Sometimes the best ideas come from our kids, even when they are grown. Hopefully we listen.

September 30th, 2008

Can the use of reverse auctions help the economic bailout package?

My daughter Meridith emailed me the other day. She is in sales and like her dad does a lot of reading to keep up with issues and trends. This of course makes me proud. Her email was related to how reverse auctions might help the economic bailout package and in fact the economy. Partial content from her email is below.

Hi Dad, I was reading an article in the New York Times and part of it caught my attention because it related to your business. The portion of the article is listed below:

The government would buy the troubled investments with the intention of eventually selling them back to the market when prices recover. The Treasury has suggested it might conduct reverse auctions to determine the price for securities that are not trading in the market. Unlike in a traditional auction in which would-be buyers submit bids to the seller, in a reverse auction the buyer solicits bids from would-be sellers. Often, the buyer agrees to pay the second-highest bid submitted to encourage sellers to compete by lowering their bids for all the assets submitted. The buyer often also sets a reserve price and refuses to pay any more than that price. This author believes this may actually be more of a forward auction, but the point is still good.

In fact reverse auctions have even become a diplomatic tool. The U.S. State Department found a tactful solution to purchasing commercial products and technology without alienating vendors or paying top dollar. “Reverse auctions in general have saved us millions of dollars,” a State Department spokesman said. “That doesn’t even touch the fact that we haven’t had to increase procurement staffing in a long time.”

As part of my regular reading, I enjoy Jason Busch’s Spend Matters blog. Shortly after receiving my daughters email Jason posted the following related blog. Treasurys-700-Billion-Sourcing-Challenge–Is-it-Reverse-Auction-Time? Jason’s lead sentence in this post is as follows. “Quick, what’s the best potential marketing plug for reverse auctions and related strategic sourcing approaches in the relatively young history of the strategic sourcing process?”

Let’s assume that the $700 billion were for retail products and historical savings using reverse auctions were greater than fifteen percent, which they are. Let’s assume that the government was only able to earn half of that amount or seven and a half percent. The earnings would equal $52.5B. That’s a pretty good ROIC or return on invested capital. It would certainly go a long way toward turning the bitter lemons of this situation into more palatable lemonade down the road.

Thanks for the email Meri.

We look forward to your comments.

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