When Reverse Auctions Come Up Against "The Machine" in the State of Illinois

I must say, I'm probably one of the individuals in the most unique positions to critique the merits of reverse auctions in Illinois' state government. As someone who spent five years of his career evangelizing the use of reverse auctions at a pioneer in the industry, FreeMarkets (now part of Ariba), and as a resident of probably the most corrupt state in the nation based upon the behavior of two of our most recent former governors, I'd say that the combination of circumstances and history puts me in a somewhat unique place from which to examine the prospects of state reverse auction usage. I've also played a limited advisory role in federal sourcing tools selection as well. But what I think adds even more credibility to the position I'll posit in a minute is that I've come to believe that reverse auctions are only appropriate for typically a minority proportion of most organization's overall external spend. In other words, they should never be a catch-all panacea, at least for extended periods of time.

Before getting into the details as to why I believe this, let me start by sharing the background of the story. My local business trade publication, Crain's Chicago, recently published a story casting the use of reverse auctions in Illinois government in somewhat of a critical light. By way of background, the article provides a bit of detail on a "new law that allows the state or any governmental unit to skip the usual sealed-bid process in favor of electronic reverse auctions" -- exempting "some politically powerful industries, such as construction and telecommunications services, [which] won exemptions." For those who aren't familiar with the despicable government of my state, it's most known for sending former Governors to jail for bribery, corruption and related items (e.g., attempting to sell the seat of the former Senator and now President, Barack Obama, to the highest bidder).

Illinois is not, however, known for forward-thinking procurement policy -- until now. Crain's notes that "While promising to shave the government's cost of goods and services, typically by 10% or more, online bidding will intensify competition and add another headache for Illinois vendors already struggling with late payments as the state's fiscal crisis worsens." In other word, vendors, many with strong political connections and track records of large political donations, will now need to sharpen their pencils in a truly competitive process, but one that has been proven to work time and time again when a lack of transparency hindered competition in the past. As an example, Ohio, another Midwestern state a couple hundred miles east, "saved more than 11% on roughly 50 reverse auctions in the last year, paying $3.4 million less than in the past on $30.7 million worth of contracts for food, personal computers and other staples."

Illinois is a newcomer to the competitive public sector negotiation stage. Crain's also notes in the piece that "Electronic reverse auctions were a little-noticed part of recently enacted procurement reforms to move the state away from "pay-to-play" contracting and other shady practices that plagued the tenure of former Gov. Rod Blagojevich." In other words, one of the primary reasons that the current administration put forth legislation allowing their use -- except in the industries which provide some of the highest levels of donation to politicians -- is to create greater transparency in the sourcing process, in hopes of making government more accountable (and saving tax payers from having to pay for jail time for former politicians).

For this reason alone, I believe that Illinois, for a period of time, should be forced to run reverse auctions for every category of spend over a certain level (e.g., $50K) to shed light on possible former corrupt or collusive contracting practices. For example, if a new bidder is able to show material savings (e.g., 5-10% for commodities, 10-40% for SKUs/services with greater value add), it might very well provide fodder for officials not just to save tax payer money, but to research potential fraud/bias in former contract award decisions. And over time, even if reverse auctions do not become a favored bidding format, state procurement and contracting officials should still be required to use an online bidding process (e.g., sealed bid, multi-round sealed bid, etc.) that creates a documentable audit trail of activity amongst potential suppliers.

Reverse auctions tend to work best in markets for highly specifiable materials and services where there is a healthy and large supply base (although they can also work in other circumstance as well). But they're also appropriate in cases where an organization wants to create transparency where it did not exist before. Even though suppliers may push back on possible public sector use -- and will probably factor into account the late payment terms the State has been pushing -- the most competitive will certainly participate. And when they learn that it is far better business to become more efficient and participate effectively in actual negotiations rather than simply sending candidates both unofficial and official envelopes during the campaign season and then waiting on contracts, they'll realize that the margin points they sacrifice in competitive environments can be made up by staying clean in other areas.

Jason Busch

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