Going once, going twice

Saturday, November 14, 2009
by: Jonathan Bilyk

Brad Cauffman has heard the refrain from frustrated would-be vendors for years. “They see the final price that we accept, and they say things like, ‘All I had to do was drop my bid by $500? I would’ve done it,’ ” he said. “So to us this just made sense to try it out.

“And from what we’ve seen, we’ll probably do it again.”

Earlier this summer, Cauffman, assistant superintendent for business services at the St. Charles School District 303, supervised what would be a first time event among Illinois school districts — a reverse auction.

The item up for bids in this case was paper — an entire truckload of copier and printer paper. Or, to be more precise, the item up for bids was the right to be paid by District 303 to supply the truckload of paper for the 2009-2010 school year.

Traditional auctions begin low and do not end until potential buyers reach the point at which they are not willing to pay more. But in a reverse auction, it is the sellers who compete with each other in a race to the bottom, to find the lowest price at which they are willing to sell their products to an interested buyer.

Since the 1990s, the process has made consistent gains in popularity in the private sector, as companies of all sizes have used the process to trim costs compared to traditional purchasing and bidding techniques.

However, the reverse auction concept has found slower going in attempting to gain a foothold in the public sector.

In Illinois, for instance, local governments were limited by law to methods like the sealed bid when using tax money to purchase goods and services. That essentially made using reverse auctions illegal, or legally questionable, at best.

This summer, however, the state enacted a new law specifically permitting local governments and taxing bodies to use the reverse auction process to purchase goods. The law, however, continued to bar local governments from using reverse auctions to secure bids for construction projects or to obtain professional services, such as engineers.

One of the chief sponsors of the new law was State Sen. Chris Lauzen, R-Aurora.

“It sounded like it made perfect sense,” Lauzen said. “We want to provide high quality service to our citizens, and to do it at the lowest possible cost.

“And this seemed to be a good way to try to do that.”

Within weeks of the measure becoming law, District 303 had signed on with Louisville-based BidBridge to organize just such an auction for its paper contract.

The way BidBridge’s process works is simple: BidBridge and the buyer — in this case, District 303 — prequalify certain companies to bid, reviewing, for instance, their capability of meeting the district’s supply requirement.

From there, BidBridge schedules a time for the auction, which is conducted electronically. The auction lasts 30 minutes, but can be extended by three minutes, should a supplier put in a lower bid before the auction ends. That then allows the other bidders to submit lower counter bids, as well. The auction ends when no supplier submits a lower bid within three minutes.

The program creates a scenario in which buyers can sit in front of a computer somewhere and watch their price go down and down and down.

“It’s a wonderful feeling,” Cauffman said.

District 303’s reverse auction for paper lasted about 52 minutes and ultimately saved the district about $18,139, or about 12 percent, when compared to the state contract for paper.

So far, District 303 is the only unit of local government in Kane County to take the reverse auction plunge.

But the results garnered by the auction have caught the attention of others in the area, prompting a number of local taxing bodies to begin either looking into the possibility of reverse auctions or talking directly with BidBridge about running similar auctions in the future.

Officials at Geneva School District 304 are reviewing their contracts to see if there might be some that would benefit from a reverse auction.

Assistant Superintendent for Business Services Donna Oberg said her district might not benefit from the reverse auction as much as larger districts, such as District 303.

“We probably don’t have the space to store that much paper, for instance,” Oberg said.

Rather, she said, the Geneva district has sought to save money by maintaining its membership in the Lake Bluff Consortium, a group of 42 school districts that buys its paper in bulk. While the district pays a little more than what District 303 paid, the paper is delivered as the district needs it.

However, that consortium does not help the district with contracts for other consumable products, she said, and the district would consider BidBridge or other companies’ aid in obtaining lower prices for those products.

Reverse auctions have also gotten the attention of the Batavia School District 101.

Kris Monn, District 101’s assistant superintendent for finance and operations, said his district is very excited by the opportunities offered by reverse auctions.

“It just seems like a terrific way to drive down costs,” Monn said. “We are trying to find the next big ticket item that we have coming up, so we can hopefully use this process.”

Guy Ramsey, an operations analyst with BidBridge, said his company has also had contacts with the city of Batavia, Aurora, Campton Township, the Geneva Park District and even Delnor Hospital.

“We’ve gotten a lot of attention in Illinois since the St. Charles bid,” Ramsey said. “But you can make a lot of headway when you save someone’s neighbor a lot of money.”

Ramsey, however, noted that his company’s ability to use reverse auctions to save taxpayer money will be limited in Illinois by the construction and professional services exclusions in the law.

But, he said, lobbies for construction-related industries in Illinois and other states have prevented BidBridge and other supporters of reverse auctions from successfully changing the law.

Lauzen said he would support such a change in the law.

“That’s a huge exemption,” Lauzen said. “Construction is where the real money can be saved, and I would eventually like to see the law broadened.

“But, for now, this is a start.”

What is a reverse auction?

Unlike a traditional auction, reverse auctions use a bidding process to help buyers obtain the lowest prices for the items they are seeking.

Suppliers essentially compete to see who can go lowest. In the end, the process can save thousands of dollars for local governments looking to buy anything from copier paper to automobiles, say those who run the service.