GSA’s New Reverse Auction Platform: Can Vendors Trust a Self-Managed System?

Spend Matters welcomes another guest post from David C. Wyld, the C.E. Laborde Professor of Management at Southeastern Louisiana University and founder of the Reverse Auction Research Center. 

Earlier today I posed two questions. Is the reverse auction platform for events or is it a marketplace? And can vendors trust a self-managed system?

To address the second question, one of the primary values a market-maker brings to competitive bidding is the ability, as an independent third party, to create a safe environment for parties to conduct business. In that role, the market-maker can deliver impartiality to the process that is simply not there if the buying organization is running the reverse auction platform.

A primary lesson learned from the first wave of reverse auction marketplaces back in the dot.com era is that industry consortium and single company-run markets do not work in the long term because vendors come to see them as exploitative and working only for the gain of the buyer. These failed models have contributed significant fodder to those currently criticizing reverse auctions as being bad for suppliers. Yet, it is no different with a government-run marketplace today, as there is no neutral party in the GSA model to encourage mutually beneficial buyer-seller matches.

Steve Kelman, who is a Professor of Public Management at Harvard and previously served five years as the Administrator of the Office of Federal Procurement Policy, recently expressed his concern that GSA could use the new reverse auction site as a way of monopolizing the reverse auction market, both for government agencies and for vendors seeking to do business with the federal government. In doing so, GSA could actually decrease competition in government contracts for affected goods and services, primarily in the information technology area—meaning prices paid for such items could rise as a negative consequence for agencies and for taxpayers.

To summarize, regardless of the existence of private reverse auction firms successfully delivering significant savings to federal agencies, GSA has decided to develop and operate its own reverse auction platform. It relies heavily on the buyer to solicit, engage, and manage vendors and administer the entire range of reverse auction support requirements, including providing spot training, quality assurance, and issue response. Combined with GSA’s strategic choice to exclude the independent market-maker function, GSA Reverse Auctions provides users with a tool most suited for high-dollar and complex requirements.

The next article in this series will specifically address the question, “What is the true cost of ‘free’ reverse auctions from GSA?” Although touted as ‘no cost’, there are real and significant costs to the taxpayer for building and operating a private sector business model.

Voices (5)

  1. Old Procurement Guy:

    I’m a retired senior procurement executive and find this series of post’s by Dr. Wyld really fascinating as it combines a great Procurement best practice discussion along with some government intrigue i.e. why would GSA spend taxpayer money to build an event based self service reverse auction platform when there are so many good and affordable commercially available solutions? About 15 years ago I had the opportunity of being one of FreeMarkets first clients. While they didn’t have a marketplace, they certainly had market makers and quite frankly the success of their highly trained market makers was what drove the new procurement technology revolution. A couple years later I then had the opportunity to move from the market maker driven solution to an event based self service model (Emptoris). Finally after retiring I spent some time with a well know procurement consultancy and also by myself working with large buying entities that wanted best practice reverse auction capabilities. I mention my background only because I was very involved in the reverse auction space for a very long time, helping companies with their programs as late as early 2012. Unless something has drastically changed in the past year, the number of truly successful best practice reverse auction programs using event based self service platforms is very small. Internal reverse auction programs using self service tools have numerous barriers to overcome to truly get embedded into an organization vs. being used ad hoc. My definition of a successful reverse auction program would be that at a minimum, 50% of an organizations’ spend would be reversed auctioned. So let’s say a large organization or a federal agency had $4B in spend. By my definition $2B of that should be auctioned. Now let’s say that the average spend per good or service being procured was $40,000. Well that would be 50,000 events. It’s laughable to think any internal program is going to have the capability to do this (with maybe the exception of AB-InBev under the leadership of the great Tony Milikin). Many of the companies I worked with had trouble even getting past 100 reverse auctions annually. There are three types of barriers to these internal programs that I saw through the years. First was the resistance to change by the internal procurement professionals. It was my experience that most procurement folks felt the reverse auction tool was a threat to their job security. Most believe the key value they bring to an organization is their ability to negotiate … and the tool does that for them. Then secondly, internal business users or clients resistance to embrace reverse auctions. In so many organizations Procurement really doesn’t have the power to make the sourcing decision and for whatever reason, business users often do not want to subject their “supplier partners” to competition. And finally, resistance from suppliers. I worked with one client a few years back who cancelled an auction because one of the current incumbents refused to participate. Again laughable, letting the supplier of a competitive good or service have the power. There is one common theme for those few highly successful reverse auction programs; A burning platform supported by the CFO, CEO (or top official) combined with a mandate.
    I do know of some companies today, including agencies at the federal government, that do use a third party operated marketplace enabled by market makers (as a matter of fact I attended a government sponsored event a year or so ago where a senior government acquisition official was extremely pleased with the success her contracting group had using such a third party operated market maker enabled marketplace). I believe there are a number of advantages to using a third party marketplace supported by market makers including; no expensive software or maintenance costs, no highly skilled procurement technology staff needed; the marketplace becomes an extension of an organizations’ overall procurement capability with no additional embedded cost i.e. can do much more without more, creates a highly auditable fair, open and transparent procurement process. The idea of a staff of market makers at your disposal ensuring maximum competition and bid validation is very attractive. My belief is that the marketplace concept supported by market makers is really the best practice.
    Now for a couple final comments. As a heavy taxpayer in a country with staggering national debt, building and operating a custom reverse auction platform must be very expensive. As I stated earlier, why would you do this when there are good commercially available solutions and why when you are already using more than one commercially available solution including a managed marketplace. And as a taxpayer I want the federal government auctioning every good and service possible. I do not believe that a custom built event based reverse auction solution is the best and most economical way to do that.

