By Steve Kelman

Blog archive

VA and reverse auctions: what's up?

Last Thursday, fcw.com reported that the Veterans Affairs department's headquarters procurement shop had ordered a temporary halt to use of reverse auctions by the Veterans Health Administration (VHA), which runs the VA hospital system and is responsible for the vast bulk of VA purchasing. For several days, an unusually long time for an fcw.com article, the news was on the top-five read and emailed articles on the Federal Computer Week site.

Clearly, this bolt from the blue has attracted a lot of interest outside the VA, given the rapid spread of reverse auctions as a money-saving tool in this time of tight budgets;  indeed, only last summer, OFPP Administrator Dan Gordon had highlighted the VHA's use of reverse auctions as a best practice for government.

I have been on the Board of Advisors to Fedbid -- the reverse auction provider that runs the VHA auctions -- for a number of years, and firmly believe the company's business model is aligned with the interests of taxpayers and agencies in saving money, an important priority, especially when budgets are as tight as they are now. Whenever I write about reverse auctions, I note my association with Fedbid, and I will confess to being slightly uneasy about weighing in on the VA headquarters bombshell, because some blog readers may think I'm biased.

I will also add that I am an admirer of a lot of what VA headquarters procurement management has been doing over the past few years, including sponsorship of the magnificent VA Acquisition Academy and efforts to improve both IT and supply acquisition at the VA. That admiration adds to my hesitation to write (and maybe creates a potential bias of a different sort).

But whatever biases I may have -- and I've spoken to some people inside the VA about this to confirm my impressions  -- it is hard to avoid the conclusion that there is something strange about the behavior of headquarters in this situation. As a friend of improved VA procurement, I very much hope that it will be reversed.

The VA has had ongoing problems over the years with vendors located near VA hospitals selling overpriced medical equipment and other commodities to the hospitals with little competition. Furthermore, for more than 70 percent of the dollars VHA spends buying medical equipment off the multiple-award schedules (managed by the VA for GSA) there has been no competition among schedule holders. That means the VHA has presumably been paying multiple-award schedule retail prices, without getting the kinds of discounts that it is (rightly) government policy to encourage. These are situations that none of the procurement leadership at the VA has condoned.

VHA began about a year ago to begin using reverse auctions to increase competition and lower prices on schedule and open-market buys. Reverse auctions are a way to implement the idea of a second stage of competition to schedule buys, in line with government policy. In the view of VHA procurement leadership -- and in former OFPP Administrator Dan Gordon's view -- this policy has been a success. What is strange to me is why headquarters leadership is not cheering this on, because this is moving exactly in the direction of getting a better deal for taxpayers and veterans that headquarters has embraced.

There are losers from the reverse auctions VHA has introduced -- overpriced vendors selling to VA hospitals without competition -- and there are reports that when the suspension of reverse auctions was announced at a vendor conference, the audience broke into cheers. Because I trust the good faith and public spirit of the headquarters leadership, I don't want to believe that these voices have overridden the interests of taxpayers and veterans. But I will confess that the bureaucratese in the memo from headquarters suspending reverse auctions gave no even vaguely convincing arguments for why they did what they did.

It's time for reason and cool heads to prevail here. If headquarters has concerns that need to be examined -- although there was nothing in the suspension memo to suggest what these concerns in fact might be -- let them be examined. But meanwhile, I urge the dedicated procurement professionals in headquarters to allow the VHA to exercise its judgment in embracing reverse auctions as a pro-taxpayer, pro-veteran procurement tool.

Posted on Mar 13, 2012 at 7:27 PM

Reader Comments

Tue, Jul 24, 2012

As a tax payer, I am offended that I must pay for the government to have procurement officers and then pay for FedBid fees on top of contract fees. Please show me where you have saved the government one dime....even one dime!!!! Reverse auctions....do you really think sales people have nothing to do all day long but watch your portal and decide if they are going to do the business at a loss because your fees are the only profit in the deal...please help me understand....examples please...how have you saved the government money...GSA schedules, SEWP, ITES, they are cost savings as the government competes the products and services and ensures a technical review...really saves the govt $$$....show me the money!!!! On top of all of it the federal buyers think you are the federal portal fedbizopps the free to use portal....really...just help me understand...and frankly the comment about VHA buying inferior products is scary!

Wed, Mar 28, 2012

From a health care manufacturer's perspective, one of the biggest concerns we have is that FedBid frequently awards orders to non-authorized distributors of our products (these are proprietary product of which we are the only manufacturer). We have seen this happen several times, and the sourcing of those products is unknown (counterfeit, non-sterile, etc). Even though the solicitations state no gray market items, there seemed to be no controls to prevent that from actually happening. Reverse auctions are likely useful tools with commodity products like fuel, but the use of it in medical product areas that are not appropriate does not add value and can lead to serious consequences.

