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Government's use of online auctions sparks debate

Network World Fusion

(IDG) -- Drawn to the dynamic competition of online auctions, the U.S. Department of Defense has begun making million-dollar purchases using the Web. The agency has been getting bids from suppliers that are shaving as much as 40% off the usual costs of items ranging from computers to U.S. Navy vessel equipment.

But the use of online "reverse" auctions - so called because prices spiral down rather than up - has generated controversy in government circles and among suppliers since the government first started using the auctions in May. About a half-dozen such auctions have taken place, and suppliers aren't happy about the price shootouts.

Even Defense Department officials confess to worries that government vendors are going to bolt due to the price pressures wrought by online auctions.

"The emphasis on low price may discourage firms from doing business with the government," said U.S. Navy Capt. Robert Moses, director of re-engineering of acquisition and business management. "We don't want to get caught up in price and lose sight of quality."

Moses' comments, made at last week's Reverse Auctions conference in Washington, D.C., echoed the widespread worry among government officials about reverse auctions. The military, like civilian agencies, frequently award contracts in which price is but one factor, Moses pointed out.

These so-called "best-value" contracts, standard fare since the early 1990s when the Clinton administration's Office of Management & Budget (OMB) overhauled procurement rules, are harder to accomplish in online auctions, where price is king.

When the Federal Acquisition Rules were rewritten, the OMB also decided to eliminate the prohibition on auctions in government. Now that auction software and hosted services are available, the General Services Administration (GSA) has stepped in to encourage their use.

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Earlier this year, the agency negotiated special deals with several reverse auction hosting services, listed at Buyers. gov, so federal agencies could use them. GSA gets a small fee, typically 1%, for their use.

In May, the U.S. Navy conducted the government's first online reverse auction using FreeMarkets' hosted auction service to buy airplane and ship parts.

The U.S. Army, though, has decided to test the auction waters by licensing software from Moai and Frictionless, which it integrated into one of its procurement Web sites.

"That way, people didn't have to reregister into our system to use it," said Edward Elgart, director at the U.S. Army's Communications and Electronics Command Acquisition Center at Fort Monmouth, N.J. Elgart noted the Army is using "spidering" technology from Frictionless to query whether items are for sale across the Internet at catalog sites or other auctions.

40% savings

At the Army's first online auction, ComTech Federal beat MicroWarehouse and Daley Computers in a bidding war to supply IBM ThinkPads, shaving about 40% off the usual GSA-listed price. The Army also bought spare parts for the Patriot Missile system using its reverse-auction tool.

The U.S. Air Force last week said it will start trying out reverse auctions on the Army site.

The real price of auctions

Despite the success of early online auctions and the cost savings, Defense Department procurement officials are anxious.

For one thing, hosted services such as FreeMarkets.com work by charging a flat percentage of the anticipated "savings" - a percentage that the buyer must agree to upfront.

In FreeMarkets' case, this would be 18%, said Ted Carter, the company's public sector director. Under the special GSA Buyers.gov contract, though, FreeMarkets is charging $69,000 per month per agency.

Defense Department officials admit they aren't at ease with the notion of paying large sums to the reverse auction hosting provider instead of seeing the savings go directly to the taxpayer.

"It's a question we're struggling with," said U.S. Navy Capt. Kurt Huff, director of contracts at the Navy Inventory Control Point in Philadelphia. "We need to construct a deal that lets the savings go to the taxpayer."

Huff suggested the government come up with a system for building the price of the auction in to the winning offer.

Not surprisingly, this kind of suggestion doesn't go over well with federal suppliers.

At the Reverse Auctions conference, the voice of vendor angst was supplied by Bob Bruce, chairman of the Information Technology Association of America's procurement policy committee.

"It's natural for an industry used to doing things one way to become alert and agitated when any change comes," Bruce said during a panel on the pros and cons of online reverse auctions.

The online reverse auctions are a concern because the profit margins on some products are already low, he said. "We're worried about these fees, the GSA fees and the [auction-service provider] fees."

Steve Kelman, a former top procurement administrator at OMB who is now a Harvard University professor, said he thinks the government should use reverse auctions, but only where "it makes good business sense."

He added, "If an item is purchased through long-term contracting, it's probably not right for reverse auctions. I'm befuddled about buying laptops this way, since we've been getting huge quantity discounts already. But it makes sense for spot-market types of buys."

Military officers said they expect to struggle figuring out where online reverse auctions fit in.

However, they don't want the OMB, Pentagon or U.S. Congress, which all have the power to dictate procurement rules, to butt in.

But that already may be happening. Ken Oscar, OMB acting administrator at the Office of Procurement Policy, voiced general support for reverse auctions, although he warned that OMB is likely to create guidance rules.

"We want a healthy industry," he said. "Are we getting the margins so low [that the suppliers can't invest] for the future?"

Although few doubt the legality of online reverse auctions in government, everyone is waiting for a major legal challenge to them. Already, the Navy had to cope with an official protest of an auction when one participant's Internet connection dropped in the middle of a bidding war. The Navy just started the bidding afresh.




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