    1. Maverick:

      “Old Procurement guy”, might you happen to work for one of those ‘market making’ marketplaces serving US Fed Gov? 🙂
      I think you win the prize for longest reply ever on Spend Matters!

      As a taxpayer, I’m happy that the GSA is at least providing the platform if it will help drive greater adoption and improvement over the old process. The baby may be VERY ugly and hard to manage, but don’t throw it out.
      However, if GSA is truly trying to practice “Free Markets” (pardon the pun) through this system, then it MUST allow independent service providers of all types (SaaS providers, Consultants, Managed Service Providers like Market Makers, etc.) to get on the GSA schedule and in essence compete with it. This is just like in private sector where shared service organizations need to compete/benchmark against BPOs doing the same services.

      If service providers were allowed to that more easily, they could then focus on whether they help the agencies use the GSA tool, their own proprietary tools, and/or OEM’d commercial tools – rather than lamenting anonymously in the blogosphere.

  2. eSourcing:

    1) I don’t follow that GSA has chosen to exclude the independent market-maker function. They don’t offer it as a service themselves, but this creates a whole new ‘marketplace’ of service professionals who can offer their assistance to federal agencies to run professional e-auctions using the GSA platform.

    2) There is also no reason why a decent federal procurement professional can’t run their own auction to the same level as one of these independent ‘market-makers’… We;ve seen it done many times here in the UK, both private and public sector. Yes a independent third party lends impartiality to the process, but the same can be said for a face-to-face negotiaton or a tradional paper-based tender – should we be using market-makers for these as well? Perhaps the whole purchasing role should be outsourced to a market-maker, if I understand these recommendations clearly.

    1. Ramen:

      @eSourcing. I appreciate the confidence you would have in acquisition professionals today and their ability to ‘run their own auction to the same level…’ I’m unaware of the demand for this specific workforce in the UK but in the US, procurement professionals are in high demand and the work bench is being stretched. Especially with the recent political climate (sequestration and the continuing resolution) several cabinet level agencies in the US have had to furlough their staff, ask that their staff members to wear an additional 2-3 hats on top of their current job to ensure their respective organization’s mission is not disrupted. Despite the assumption that a decent procurement professional can run their own auction, my question in earnest would be why make the job harder?
      It’s akin to my experience with my holiday shopping the past couple of years. Like some people (perhaps the majority), I would rush to the mall, try to remember how many people I would need to buy gifts for, wrap them, trying to conscious of what members of my family would appreciate but most of all trying to stay within my budget and be most efficient with my time. Mall shopping quickly became obsolete as soon as I discovered Amazon Prime and the services they offer over the past few years. Why go to a crowded mall, try to remember and list out everything when I have a service that will keep track of my shopping cart, that will wrap my gifts for an extra fee and will also have them all delivered in two days. A great deal for me.
      It is similar to what a procurement professional goes through for every contract they have to solicit. They have a laundry list of things to remember, to comply and abide by, so why not simplify the process? I do not doubt a decent acquisition professional could absolutely do a fantastic job at running their own events but when agencies are charged with the burden of doing more with less, why add another layer of complexity and task this already spread thin workforce even further. If there is a readily available solution that is fully managed to remove the day to day administrative load, why not take advantage of the extra time that is now available and tasked to a third party to manage so that procurement officials may dedicate their time to other pressing matters in the office.

      1. eSourcing:

        Hi Ramen – great point, well made. I think on balance that what I admire about the GSA initiative is that it offers choice. The buyers who have the confidence and perhaps (rarely as you say) have some time can use the eAuction approach themselves. Alternatively there is nothing stopping them from using a third party service. It’s great to have that choice. Afterall, I do use Amazon a lot for my purchases, but every now and then I like to head to the mall and have a nose around myself!

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