Thu, Mar 22, 2012 Convincing Argument Follow-up

Steve, Thanks for your reply. Let me respond. A single GSA schedule price is not necessarily a good baseline for calculating savings with Fed Bid because it doesn't account for the price-lowering benefit of competition obtained through every competitive procurement (Fed Bid or not) while Fed Bid's fee is calculated off of that inflated target price benchmark - thus inflating Fed Bid's fees. The use of the last purchase price would account for the price-lowering benefits of competition in any competitive procurement and serve as a good benchmark but that only applies to repetitive purchases. In reality, the benchmark being used most often is a single vendor's pre-competition (higher) price. Regardless, even if we assume that utilizing a GSA schedule price or last price purchased is a good baseline for calculating savings, you have to address the fact that Fed Bid's calculated savings are not compared to what is typically saved in the absence of Fed Bid. There is no benchmark to compare to typical savings pre-Fed Bid or when Fed Bid is not used. Is it really saving money if that money would have been saved anyway? No. Making matters worse, direct costs of Fed Bid - such as the fee and the salaries of Government employees dedicated to managing the Fed Bid relationship - are not being fully accounted for. The amount and application of the fee is not transparent and there are instances where the Government has paid more than it would have because of that fee. Contracting professional's fault in that instance? Ultimately, yes. But those same professionals were having a system pushed on them because it was supposedly saving millions of dollars. Thus, a circular problem. With regard to the tax revenue, it's counter intuitive but it is indeed the case that the Government receives less tax revenue when contractors are paid less. For every dollar the Government spends out, some trickles back in as tax revenue. That obviously is not a reason to avoid paying less. We're talking about saving money here of course. This is however an offsetting factor that has been disregarded in the calculation of Fed Bid's "savings". In conclusion, if an entity is going to claim that it's saving millions of dollars, it should be able to withstand scrutiny and validate its claims. To suggest that raising legitimate questions about the calculation of supposed savings is dumping on efforts to save money seems a bit off point. Moreover, all of these points I've raised are actually about whether money is indeed being saved. If these points are not legitimate then let's see someone discredit them. If my points are legitimate, then your advisory board should ensure that they're addressed.

Fri, Mar 16, 2012 Quinn California

Reply to Geoff, Ctd. My main belief, though, is that the Government is on a unsustainable and ethically questionable path under FedBid's model. Typically, a Government contractor can only use third party information and data it collects for the U.S. for performance of that specific Government contract. For instance, consider if the IRS hires a company to help with some aspect of tax collection. As a private citizen, I'm never asked to enter any agreement with the contractor. Instead, I know nothing about the company, I see no indication I'm not dealing directly with the IRS, and the IRS contractor can't use my data other than to perform the specific contracted task. Limiting the contractor's use of information acquired as part of contract performance helps, among other things, to avoid conflicts of interest and unfair competitive advantage. What's disturbing is that FedBid's basic business model seems to be that very thing: taking information it gathers in performance of Government contracts and exploiting it for added, outside private gain and unfair advantage. if I sign up for a specific, say, VA auction on FedBid, is FedBid's policy to discard my vendor information once that specific auction is over? Or, is FedBid's policy to keep that information gained performing under a Government contract in order to build its roster of firms in FedBid's walled garden? My understanding is that FedBid's policy is the latter, but please correct me if I'm wrong. Naturally, I don’t begrudge FedBid becoming successful. That success seems tainted, though, if it's gained by so directly leveraging information gathered under a Government contract to earn profits on work outside of that specific contract. Allowing FedBid to build a permanent advantage over other firms by keeping and exploiting bidder information seems to be the Government building a monopoly rather than impeding it. Instead of allowing Government bidder information to be exploited in this fashion, the agencies need to assume full control over the platform. FedBid or someone like it could run the reverse auction site for a fixed amount. At the end of such an auction-hosting contract, though, the bidder information should be owned by the U.S.. A competition could then be held for the follow-on work of running the platform. Whatever firm won the follow-on would do so on technical merit and price rather than by exploiting information it was allowed to gather and keep from past reverse auctions. Seemingly, FedBid has adopted its business model of owning the reverse auction platform so that it doesn't have to worry about future competitors. The company's motto could be something like: "Fair, Full and Transparent Competition for Everyone . . . But Us"

Fri, Mar 16, 2012 Quinn California

Reply to Geoff: 1) Actually, I agree that auctions of goods involving unauthorized resellers aren't ultimately FedBid's fault. The Government buyer does the wrong. But, can you tell me if FedBid frequently bans vendors for unauthorized reseller activity? Generally, I haven't heard of FedBid doing much to ensure its rules or Government rules are followed. Correct me if I'm wrong, though. 2) You indicate that FedBid's "fee structure . . . guarantees results" and is a "share of the savings." Sorry to say that you provide no real rationale to back up these assertions. First, if FedBid charged government agencies a flat, say, $3 per successful auction, how would that alter one iota the ability to hold auctions just as it does now? Second, the assertion that the fee reflects a share of savings seems less than entirely accurate. Isn't the fee a percentage of the overall price rather than a percent of what the savings are believed to be? Thus, for transactions inappropriately placed on FedBid that lead to a higher price (such as the unauthorized reseller), FedBid still collects its fee while the Government pays more. How's that a share of savings?

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