
This trend toward “e-procurement” and “e-sourcing”
has exploded over the last few years, leading to a
proliferation of third-party “auction providers” for
both public sector and private sector purchasing. Some
major players in this new field are FreeMarkets, edeal,
Ariba, Commerce One, and Sorcity.
Ohio jumped onto the reverse Internet auction
bandwagon in late 2001 with the enactment of House
Bill 120 (creating new Ohio Revised Code Section 9.314).
This bill officially authorized the use of reverse Internet
auctions for purchasing by both the state of Ohio and
political subdivisions (including municipalities).
Materials prepared by the Legislative Service
Commission (LSC) at the time described the following
basic elements of a “typical” reverse Internet auction:
Reverse auctions are hosted by “e-commerce
enterprises” that support the online bidding software.
Actions take place online over a prescribed period,
usually a working day.
The buyer selects the most promising bid after the
deadline is reached.
The choice is made on the overall criterion of “best
value,” in which such factors such as price, quality
of merchandise, and past performance of vendors is
typically considered.
Price alone is not the controlling factor that determines
the winning bid
The specific procedures actually enacted by HB 120 for
political subdivisions incorporate these basic elements
including - perhaps most significantly - the last
characteristic set forth above. These procedures may be
summarized as follows:
Rules on reverse Internet auctions must be
adopted by the political subdivision.
Notice of the auction must be published in
accordance with the rules.
A request for proposals (RFP) is issued on the
Internet which states the relative importance of
price and other evaluation factors.
A political subdivision may conduct discussions with
responsible offerors regarding any clarification,
correction, or revision of their proposals, as long
as offerors are given “fair and equal treatment”
with respect to such opportunity for discussion.
Contract is awarded to offeror whose offer “is
most advantageous to the political subdivision, taking
into consideration factors such as price and the
evaluation criteria set forth in the RFP.”
A performance bond or other form of security is
provided by the successful bidder, if required by
the political subdivision’s rules.
In reviewing this procedure, it immediately becomes
apparent that the reverse Internet auction is
dramatically different from the typical RFP procedure
in several key respects:
The procedures are determined primarily by the
subdivision’s own rules, not a state law or
regulation.
The bidding process is “live” and compressed into a
defined time frame.
The bidding process is “dynamic,” allowing bidders
to see other competing bids and respond by bidding
the price even lower.
You are allowed to communicate directly with
individual bidders while the bidding is underway.
The criteria for selection are self-defined by the
subdivision and need not be driven by price alone.
In short, the reverse Internet auction procedure is more
flexible, more informal, and more time-efficient than the
typical RFP process. It also appears to provide the
municipality or other subdivision a unique opportunity
to avoid the restrictions of the applicable bid standard
(usually “lowest and best bid” for municipal purchases
over $10,000). Instead, the criteria for selection are
entirely “user-defined” and may be tailored to the
particular goods or commodities being acquired.
What things are you allowed to buy this way? The law
(RC 9.314) says you may only purchase “services or
supplies” through a reverse Internet auction. However,
this is somewhat misleading since “supplies” are
broadly defined to include (somewhat counterintuitively)
equipment, as well as “materials, other
tangible assets, and insurance.” Therefore, about the
only thing excluded by law from the reverse Internet
auction procedure is real estate.
In reality, however, it is generally recognized that the
reverse Internet auction procedure works best with
“commodities” and other “generic” goods and services
that can be clearly defined and quantified. The
following list of goods - taken from an actual reverse
Internet auction conducted on behalf of public buyers -
is typical of the kinds of items which can be effectively
purchased by this method:
Automobiles, trucks, and vans
Carpet
Printers and toner cartridges
Playground equipment
Roofs
How can your city or village participate in a reverse
Internet auction? There are basically three methods:
Acquire the necessary software to conduct the
auction on an “in-house” basis;
Contract with a commercial auction host to
conduct the auction for you; or
Participate through a regional, state, or national
purchasing cooperative.
The last option is undoubtedly the easiest and most
common method for public entities to take advantage
of HB 120. After consulting with any purchasing coops
your city or village might already belong to, you
may want to obtain additional information on internet
procurement programs from the following national
organizations and resources:
One final word of caution - House Bill 120 is still
relatively new, and a certain amount of interpretation
will be required in “melding” the rather unusual
reverse Internet auction procedures with the existing
laws governing municipal purchasing. You will need
to consult with your legal advisor on these issues and
(as always) on the impact which your charter may have
on these issues if you are a “home rule” municipality.
Reprinted from Finley’s Ohio Municipal Service, with the permission of the
publisher and copyright owner, West Group.
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