Reverse Auctions: A Tool With No Mechanic - Sponsored Whitepaper

Reverse auctions have turned the once-secretive, sealed-bid process for procuring goods and services into an open bidding war – which appears to be to the advantage of the buyer. Under this arrangement, the buyer contracts with a third party that issues a request for quotations from suppliers. At a predetermined day and time, suppliers log into an auction site and input price quotes, competing for the buyer's business primarily on the basis of who will agree to the lowest price.

A reverse auction may seem like a perfect solution. The dynamic bidding gives the appearance of downward price pressure. It has cut costs for some commodities at many companies. In response many organizations have enacted corporate policies that favor, or even mandate, this e-procurement tactic.

However, when it comes to energy, a reverse auction without a strong strategy can backre, often resulting in higher prices and contractual terms that are not in the buyer's best interests. Reverse auctions have not proven as successful for energy because they cannot answer two primary questions essential for success: Is now the right time to go to market? How do I know that the lowest bid price is a good one?

A reverse auction is simply one tool. You need a whole toolbox.

While a reverse auction with a good strategy can yield acceptable results, buyers can get off track when they confuse the tool as “the strategy”. The claims by companies running the auctions seem compelling: more supplier competition, lower transaction costs and enhanced pricing transparency. However, in the energy sector, these claims cannot be substantiated. There are more effective means (including other methods of e-procurement) that ensure end-users get the best possible energy procurement outcome.