A reverse what....?
As a steward of taxpayer dollars, municipal buyers face tremendous pressure to get the best price for your organization. This keeps the tax burden low amid always tight budgets. The mantra often heard is “do more with less”. Often the “best price” isn’t always the “lowest price.” You need the most qualified vendors to give you their lowest possible price, and you need to settle on those prices quickly.
You are already relying on your purchasing staff and group organizations, to ensure the vendors you select are qualified. Are you aware that you can now take savings to a whole new level with Electronic Reverse Auctions? A “reverse what?” you say….
The term “Electronic Reverse Auction” or “ERA” may not be known to you now but it is a tool that every municipality in Canada will be hearing more of as it becomes a standard part of the municipal procurement tool kit.
The traditional procurement tool kit in Canada consists of tenders and RFPs that function under the notion that bidders get one chance to give you a price which is sealed in an envelope and opened later by the purchasing staff. Once the envelopes are opened, changes cannot be made to the price and the lowest price bidder is duly rewarded, either with the contract outright or by being assigned the most points for that criteria if there are other criteria to consider. What is generally believed is that we received the best possible price…..only we do not have any way of knowing if bidders collectively would have bid lower, had they been given the opportunity to make further reductions in price. We may have gotten the best value that was offered but buyers are left to wonder if we received true market value. Many in the municipal sector are familiar with the terms “municipal premium” or “public sector premium”, usually spoken of in whispers and behind closed doors. We often think that it would have been much less expensive if we were buying the same thing for a private sector organization. A buyer in the private sector likely would have been able to, or even encouraged to, negotiate a better deal.
What if municipal buyers did not have to take the first and only offers presented? What if they could negotiate with the qualified suppliers in a fast, fair and honest way? Could suppliers be allowed to reduce their bid, if they felt it was in their best interest, in order to secure the public contract.
Until recently, this type of scenario was not realistic in Canada in the public sector, but that has now changed. In 2017 the Canadian Free Trade Agreement and the Comprehensive Economic and Trade Agreement both came into effect. These trade agreements, for the first time, explicitly recognize electronic reverse auctions as a legitimate public procurement method in Canada and include provisions to govern their use in public sector procurement.
While this is a new development in Canada, reverse auctions have been recognized internationally for many years in leading standards like the United Nations Model Law on Public Procurement as well as the European Union Procurement Directive. Countries around the world, including the US, UK, and Australia, have successfully used reverse auction in municipal procurement for the past two decades with significant savings in a variety of categories of spend.
An Electronic Reverse Auction (ERA) is an online, real-time purchasing technique which involves the presentation by suppliers of successively lowered bids during a scheduled period of time and the automatic evaluation of bids. A reverse auction can be configured in two ways that align with the traditional procurement process: 1) as the entire competition when price is the only criteria and the winner is the lowest bid at the end of the electronic auction; or 2) as the second stage in a two-stage competition when other quality-based criteria have already been evaluated, in which case the winner is the supplier judged to have the highest overall evaluated bid.
Respected Canadian public procurement lawyer, Paul Emanuelli, stated in his recent whitepaper, Electronic Reverse Auctions: Debunking Myths and Misconceptions, published in 2018:
“The question is no longer whether ERAs can or should be used…. The question is how much further can ERAs be expanded across all sectors, …., to achieve improved process efficiencies and cost savings.”
Emanuelli goes on to recommend that “organizations interested in implementing ERAs should take the following seven steps:
Adopt legally vetted Negotiable RFP templates with ERA protocols
Update to ERA‐friendly policies and procedures
Develop an industry strategy to select the right projects
Create a rollout plan to control internal deployment
Ensure appropriate internal training and awareness
Get initial launch support from experienced advisors
Develop a plan for self‐sufficient long‐term use”
For Canadian municipalities, ERA’s represent an opportunity to reduce spending in a disciplined and strategic way. While not fool-proof and certainly not applicable to all purchasing categories, when ERA’s are strategically used, you can expect to generate savings of 8-20% depending on the category. What kind of impact would that level of savings have on your organization?
Qualified vendors. Lowest prices. Best use of taxpayer dollars. That’s what you get from a reverse auction.
To learn more please contact Craig Milley at Wayfinder Consulting Inc. - Your Procurement & Supply Chain Guide