In an era where visibility and transparency are second only to staying on budget and saving taxpayer dollars, state and local government organizations are actively seeking innovative methods to cut costs.

One such method that is gaining more popularity is reverse auctions, in which multiple suppliers bid against one another in an online environment. The process is set up so vendors are anonymous, but their prices are visible to other suppliers.

One federal example of the growing popularity of reverse auctions is the U.S. Department of State. The agency more than doubled its participation in reverse auctions in four years. That number continues to increase currently.

Once engaged in the reverse auction, vendors can see the current low price and offer a lower price than previous bidders. Prices are driven down as suppliers outbid one another. Agencies can choose to assign a time period for a reverse auction to run anywhere from one hour to several weeks.

Furthermore, the technology has advanced to a point that the entire process—from gathering vendors to conducting the reverse auction—can all be done in the cloud.

Not Just for Commodities

Traditionally, reverse auctions have been primarily used for such commodity items as raw materials, processed goods, printing services, paper, office supplies, and similar items. Reverse auctions, however, have recently proven successful in obtaining low prices for an even wider variety of goods and services.

Maricopa County, California, for example, conducted a reverse auction to obtain health benefits for county employees. The county first narrowed the field to a short list of vendors, and then conducted a reverse auction among them. The result was a high-quality benefits package and multimillion dollar savings for the county and taxpayers.

For suppliers, reverse auctions have a tendency to level the playing field for all involved. Suppliers adjust their prices based on their competitors’ prices, which helps maintain a fair profit margin among vendors while providing the purchasing agency with the lowest possible price.

Competition Creates Lower Prices

Increased competition is one of the most powerful contributions reverse auctions bring to the marketplace. When an organization typically works with the same two or three vendors, the prices can stay at a similar rate year after year.

When competition is increased, however, it can generate more favorable deals. In numerous cases, organizations are able to capitalize on better terms than they have ever seen before.

It also allows new and upcoming vendors a chance to gain government contracts, adding even more competition to the mix. Price savings can range anywhere from 5 to 70 percent—money that can be used on other projects that benefit the communities.

Because reverse auctions are conducted online, geography is not a barrier. This allows suppliers in different locations, sometimes even on opposite sides of the country, to participate in the auction.

Due to the ease of use and the cost savings that reverse auctions bring, government organizations should consider them for their procurement sourcing strategy. But the benefits of reverse auctions can transcend simple cost savings.

Transparency in government purchasing has become a clarion call by taxpayers who demand their tax dollars be spent more wisely. Reverse auctions provide an unbiased approach that completely negates any possibility of favoritism and provides an equal chance of winning for all suppliers. Any appearance of unethical dealing is removed when government agencies employ reverse auctions.

As budgets become tighter and savings need to be seen quickly, conducting reverse auctions is strategically a viable, easy, and effective option.