If you’ve ever bought anything on eBay, you’re familiar with the online auction process: It involves one seller but many potential buyers, who bid up the price until the time expires and the highest bid wins the item.As its name implies, a reverse auction works the opposite way. It features one buyer—in our case, a university—but multiple sellers, all of whom offer the same product or service. Using an online platform, they progressively lower their bids until the time expires and the auction concludes.
San Diego State University (SDSU) recently used a reverse auction to procure photocopier services for our campus of 36,000 students. As one of the 23 campuses of the California State University System, SDSU participates in group procurement efforts that result in lower negotiated prices for many products. However, for some products and services, each campus does its own procurement.
SDSU’s annual budget, including research and all auxiliaries, is $811 million. The core university operating fund is $372 million, which comes from tuition and state funding—and about 78 percent of it is spent on salaries and benefits. We must stretch the remaining 22 percent to cover all nonsalary operating costs. When our centrally managed lease for 150 photocopiers on campus approached its expiration date, the procurement office saw a good opportunity to try the reverse auction method in lieu of the traditional request for proposal (RFP) or invitation for bid (IFB). Leasing arrangements for photocopying equipment and maintenance services are usually available through multiple suppliers, heightening the likelihood of our receiving competitive bids.
The Mechanics
We began by issuing a standard RFP, with detailed specifications for the number and types of photocopiers, desired number of copies per minute, and so forth. We asked the vendors to respond just as they would normally, with the exception of not including a price. Instead, we notified the vendors that pricing would occur through a reverse auction.
While you can certainly use a reverse auction to select a vendor on price alone, we combined that quantitative step with a qualitative one. In other words, we used the reverse auction to arrive at the best and final price—not necessarily the lowest price overall—for the vendor best meeting our other criteria.
When responses to the RFP arrived, we reviewed and scored them based on qualitative factors, such as the ability to fulfill our specifications and service requirements. Five vendors passed this pre-qualification stage to move on to the pricing stage. They then received notice of the date, time, and online site for the reverse auction.
We used a third-party vendor to host the automated auction. Typically, the hosting function is free to the institution, but the bidder eventually selected as the winner pays the auction site a premium—usually about 3 percent of the winning bid, which the vendor undoubtedly calculates into the price. So, indirectly, the institution pays for the hosting service but doesn’t have to worry about the mechanics of it.
With the online platform, the bidders for our photocopier services did not know the identities of the other participants. They could, however, see the dollar amount of the low bid and how their current bid ranked in relation to the others’ bids (for example, the highest or lowest bid out of five). On SDSU’s end, we could see both the actual bids and the names of the companies participating—and found it quite exciting to watch the bidding unfold.
Most online reverse auctions last for 15 to 30 minutes. An automatic extension of bidding time is granted if a vendor responds to the last low bid within a two-minute window. The auction for our photocopier lease ran nearly 50 minutes, with much back-and-forth bidding before it closed. The auction began with a large price variation among the initial bids—the highest bidder started at $2.5 million, while the lowest bidder opened at about $1.7 million.
In the end, based on all scoring factors, we selected the vendor that bid $1.3 million. The new contract gave us essentially the same type of photocopier program we had before—although with 11 different models instead of 35—and for the same duration. But we paid about $1 million less for the new contract compared to our previous one.
Find a Good Fit
Given this financial success, we’re now looking at expanding our use of reverse auctions to procure other goods and services. The trick is to find those with the best match for the auction process. For example, we considered using a reverse auction for a campus lighting project but determined the project was really public works; the reverse auction does not follow the processes required of a public institution such as SDSU.
Reverse auctions work well for obtaining equipment or services that aren’t too specialized and are provided by enough vendors to form a fairly large pool. Ideally, you need between three and five vendors to participate in a reverse auction, and not all potential vendors who receive your RFP will meet your qualifications or wish to participate in the online bidding process.
As with any RFP, it’s also helpful to develop detailed specifications and clarify your evaluation criteria. With our photocopier leasing contract, we emphasized that the final bid price, as determined through the reverse auction, would play a big part in our selection of a vendor, but would not be the only determinant.
SUBMITTED BY Agnes Wong Nickerson, associate vice president of financial operations, San Diego State University.