Reverse Auctions: A Horrible Way To Buy Security

By: Brian Rhodes, Published on Apr 16, 2012

One of the hottest procurement trends is using a ‘reverse auction’. Unlike an RFP, which typically awards a project based on multiple criteria, a ‘reverse auction’ awards solely on lowest price, usually in a manner where 'the lowest price when time runs out, wins.' In this note, we explain the top reasons why this is the worst possible procurement method used to buy security systems.

Overview

While awards based on ‘lowest price’ are nothing new, a hallmark of the reverse auction process is the ability of the interested bidder to issue multiple, decreasing bid amounts in order to ‘win’ a project. Typically, the bidder will start with bid that represents modest profit and will successively lower the bid number until the total falls beneath being an attractive project. At the end of the auction the lowest total bid is awarded the job.

Some recent security bids using this a reverse auction include:

This method of buying is especially popular among government procurement offices. The administrative process of distributing bid packages, vetting eligible responders, and prequalifying them to perform work is simplified resulting in quicker 'close' and award periods than traditional RFP processes.

The internet has catalyzed the ‘reverse auction’ process, with websites serving as auction agents to many of the world’s largest security customers, including national governments, military branches, state governments, and major metropolitan cities. These websites allow thousands of service providers across regions or countries to submit responses, and some websites even actively recruit integrators to join the legion of responders.

Common examples of the reverse auction process can be found at travel websites like Hotwire.com, Priceline.com, and Hotels.com, among many others. These websites are extremely popular for delivering the lowest prices on airfare and travel arrangements. The same concept now is being applied to acquiring physical security systems.

While the procurement method been acclaimed by some customers for saving time and money over the traditional RFP process, it has been equally condemned for overly simplifying the process of buying traditionally very complex and hard-to-define security systems. In the following section, we examine 7 reasons why this method of procurement is an especially bad choice when buying security.

The 'Top 7 Failures' of Reverse Auctions

1. Procurement Professionals are lousy Technical Specifiers: In a reverse auction process, the customer’s procurement staff are the ones managing buy opportunities and selecting winners, not technical evaluators. While these people may not be responsible for writing the initial specification, they are responsible for screening out and disqualifying non-compliant responses from potential award.

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Procurement professionals are trained in the ethical and fair administration of contracts, but they are not competent for technical specification or clarification of specialty equipment like physical security systems. As we noted previously, poorly written RFPs are a common weakness of modern procurement methods. The ‘reverse auction’ process exacerbates this weakness by restricting available time to clarify gaps in bid documents, limiting visibility of the opportunity to bidders, and places the burden of technical clarification and bid selection squarely on people unqualified to provide those details.

2. 'Physical Security' is reduced to a commodity: Buying $250,000 worth of paperclips is entirely different than buying a $250,000 security system. While reverse auctions may be best suited to getting the best price for ‘commodities’ – materials or services without much variation - physical security systems are not commodities. Well designed and installed security systems are very difficult to describe in a handful of documents, or even hundreds of documents. Most integrators prefer access to interview end-users, walk the job sites, and examine the opportunity completely before issuing a bid number. When issuing bid responses to ‘reverse auction’ projects, respondents are forced to focus only on the information available, no matter how complete, sensible, or understood that information may be.

3. The process rewards 'cutting corners': Since lowest prices drives the eventual award, this drives integrators to interpret project documents in the most austere, legally compliant manner possible. If the bid document fails to mention furnishing an item, it is not included. Integrators are discouraged from applying ‘best practices’ and substituting ‘cheapest method possible’ due to the awareness that competitors vying for the award are also focusing on lowest price.

4. Cheap junk becomes defacto product selection: Since price, not performance, is the primary attribute being selected, product selection is condensed to (often inaccurate) specifications listed on data sheets for the least costly product available. Selection is not based on strength of product experience, manufacturer support, or performance value to end users. Robust and effective physical security systems are seldom composed of low-end equipment, yet ‘reverse auctions’ effectively limit awards to this class of product.

5. Winners are ‘here today, gone tomorrow’: Since buying arrangements are limited to single projects, reverse auctions have the unfortunate result of buying ‘one and done’ transactions. A problem as dynamic as physical security is best served through a consultative sales relationship between customer and integrator. Security needs can be identified, researched, refined, and adjusted over time. Trial and error proves to be a valuable exercise in selecting ideal equipment for many customers. Reverse auctions, however, focus on the brutally efficient process of winning an award, performing it as quickly as possible, and moving to the next job without delay. Winning subcontractors optimize on volume selling and installs, not necessarily on how effective their security systems perform and adapt.

6. System scalability is ignored: Reverse Auctions focus on the immediate project at hand, not on the prospect of future system expansion. This results in short-sighted buying that does not adequately consider a customer’s changing or expanding security needs. Ultimately, the expense of integrating cheap, disparate systems that‘down the road’ may ultimately be more costly to support and scale than if purchased based on expansion capabilities upfront.

7. Many of the best integrators choose not to participate in Reverse Auctions: Even in the best circumstances, profit margins and markups for many integrators are lean. The entire purpose of a ‘reverse auction’ is to minimize the profit an integrator takes away from a project. The prospect of low profit without the benefit of well-defined bid packages, long-term customer relationships, or future business means that many of the best integrators ‘opt out’ of such opportunities. This leaves the pool of responders as potentially being lesser skilled, less knowledgeable, and more under equipped than world-class integrators provide. No buying agency makes an overt point to hand awards to ‘second tier’ subcontractors. However, the net effect of ‘reverse auctions’ accomplish just that.

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