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:
- Is the reverse auction platform for events or is it a marketplace?
- 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?