Southern Company sold on reverse auction process

Southern Company CIO Becky Blalock’s 950-person staff supports a vast IT domain – the infrastructure management, systems maintenance and code writing for all 10 of Southern’s subsidiaries. All told, that’s 21,000 desktop PCs, 1,200 servers, a mainframe and 423 applications. “We’re our own telecommunications provider,” she says.

To help make that happen in 2003, Blalock’s division rolled out 420 projects. But instead of taking the traditional route of opening individual sealed bids, Southern got vendor charges down and bidding efficiency up by running reverse auctions – timed online competitions where everybody bids with full knowledge of their competitors’ bids.

Reverse auctions are one way Southern is expanding its digital communications reach, and that requires fewer personnel and less product to get things done. “We add 60-90,000 customers a year without having to add resources because we’re automating more and more of our work processes,” observes Blalock.

Southern first used reverse auctions to buy transformers for its electric power distribution. “It was a very successful way for us to get competitive pricing in our core business,” Blalock recalls. “So, we decided to extend it to IT.”

Here’s how it works. Southern sends out an RFP over the Web to solicit bids, then schedules a date when vendors compete against each online. People bid in real time, usually within a 30-to-45-minute window. Once the opening bid comes in, the remaining vendors have two minutes to make a counteroffer. If somebody makes a competing bid before the two minutes are up, the clock re-starts, and the bidding goes on this way until two minutes elapses without any more bids.

Because the vendors aren’t bidding blind, in ignorance of everybody else’s quotes, the reverse auction gives the same bang for fewer bucks. “They can see each other’s bids,” explains Blalock. “We were able to sit there and see the prices falling on the screen.”

Blalock has used reverse auctions twice to purchase desktop PCs and their servers and it’s paid off. As one of the internal efficiencies Southern has accomplished, the reverse auctions have contributed to a nearly 15 percent drop in the company’s IT budget during the past three years.

Happily, this compliments the downward trend in the cost of technology. Blalock remembers when a megabyte of storage cost $1.80 seven years ago. Now, it’s just 7 cents. That’s a good thing for a company whose service growth is 40 per cent annually at a time when the pace of technology advancement grows exponentially. “Every 18 months, the technology is changing over,” notes Blalock. It also helps that Southern has a uniform technology environment. “To leverage buying power across our company, we have a very homogeneous product technology,” Blalock says. “We get a better price because we’re buying a lot of product at the same time.” This makes it easier to promote employees from one Southern unit to another and save on new hires.

Not every vendor likes reverse auctions; some have told Blalock they won’t participate in them. And, because non-price factors also enter into the service agreements, the low bidder doesn’t always win the contract. “But we’ve taken significant amounts of money out of our business through this auction process,” she says.