E-Reverse Auction: Is it loosing its sheen as a Negotiation tool?

E-Reverse Auction: Is it loosing its sheen as a Negotiation tool?

The history of electronic Reverse Auctions (e-RAs) dates back to 1989, when Bank of England used it to auction British Government debt. Subsequently, General Motors developed its RA program and priceonline.com became the first company to apply e-RAs in the open market. With the passing years, various types of auctions emerged based on the combinations of decision and termination criteria, namely:

• Reverse English - the most popular where the Contract is awarded to the lowest Bidder at the lowest price.
• Reverse Vickrey – similar to Reverse English with an exception that the Contract is awarded to the lowest bidder at the price of the second lowest bid.
• Reverse Dutch – The bidder quotes the number of items & the prices and the number of items quoted by successful bidders (could be more than 1) are sold to the Purchaser at the lowest bid price.
• Reverse Yankee – It’s a variation of Reverse Dutch with an exception that the items are purchased from the successful bidders at the prices quoted by them (also known as Bucket filling method in Indian context)

In addition to above, there have been other variations like Japanese Reverse Auction, etc. Though e-Reverse Auctions have been used by various Private & Public Sector companies like GE, 3M, HP, South West Airlines, NTPC, SECI, Coal India, etc., there have always been questions around its effectiveness in generating the savings.

In the Indian Scenario, e-RA was adopted by some players in the early 2000s, however, its widescale adoption started from the year 2010 onwards. During my tenure with my previous organization, I distinctly remember receiving the Ministry of Power (MoP) Order dated June 11, 2015 (relevant part enclosed below - order available in public domain) stating that e-RA should be resorted in all the Project packages where bid selection criteria is evaluated L1 price. Though the order said, Boards of PSUs should frame the adoption guidelines, practically, all the PSUs started abiding by the spirit of the Order i.e. to adopt e-RA in all cases.

Being part of the Procurement Policy division, we tried our best explaining it to the MoP that e-RAs should be used as strategic tool and can’t be implemented in every case. World over, the Reverse Auctions are primarily used for buying commodities which basically means standardized products without any engineering complexities, with large number of suppliers and a market primarily driven by prices. With MoP mandate, e-RAs were practically adopted by all the Public Sector undertakings specially for Renewable projects and it lead to discovery of unimaginable prices for which the Government took lot of credit. All the newspapers headlines were highlighting the record-breaking low levels of Rs 2 per unit cost of electricity in Renewable projects which seemed to go down further with every auction.

On one extreme, MoP apparently mandated all the Project packages to be awarded through e-RAs in 2015 and on the other extreme, Government has now decided to completely pull the plug for use of Reverse Auction in the Renewable Sector.

In my previous organization, we used dynamic e-RA with loading of performance parameters in each iteration, for awarding FGD projects, which was first of its kind in India in the Projects domain and it brought substantial cost benefits, which clearly indicates that e-RAs can be of immense use even in the Projects domain.

The knee jerk reaction of completely pulling the plug on e-RAs in Renewable sector is likely to impact the discovery of prices for new Projects and we may see some substantial increase in prices which would mean bringing in conventional negotiations into the play. This would lead to delay in finalizing the prices and thus delay in the award of the Projects. I believe e-RA or its improved versions will continue to be used effectively worldwide to negotiate the prices and the technology will have a bigger role to play as more effective and business-oriented e-RA technologies would be developed with built-in intelligence capabilities. Meanwhile, Government should give autonomy to the Procurement Organizations to take strategic decisions regarding usage e-Reverse Auctions.

Disclaimer: The views expressed in this article are completely personal and do not purport to reflect the opinions or views of the Company where the author works.?