GSA’s Reverse Auction Platform: How Important is the Absence of a Market-Maker in the GSA Model?

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.

In the first installment of this series on GSA’s new reverse auction program, I looked at the basics of the recently-launched GSA Reverse Auctions platform, run by the Federal Acquisition Service's National Information Technology Commodity Program of the General Services Administration (GSA).

This second article goes a step deeper, examining GSA’s decision to create a reverse auction offering that functions as an internally-operated and agency-branded SaaS (software as a service) tool, similar to those presently offered by dozens of private sector firms. In the words of one industry observer, GSA is essentially “reinventing the wheel” with its competitive bidding platform, adopting a traditional self-service, event-based model instead of a market one, in which a third-party “market-maker” works to bring government buyers and private sector competitors together.

In order to create an effective, high-volume transactional space for buyers and sellers, there must be a “market-maker,” a neutral third party facilitating and managing the competitive process to create a true marketplace. In examining the impact of GSA’s choice to administer and run GSA Reverse Auctions internally and without the use of a third-party market-maker, it is important to ask two fundamental questions:

  1. Is the reverse auction platform for events or is it a marketplace?
  2. Can vendors trust a self-managed system?

 

To answer that first question, the role of a market-maker is to establish the market. When trying to explain the difference between an event and a marketplace, I often turn to the example of my teenage son’s online media gathering. He is adept at finding any television show or movie posted on the web. So why do people pay for a service like Netflix or Hulu when they can find it for free? Quite simply, it is because of the sophisticated way Netflix matches what you want at a particular moment with what they have in their video library. The value of the market-maker in this case is to provide this content to you instantly and legally in the video marketplace they have established to match content seekers with content providers. And in the end, all parties benefit through the efforts of the market-maker. The real-time matching process between buyers’ needs and sellers’ ability to deliver at the right price for them is precisely why match-making companies like eBay have succeeded with their marketplaces in the forward auction space.

To draw this analogy to the present matter, the GSA Reverse Auctions platform is clearly an event-based model. Based on a review of the user guides for buyers and sellers, as well as all publicly available information on the GSA Reverse Auctions site, the buyer is required to self-manage the auction process. In such an event environment, federal acquisition staffers using GSA’s platform will have to find and engage prospective suppliers interested in their current buying needs, respond to questions regarding the system and bidding process, conduct quality assurance, track delivery, and perform all other support services.

Although the system is designed to notify vendors based on Special Item Numbers (SIN) corresponding to the requested product or service, buyers will need to ensure that those notified vendors are actually engaged and bidding. Additionally, because the processes involved are information intensive (e.g., the buyer must complete 19 fields per line item, or 190 fields for a 10 line item purchase), the platform is much less effective as a high-volume purchasing marketplace than as a classic event system.

A final, critical point must be made about GSA’s use of such an event-based model. GSA has chosen to give bidders relatively full visibility into precisely where their bid stands in the course of the reverse auction versus those of their competitors. Years of economic research has shown that giving competing bidders the ability to see where they stand vis-à-vis their competition leads to more aggressive bidding. Just as an eBay user can get caught up in the high of bidding, the “winner’s curse” can just as easily occur in reverse auctioning.

In this context, the winner’s curse simply means that a vendor, caught-up in the heat of the moment, will often bid down their company’s price offering simply to beat the competition. When they do, they can actually drop their pricing to a point where, though they “win” the contract, they “lose” simply because they lower their bid price to an unprofitable point. Thus, while GSA may produce savings based on the competition that takes place to produce savings for participating agencies on acquisitions such as IT and office supplies, the savings may in fact be harmful for participating firms if they are not adhering to pre-established limits on their bidding activities.

Check back later today for a close discussion of question #2: Can vendors trust a self-managed system?

Voices (5)

  1. eSourcing:

    All excellent points and a good dialogue. As an ex-market-maker myself, I’m only too aware of the benefits that I brought to the table. However, there was a downside. I took 25% of the identified savings. Now, whethere those identified savings became realised savings was not my problem, and in my experience if the buyer could turn 80% of those identified figures into implemented contracts, and sustain those prices for the length of the contract, then they were doing very well indeed. So yes, a market-maker (me) can help identify better savings, or indeed better suppliers, as well as take away administrative & resource burdens during the ‘negotiation’ phase. It still leaves the buyer having to do all the hard work of actually implementing the savings. And then later down the line, sustaining those savings for the contract. Or should the market-maker remain in place for all this period as well?

    Alternatively, someone can be hired internally to centrally manage the reverse auction process, taking the prep. work from the category managers and crunching it through a fairly standard process before handing it back to the category managers. We have clients with turnovers in excess of $1.5bn do this, with just one person needed to run the auctions. Say they are on a salary of $100k a year, auctioning say $50m of contracts per annum. Let’s say on average they save 10%, or $5m per annum. In my old market-maker model, I’d be asking for fees of 25% identified saving = $1.25m! Thank you very much! Alternatively our clients achieve this with a full-time employee for a fraction of the cost. And with only one employee needed for the auction tool, I’d only need one licence, although that’s a moot point with the GSA tool as it is free anyway.

    If I were the Head of Procurement, I know which option I’d choose.

  2. Matthew:

    One important factor to consider when discussing the benefits of market-maker vs. self-service solution is the additional administrative cost savings that a managed marketplace provides. The market-maker model creates additional efficiencies, on both the buyer and seller side, that empowers acquisition personnel to focus on the more complex requirements where they can add greater value and also allow sellers to have access to new opportunities that they may not in an event style auction.

  3. Zach:

    You make an interesting point, eSourcing; ‘Whilst ‘market-makers’ do add skills and experience to the process, they are not always essential to the success of the auction.’ It poses the question then, why leave it to chance? If time, energy, and support can be applied towards both the success of the auction, and the maintenance of the software by a 3rd party, where is the downside? I have no doubt buyers perform their duties well and would be able to manage the process on their own, but beyond results, additional time savings and efficiencies can enable higher productivity with the support of a market maker. Additionally, there may be benefits to the vendors. In a self-service platform, the buyer is responsible for their own outreach to potential bidders, whereas a market-maker is intended to maximize the audience of the auction in order to ensure the buyer has the results and/or market intelligence needed to make sound procurement decisions as quickly as possible.

  4. Anthony:

    If buyers had days to spend on making one purchase work then the Self Service model would work fine. From my experience TIME is what these US Federal buyers are lacking. I can’t tell you how many times I’ve called Fed buyers and they tell me they are way to busy to talk. ‘Market-Makers’ seem to help remove the busy work and possibly focus them on the important stuff (Evaluations).

  5. eSourcing:

    I thought eBay was a self-service marketplace? Whilst ‘market-makers’ do add skills and experience to the process, they are not always essential to the success of the auction. Perhaps I’m just confusing a ‘market-maker’ with simply a buyer who does their job well and proactively engages with suppliers during their negotiatons, be it face-to-face or via eAuction.

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