What is the True Cost of GSA’s “Free” Reverse Auctions?

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.

“Free can mean many things, and that meaning has changed over the years.

It raises suspicions, yet has the power to grab attention like almost nothing else.

It isalmost never as simple as it seems, yet it is the most natural transaction of all.”

– Chris Anderson (from Free! Why $0.00 Is the Future of Business)

 “Free!”  There’s perhaps no more powerful word in modern marketing. Today, if one has a “free” and comparable alternative product or service available, why would one choose an offering that has a cost—any cost—associated with it? This third installment will offer insight on the true cost of GSA’s “free” reverse auctions. Throughout, I will examine the short and long-term costs—both the real cost to taxpayers and to competition for contracting—proving that there are in fact significant real and opportunity costs involved with the platform.

In what is a master marketing move, the General Services Administration (GSA) has positioned its GSA Reverse Auctions platform as a completely free service to the various federal government agencies who would use the platform or to the vendors who would be competing to sell to those agencies. GSA states that its reverse auction service is “designed to drive down the total cost of acquisitions and increase savings to customers [government agencies] and taxpayers.

This recent (July 1, 2013) introduction of a “free” competitive bidding platform for federal acquisition is leading respected federal acquisition commentators to speculate what this will mean for the private sector reverse auction providers currently serving federal agencies who DO charge a transaction fee, impose a service fee, or charge for a site subscription/software license to the participating agencies.

“Free” is Rarely Free

Let’s first examine the hard dollar costs involved. My previous article established that GSA worked with private sector software developers and solutions providers to establish what is essentially a GSA-branded SaaS (software as a service) reverse auction site. In order to establish the platform, GSA incurred development costs safely estimated to add up to at least several hundred thousand – if not a million – dollars to date. On top of those costs, GSA invested in ongoing sales, training, and help desk support for both government buyers and private sector sellers. Plus, there will be ongoing costs for managing and operating the platform and related help desk, as well as the costs of technology and software maintenance and upgrades. Clearly, all of this comes with a price tag, yet GSA has not disclosed these costs publicly or in response to my request.

Accurate consideration of costs incurred and savings generated by GSA’s competitive bidding platform must examine net savings for the government as a whole, taking into account the purchase price savings less GSA’s “overhead” developmental and ongoing operational costs. But it must also take into account the existing fee structure incurred by Schedule vendors and passed through to buyers of Schedule based goods and services. Currently, most of the goods and services sold through Schedule and anticipated as having application for GSA Reverse Auctions are subject to an Industrial Funding Fee (IFF) equal to 0.75% of the transaction. Like a credit card merchant fee, these costs are theoretically incurred by the vendor but certainly included in the cost of goods or services.

Considering these two very material real cost elements of the GSA Reverse Auctions platform, it is clear that the GSA model certainly is not free. More importantly, in addition to the per transaction IFF cost, it shifts an unknown level of development, maintenance, and operational costs onto the taxpayer.

From a governmental accounting aspect, the federal agency buying through GSA Reverse Auctionsis not paying a fixed transaction or service fee per se. However, the government and taxpayers are paying what could be a far larger and increasing aggregated cost than if the agency simply utilized an existing commercial competitive bidding platform.

Check back later today for the second part of this post, which will look at opportunity costs.

The Complete Series:

A Close Look at GSA’s New Reverse Auction Platform

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

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

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Voices (3)

  1. eSourcing:

    Hi Anthony,

    You’re quite right, there are advantages and it is a popular approach in some areas (like PayPal for example). However, I think it is unfair to pass the costs onto the supplier when it is also the buyer who is significantly gaining from whatever tool or service they are using. Little upfront investment is fine, but what they can lead to is poor buy in, as they lose little by not persisting. There is increased flexibility by the buyer to cancel the solicitation, but that can greatly upset the suppliers if they have invested a lot of time up to that point only for the plug to be pulled on them.

    The eMarketplace platform the central government in the UK use is based on a ‘supplier pays’ transactional fee model. We’re on that catalogue and so we increased our fees, which are already clearly listed on our website, in order to accommodate the transaction fee. Therefore anyone who transacts with us through the marketplace is getting a worse deal that if they buy from us directly. However there is monthly administrative burden that we go through to be on the marketplace which takes resource, and so it is a legitimate cost. Net result – buyer pays more.

  2. Anthony:

    @ Market Dojo. Before responding, I wanted to spend some time reading through your website to understand your perspective regarding a potential fee. I respect and understand your stance on a user based yearly subscription fee as that’s how your company charges the buyers. With that said, there are many advantages to a transaction fee including (Little upfront investment from the buyer/buying organization, increased flexibility to cancel a solicitation on the platform and go a different direction if the needs are not met, and some transactional fees are performance based and can be lowered depending on value added to the procurement)

  3. Market Dojo:

    Supplier pay solutions are always attractive however they are wrapped up whether for every supplier on a portal or just for the winning supplier . The reality is that in the long term you turn off suppliers who dont win in the first year or end up paying more especially if you forget the fees are in the costs when you come to renew a contract! Perhaps they would be better off charging their users or reinvesting the savings instead of the transactional fee.

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