Wielding the Virtual Gavel--DOD Moves Forward With Reverse Auctions

• Author: Major Susan L. Turley
• Pages: 01

MILITARY LAW REVIEW

Volume 173 September 2002

WIELDING THE VIRTUAL GAVEL-DOD MOVES FORWARD

WITH REVERSE AUCTIONS

MAJOR SUSAN L. TURLEY1

1. Introduction

   Five hundred years before the coming of Christ, Babylonian men procured wives during an annual auction of women of marriageable age.2 Would-be husbands bought the attractive women in traditional auctions with the lucky suitor being the highest bidder, but the less desirable females had to pay someone to marry them. The not-so-pretty women auctioned themselves off in what is probably the earliest precursor of a reverse auction in recorded history. Most likely using the prices paid for the good-looking wives as a starting point, the potential suitors competed to reduce their "bids" until hitting their bottom line-the bargain-basement dowry they would accept to marry an ugly wife. The man with the cheapest requirements took home a bride.3

   More than 2500 years later, the public sector has turned to auctioning to buy millions of dollars of computers, natural gas, airplane parts, dishwashers, pharmaceuticals, and even goats. In this day and age, however, the auctions have a new twist-they are online and they are "reverse." As they gain in popularity, the virtual gavel can be heard banging across the Department of Defense (DOD) and the entire federal government.

   Government agencies are turning to this procurement tool not only as a way of leveraging electronic commerce technology, but also because it has significant potential to shorten the contracting timeline and, perhaps more importantly, to result in dramatic cost savings for the government. Not everyone favors reverse auctions' bid for acceptance, however. A number of legal questions and concerns about reverse auctions still loom in contracting cyber-space.

   This article first reviews the background of reverse auctions, starting with their history, including use by the private sector and by state and local governments. The article also provides a general description of how reverse auctions work and looks at the federal government's experience with reverse auction procurements, including an overview of the perspective of the different services. Next, the article addresses the baseline question of whether reverse auctions are legal, followed by explaining what regulatory guidance exists. The article then reviews some of the difficulties previous reverse auctions have faced, the challenges in properly implementing them, and some of the concerns among government and industry users. The article evaluates the validity of some of those criticisms, as well as assessing possible solutions to the various problems. The article next concludes that the reverse auction is a valuable procurement tool that will continue to grow in popularity. With that baseline assumption, the article then analyzes opinions regarding whether reverse auctions require additional regulatory guidance. Finally, the article asserts that while the reverse auction experience to date does not indicate a need for extensive regulation, more formalized guidelines could benefit some areas.

2. Reverse Auction Background

   1. History of Reverse Auctions

      After the Babylonians, the British apparently used a descending price auction-also known as a Dutch auction-as far back as the 1600s.4 A descending price auction is similar to a reverse auction in that participants bid down the price from its beginning level.5 The two formats differ, however, because a descending price auction still has the traditional goal of selling something to the bidders. On the other hand, in a reverse auction, the bidders are vying for the right to sell something to the auction holder.6

      In the private consumer world, Priceline.com uses a reverse auction to match travelers with airline tickets, and the lending industry, automobile sales, and hotel bookings have all employed reverse auctions.7 At least three online reverse auction Web sites will locate attorneys for legally troubled consumers,8 and the concept has found a place in class-action suits,9 environmental siting decisions,10 and even medicine.11

      In 1998, online auction transactions (both reverse and traditional "forward" forms) between businesses and from businesses to consumers totaled about $8.5 billion a year.12 One analyst predicts online auctions will account for an astronomical $100 billion by 2004.13 Local, state, and federal government currently spend less than one dollar out of every 100 online,14 but one estimate figures online auctions could cut governmental procurement costs by at least $50 billion.15

      Pennsylvania was the country's first governmental organization to utilize reverse auctions. Over several months in 1999, the state saved $8.5 million buying online rock salt for roads, aluminum rolls destined to become license plates, and heating coal.16 In January 2001, San Antonio, Texas, saved forty percent in reverse auctions for equipment for its emergency services.17 Minnesota's forty-five-minute reverse auction in June

      2001 for aluminum was expected to reap five-year savings of more than $175,000.18

      In short, "the Internet has made procurement sexy"19-and the DOD has not proven immune to the enticement of technology's bright lights and big city. Drawn by the lure of big-buck savings and the thrill of the Internet revolution, various government agencies have turned to reverse auctions with varying degrees of enthusiasm and success.

