`Reverse auction' saves cash ; HAVERHILL; City gains as bids from suppliers drop

Haverhill is helping demonstrate the value of a new tool thatcommunities can use to save money purchasing goods and services.

The city on Jan. 27 held a series of reverse auctions to choosesuppliers for nearly $1 million worth of pipes and other equipmentfor the Water Department, and estimates it saved $20,000 throughthe process.

A reverse auction is an Internet-based procurement process inwhich sellers of goods or services anonymously bid against oneanother online.

"In a regular auction, it's the buyers driving the price up. In areverse auction, it's the suppliers driving the price down," saidRobert DeFusco, the city's purchasing director.

Haverhill may be the first municipality in Massachusetts to use areverse auction since the adoption of the Municipal Relief Act lastJuly gave the go-ahead to do so for goods and services valued at$25,000 or more. The state already had the authority to conduct such auctions.

State officials and the software vendor for the state's reverseauctions - which also handled Haverhill's recent auction - toldcity officials they are not aware of any other community that hasheld such an auction to date, according to DeFusco.

"It's not new to private companies and it's not new to thefederal govern ment, and the state has been using it," said DeFusco,who often conducted reverse auctions while he was working in privateindustry.

For cities and towns, such auctions differ from the standardsealed bidding process because sellers can "see the low price thathas been offered and they can either beat it or stay with theirbid," DeFusco said. By contrast, in a regular bidding process formunicipal work or goods, "people submit bids blind. They have noidea what the competition is going to do."

DeFusco said if the bidding becomes lively, the buyer can end upwith a lower price than would otherwise be the case.

Haverhill also played an active role in seeking the legislativechange that allowed reverse auctions at the local level.

Mayor James J. Fiorentini said when he interviewed him for theprocurement director's job, DeFusco suggested the city conductreverse auctions to save money, and Fiorentini liked the idea.Later, after assuming the position, DeFusco advised the mayor he hadlearned municipalities were barred from using the process.

Fiorentini said that spurred him to propose that the MerrimackValley Mayors and Managers Coalition seek needed legislation, andthe group worked with area legislators to promote the change beforeGovernor Deval Patrick made it part of the Municipal Relief Bill.

"It saves us money," said Fiorentini, who also views the reverseauction as a "more transparent process."

Because the process is new for cities and towns, Haverhillworked closely with the state inspector general's office, whichoversees the procurement law for municipalities.

One outcome of discussions was a revision by the agency in itsinterpretation of one part of the law. In a bulletin last September,the office had advised municipalities that reverse auctions must endat the designated closing time. But DeFusco persuaded the agencythat the law allowed for extending bidding, a practice that he saidcan heighten competition.

"He convinced us his interpretation was accurate. We agreed withhis interpretation," said Jack McCarthy, a spokesman for theinspector general's office.

In its September bulletin, the office said that reverse auctions"may offer advantages, which include increased savings, a reductionin clerical work, and time-savings in comparing bids. In addition,the bidders' time to respond to [bid invitations] can be reduced byusing electronic bid submission."

It added though, that reverse auctions "have disadvantages,including the focus on price, which may cause vendors to trade-offquality."

DeFusco said he believed the process was suited for certain typesof procurement: when the items being purchased have a significantdollar value and there is lot of competition. He said it would alsobe a good tool for communities to use when joining forces onregional purchases.

In the Jan. 27 auctions, six bidders participated, with oneauction held for five types of Water Department equipment: pipesand mechanical joints; hydrants; repair material; valves; andservice brass, a term covering varied equipment.

"We were pleased," DeFusco said of the outcome. "It was new tothe suppliers so they were very cautious. But in the end, we got alittle bidding war going and suppliers started to compete againstone another."

He said the bidding war occurred in the auction for hydrants,where one supplier dropped its price by nearly $12,000 to outdoanother, and then 13 other bids were received in 15 minutes.

Following the state's practice, Haverhill is requiring the lowbidders to fund the cost of the software vendor.

DeFusco said he hoped to use reverse auctions three or four moretimes this year.

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