A reverse auction is an auction where the roles of buyer and seller are reversed and the primary objective is to drive purchase prices downward (as opposed to the rising prices in a regular auction). In a reverse auction, sellers are competing to win business (as opposed to a regular auction where buyers compete for the right to purchase an item). Reverse auctions (which are also called e-auctions) are generally used in business-to-business procurement, and are usually conducted by way of e-sourcing software with an e-Auction component.
Reverse auctions gained popularity in the late nineties and early noughts because many initial forays not only simplified and sped up the sourcing cycle, but generated significant returns for the early adopters. (Of course, for some early adopters the incremental returns on repeat applications on the same categories diminished rapidly when all the fat was trimmed from the margins or when the market conditions shifted back to support the supply side, but many companies still get a decent return on initial application for a new category, and reverse auctions still enjoy steady usage for this reason alone).
More importantly, when used properly, a reverse auction offers more than just cost savings potential for the buyer and more than just the opportunity to win new business for the seller. Buyers get increased market transparency, decreased error rates, easy apples-to-apples bid comparisons, cycle time reductions, and a platform for supplier improvement while suppliers get increased efficiency, process transparency, more communication, a lower cost of sale, and more benefit from knowing the buyer did upfront planning, is capable of comparing bids apples-to-apples, and will be able to present the supplier with a solid reason as to why the supplier did, or did not, receive an award.
However, reverse auctions only succeed when they are used ethically, and when both buyers and suppliers follow a strict code of ethics. Buyers need to define rules up front, adhere to those rules from initial supplier invitations through final award, hold all supplier information in strict confidence, intend to award the business to the winner, and award the business in a timely fashion. Suppliers must follow the rules, hold all information furnished by the buyer in strict confidence, only participate if the supplier is able to meet the requirements, accept that all bids are legally binding and only submit bids it can support, and be willing to enter into a contract promptly upon auction completion if it wins the business.
The complexity of reverse auction software ranges in complexity from a simple single sealed bid auction, to a reserve price reverse auction with masked bidders and automated extensions, and some platforms will support ten or more types of reverse auctions, including fixed-price, japanese, brazillian, vickrey, english, dutch, and yankee. Regardless of the complexity of auctions supported, most reverse auction platforms will support bid management, lots, overtime, and multiple bid views. More advanced software will allow for bids on partial lots and lot bundles, non-price terms of service bids, and goals (that define a price/performance ration).
More information on reverse auctions, including benefits, best practices, and success enablers, can be found in the e-Sourcing wiki paper on e-Auctions in Sourcing and the following blog posts: