Reverse auctions are seen as providing a new tool for companies that will help them shave expenses and better document their procurement transactions. If I were a procurement professional, I'm sure I would like reverse auctions because:

• It cuts time and costs of both the product and the process (savings 5 to 15%)
• Companies focus on lowest cost and best value supply relationships; eliminates bias and opens bidding to new suppliers
• Transaction information is standardized, organized, time-stamped and trackable; provides an ability to confirm pricing and leverage previous agreements
• Data bases, queries and reports are flexible; they can be organized by supplier, pricing, product, time, etc.
• Process provides documentation for accounting and legal requirements; provides a paper trail for meeting Sarbanes-Oxley
• Buyer maintains security over product and process information, and lessens both internal and external fraud and theft
• Allows for tighter, faster scheduling and reduction of inventory levels and loss; low level of expertise needed to implement
• Increases sourcing skills and knowledge across the organization
• Vendors may add value to their bid by including other services

So, with all these benefits, how well does it work in purchasing energy? Reverse auctions tend to work best when:

• Specifications and quality standards are clear and quantifiable; works well with commodities and generic goods
• Suppliers have well established reputations for their reliability and product
• There are minimal contingencies and/or layers of complex requirements involved in the product or service being purchased
• There is a high level of rivalry among suppliers
• Product shortages are rare; it is unlikely that additional services will be required after purchase
• Distance/delivery is not a problem
• The product is not readily available by other means
• The product is of high value and minimum risk

In theory, it seems that just about all of the above criteria is met for energy procurement. So, how does it work in real life? Just like most vendors, energy suppliers do not like reverse auctions, therefore some suppliers may not even participate. That is a risk that you must consider. What if you placed a reverse auction and only one supplier bid at the Price to Compare? Does your reverse auction bind you to that bid?

Energy procurement has a number of factors (some described in our blog on The Top Three Energy Procurement Mistakes) that need to be addressed when requesting a bid. If the Reverse Auction is final and binding at the conclusion of the bidding, then contracts need to be in place with every bidding supplier. This creates extra work for the supplier before they even know if they have a chance to win.

Energy supply is critical to anyone's operation and can't be taken for granted. You need to make sure you have a reliable source of energy from a supplier that can deliver it. This blog may sound like we are against Reverse Auctions - we are not!  It's important to better understand the pros and cons before jumping into any energy contract.

If you are considering a reverse auction, EMR has a web based reverse auction platform that can be used. However, we would need to take the time to understand what you want to accomplish and the risks you are willing to take so that we can structure the auction to fit those needs. It should not be a cookie-cutter approach.