Reverse auctions can save money for colleges

Friday, November 13, 2009

Reverse auctions can save money for colleges


Published November 6, 2009: Community College Times

Uncertain economic times have forced businesses, government agencies and academic institutions across the country to tighten budgets and search for new cost-saving strategies.

To stay on the cutting-edge of technology and progressive business, a growing number of schools and higher education institutions are looking into the benefits of reverse auctions for procuring goods and services.

In the past, organizations in the public sector have practiced procurement through more traditional means, like one -price-per-supplier response. But today’s procurement strategies don’t always adhere to best practices that can help organizations drive prices closer to market value. While the concept is not a new one, many organizations have been lax to adopt a procurement platform that features reverse auctions as its core component.

Reverse auctions fill a much-needed void in the procurement process by offering visibility for the purchasing organization, true competition between suppliers, standardized buying methods and reduced overall spending. Implementing a reverse auction platform can greatly reduce both purchasing costs and transaction processing costs.

Research by PriceWaterhouseCoopers and Killen & Associates indicates reverse auctions can log a 5 percent to 10 percent savings in purchasing costs while increasing profit margins by 28 percent to 50 percent. Aberdeen Group reports that with e-procurement, transaction processing costs drop by as much as 70 percent.

To leverage the most efficient technologies, community colleges looking to use reverse auctions for purchasing should consider an e-procurement platform. E-procurement offers organizations significant advantages over traditional platforms, including greater visibility for the purchasing organization, real-time updating, a dynamic and time-efficient experience and secure management—all while promoting increased competition between suppliers, ultimately driving down prices for goods and service.

In order to successfully integrate a reverse auction/e-procurement platform, community colleges must take three key factors into account:

Full support within the buying organization. In many cases, multiple parties at a community college are involved in the purchasing process. Making sure all levels involved in the decision embrace the strategy—from board members to directors to central purchasing to the department requesting the goods/services—is crucial.

Open specifications allowing for competition between multiple suppliers. Sometimes procurement specifications are developed in a way that significantly favors one supplier. In order to promote true competition, the reverse auction process should only take place if the purchasing process includes open specifications revolving around factors such as quantity needed, delivery expectations, peripheral costs, payment terms and discounts, and ceiling/floor guidelines.

Willing participation from a base of multiple, educated suppliers. To ensure a truly competitive environment, many e-procurement services practice strategic sourcing, a process that is difficult for community colleges to undertake on their own time. More experienced reverse auction platform providers have a diverse base of suppliers with which they have established relationships and notify of upcoming bid opportunities. Some providers even go the extra mile, exhausting every possible channel for finding new suppliers to compete for the business.

As an example of how the reverse auction process can benefit the education industry, San Diego State University (SDSU) worked with an e-procurement services provider on two bids. In the first bid, four suppliers competed to provide the institution with HP Blade Servers and backup software. The bid, taking place earlier this year, lasted a total of one hour and seven minutes and logged 128 unique bids. At the conclusion of the event, SDSU had saved $18,000 against budget.

In May, the institution’s second bid returned similar results. Seven suppliers competed to provide the university with new tables and chairs for the university library. First and second place suppliers were only separated by a margin of .31 percent. The lower the percent separation, the stronger the indicator that the university achieved market value for the procured goods.

SDSU provides a compelling argument for why more institutions should consider a reverse auction platform to obtain goods and services. As technological and procurement landscapes continue to evolve, the education industry needs to be at the forefront of these niches.

Headlee is CEO of eBridge.