It's 11am and an online auction for the supply of nearly 3,000 desktop PCs to the NHS is about to begin. Just going through the process of getting five competitive suppliers to pitch for the business has already generated a significant saving on the initial contract estimate of £1.6m. Before bidding even begins an initial proposal from one supplier has undercut the estimate by £332,128. There's a £650,000 difference between the highest and lowest initial bids.

The 45-minute auction will be the culmination of four weeks' work, with five potential suppliers briefed about the specifics of the contract, ready to do battle over price.

For the buyers, a group of IT managers in the NHS South Yorkshire Supply Management Confederation (SYSMC), the process is a test run of how effective online auctions can be in reducing procurement costs.

The private sector has been using e-auctions for some years, led initially by the automotive sector. But Marc Ibbotson, associate director of ecommerce at SYSMC, says online auctions are gaining momentum in the public sector.

'The technology has been around in the private sector for a long time, but in the public sector it's still in its infancy. The public sector will pick this up, especially within the NHS. Hopefully it will drive costs down, but not at the cost of quality.'

Ten minutes into the bidding and the other suppliers have been playing catch-up, with most dropping significant amounts off their initial positions. The leader, supplier C, continues to cut more off its already low bid. Three bids for the largest single element of the contract - 2,365 standard desktop computers - have dropped below the £1m mark. Total savings are now slightly below 23 per cent.

The auction, run by specialist sourcing provider TradingPartners, is the first of its kind for SYSMC, but the potential of the system is already changing its approach to procurement.

'We're considering a number of areas to do this kind of auction, but we need to ensure that we act in accordance with the EU procurement rules. If it hasn't been advertised as a potential e-auction, then we can't do it,' said Ibbotson.

One of the factors driving the uptake of online auctions is the commoditisation of the technology, which is now easily available as a hosted service from various specialist suppliers. Another factor is the increased acceptance of the process by the supplier community: of the seven suppliers invited to compete in this auction, five took part.

And supplier take-up is not restricted to IT vendors. The Ministry of Defence (MoD) has used online auctions to save £750,000 on the supply of mosquito nets to protect soldiers against malaria.

'We made a tremendous saving and we're encouraging further use of e-auctions throughout the organisation,' said Guy Hargreaves, auctions manager at the MoD's defence logistics organisation.

The MoD even set up a specialist online auction team in 2002, and has run about 35 events since then, saving an average of more than 20 per cent.

'People weren't sure they would be legal under the EU procurement legislation, and e-auctions suffered some negative publicity in the private sector. But resistance has faded as more auctions have been successfully run,' he said.

There's two minutes to go of the allotted 45 minutes. Fifty-one bids are in and supplier C, still the leading bidder, has cut its position to provide a saving of £361,645. Suddenly a new overall lowest bid is submitted and the allocated auction time is automatically extended by five minutes. Bids are coming in fast as the last-minute adrenaline kicks in. Just a minute later, 59 bids have been made and another £11,000 has been chopped from the overall price, with supplier D taking the lead for the first time.

The technology presents the possibility of more easily cutting out the middleman and allowing direct negotiations with the manufacturer.

Ibbotson says firms such as TradingPartners will increasingly provide direct links to low-cost vendors in places such as the Far East. But even so, he doubts that direct meetings will ever disappear entirely, with certain contracts being just too complex for this kind of process.

'It's a tool in the toolbox, and I'll use it when it's appropriate,' said Ibbotson. 'If there's a lot of diverse technicalities, then direct face-to-face meetings will be most effective, but for more commodity-based items, this will fit the purpose.'

In the meantime, this initial trial has proved a success.

At 12.20pm, the lowest bid hasn't been matched for more than five minutes and the auction closes. After some 79 bids, supplier C has regained the lead, with a final bid of £1,200,045 - cutting £396,400 off the estimate, an overall saving of 25 per cent. From an initial difference of more than £650,000, just £7,000 now separates the top three suppliers.

The end of the auction doesn't necessarily determine the winner of the contract, it just sets the price for the final stage of the negotiations with suppliers.

This week, about eight IT managers from the constituent trusts that make up the SYSMC will meet to decide which supplier to go with.

'It's their decision about whether or not they want to change,' said Ibbotson. 'They have to take into account the cost of change between suppliers and whether the price gain is worth it.

'But I felt good about it; it was very positive. I was pleased with what we got.'