GSA’s “Free” Reverse Auctions: Opportunity Costs

This is a continuation of the earlier post on the true cost of GSA’s “free” reverse auction platform, by David C. Wyld, the C.E. Laborde Professor of Management at Southeastern Louisiana University and founder of the Reverse Auction Research Center.

There are three categories of opportunity costs involved in this assessment. The first and most obvious is the question of how the savings generated by competition through GSA Reverse Auctions compares with that achieved by private sector reverse auction providers who have a proven track record of successfully working with federal agencies.

My research for the IBM Center for the Business of Government has shown that federal agencies consistently experience “net savings” (typically, calculated as independent government cost estimate less price paid, inclusive of the total associated transaction/service fees) in excess of 10% on procurements of goods and services made through reverse auctioning. Taking into account the fact that the undisclosed operational costs discussed in the prior section are difficult to allocate to specific agencies and specific transactions, such a comparison would likely have to be done on a more global scale. With the “cost shifting” of both operational costs and IFF inherent in the GSA model, the savings generated by the new, government-operated platform would have to outpace those achieved by the third-party providers by several percentage points to equal the results produced by these private sector partners. As an observer of the marketplace with knowledge of both models, I think it is highly unlikely that this could occur. And the difference in cost to the taxpayers could be significant.

On a second front, as discussed in-depth in my article last week, there will be opportunity costs for buyers and sellers alike as the self-service operational aspects of the GSA Reverse Auction platform do not encourage robust vendor participation and will require agency buyers to utilize more time and resources to create and manage each buy. While there are certainly “user-friendly” aspects of the interface for the platform, the mechanics of the GSA event-based model do not appear to be as conducive to bringing the right sellers to the right virtual competition at the right time as current commercial offerings.

The final area of opportunity costs will again be difficult, if not impossible, to quantify. Yet, they are significant. This is the fact that GSA’s decision to take on reverse auctioning as an internal operation will divert resources from its financial and managerial ability to deal with other issues and initiatives. As Wakeman put it bluntly, “In today’s environment, shouldn’t GSA spend its precious resources on something else when the services and technology is so readily available and being successfully used in the private sector?... I’m sure there are other priorities for the resources than reinventing the wheel.”

By re-plowing old ground and creating a redundant service offering, this inevitably detracts real dollars and real executive attention from other efforts, with no apparent reason for deviating from a third-party-based reverse auction model that has worked well over the years for both the government and suppliers, especially small businesses.

And so, this leads to my concluding article (to be published next week), by asking on a more philosophical level: Is there a problem with the government competing with private sector reverse auction services?

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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First Voice

  1. Peter Smith:

    Surely the Government needs a business case to develop something itself – at significant cost – that is easily available and works well from the private sector? We have a Freedom of Information Act in the UK – I’d be asking to see the costs AND the business case for this!

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