   2. How Reverse Auctions Work

      Generally, reverse auctions allow companies to bid against each other in real time. The government knows the bidders' identities, but the bidders themselves see only aliases so they do not know who they are bidding against.20 One of the most critical steps for the government is to determine the opening price, which participants then bid down. This price generally is set using a previous baseline (such as the supply schedule from the General Services Administration (GSA)) or the Independent Government Cost Estimate (IGCE).21 The auction lasts for a fixed period, usually thirty to sixty minutes. 22 It can be extended past that window, however, if an offeror submits a bid within the closing minutes (again, another set period, for

      example, the final five minutes). At this point, each participant gets an additional period to submit new bids and "literally buy themselves more time."23

      The circumstances-the buyer, the suppliers, the type of contract, the item or service involved, the level of technology and the auction provider used-may require or allow the agency to customize the actual process somewhat. For example, in a negotiated procurement (either a best value tradeoff or lowest price technically acceptable),24 the process may work this way: 25 The agency identifies and articulates the competitive requirement, synopsizes it, and releases the solicitation. After receiving proposals, the agency determines the competitive range and then schedules the reverse auction. (The agency also often reserves the right to award without using a reverse auction.) All the contractors who will be participating receive training before the agency conducts the auction. After the auction, the agency does a post-auction analysis and awards the contract.

   3. The Federal Government Experience

      1. General Overview

         Reverse auctions are attractive first and foremost because of their "dynamic pricing"-their ability to create an environment where prices can fall as much as the market will allow.26 Government agencies have saved millions after seeing prices drop as much as fifty percent from the starting price. Another benefit has been the ability to award a contract in days, sometimes literally hours, compared to the weeks or days that award traditionally takes.27

         In May 2000, the Navy conducted the federal government's first online reverse auction, for 756 recovery sequencers used in airplane ejection seats.28 During the fifty-one-minute auction, the price dropped from the starting bid of $3.2 million to the final price of $2.37 million, a savings of about twenty-eight percent. After the auction closed, the Navy needed less than an hour to award the contract to the winner of the three would-be suppliers.29

         Also in May 2000, the Army's Communications-Electronics Command (CECOM) carried out two test reverse auctions but on a much smaller scale. The CECOM bought a secure fax machine at a savings of about twenty percent off the GSA schedule, followed by a purchase of two computers for $3280, about half the price the Army would have paid through GSA.30

         The Defense Energy Support Center held its first reverse auction in August 2000, knocking about $425,000 off the cost of a month's worth of natural gas for Washington-area military installations. Six suppliers submitted twenty bids in thirty minutes.31

         The following month, in September 2000, the GSA's Federal Technology Service (FTS) launched Buyers.Gov 32 as an online reverse auction provider. GSA contracted with five companies, called "enablers," to conduct the auctions.33 After a year, the site had handled about two dozen auctions, about half for information technology products.34

         During its inaugural month, Buyers.Gov conducted the largest online reverse auction to that point. In September 2000, the Department of Defense Finance and Accounting Service (DFAS) watched fifteen bidders compete to supply its information technology needs. Originally set to last just sixty minutes, the auction went more than four times as long as falling prices extended the deadline. Prices on the four lots dropped from twelve to forty-eight percent, and DFAS paid about $2.2 million less than the $10 million IGCE.35 Officials gushed, as well, over the speed of the procurement, which closed out that same day.36

         In June 2001, GSA announced plans to award a long-term, government-wide indefinite-delivery, indefinite-quantity (IDIQ) contract to execute the Buyers.Gov reverse auction program.37 By June 2002, Buyers.Gov had apparently fallen prey-at least...