Auctions the next tool for the federal buyer

An amazing thing happened to me recently. In the span of one week, I received three phone calls from organizations looking to introduce online auctions into federal government buying.

Industry hates auctions for one good reason and one bad one. The good reason is that auctions evoke the old, discredited, low-bid world where, for example, the provision of sophisticated IT professional services went to whoever came in with the lowest hourly rates. The bad reason is that by increasing competitive intensity, auctions favor buyers over sellers. Government, by contrast, should be happy about anything that increases the intensity of competition as long as attention to past performance punishes vendors who decide that they bid too low and don't honor their deal.

Because of industry's opposition, Part 15 of the Federal Acquisition Regulation had included a ban on using "auctioning techniques" during post-proposal discussions with bidders in the competitive range. When Part 15 of the FAR was rewritten in 1997, the ban on auctioning during discussions was eliminated, although the rewrite still prohibited releasing a specific bidder's prices without that bidder's approval.

In addition, the Procurement Integrity Act prohibited disclosure of proposal information to competitors and could be interpreted as forbidding auctions, although clearly this was not the intent of the legislation.

One auction company seeking to enter the federal market is fast-growing Pittsburgh start-up FreeMarkets OnLine Inc., which may broker as much as $1 billion worth of electronic business this year. (Since the company's phone call to me, I have provided a few hours of paid consulting advice to FreeMarkets about entering the federal market.) The online price-bidding technology the company has developed is fairly constant across the auctions the company conducts, but Free-Markets works with customers to tailor the composition of the lots being auctioned and the non-price elements of the buy.

A crucial feature of Free-Markets' auctions is that the winner is not necessarily the low bidder. Offline and in advance, all bidders provide the customer with written information such as technical and past-performance information. When the auction occurs, only price is bid. All bidders follow the progress of the price bids on a screen, and each bidder is identified only by number. At the end of the auction, it is up to the customer to weigh price and other considerations to make a final award decision. FreeMarkets has found that customers save from about 2 percent to about 25 percent compared with what they had previously paid.

FreeMarkets is another example of a small business that has achieved success based on building a better mousetrap and is seeking to enter the federal marketplace after enjoying commercial marketplace success. The company is not complaining about any problems procurement reform supposedly creates for small business.

When I was in government and raised the issue of the government's refusal to consider auctions as a procurement technique, industry critics argued that auctioning was not a commercial practice. The spread of auctions in commercial buying—interestingly, one of FreeMarkets' customers is United Technologies Corp., a major government contractor—suggests this is no longer the case. One should note, however, that these auctions do not reveal competitors' names to the companies bidding.

There are many issues to deal with before online auctions come to federal buying. For what items is this an appropriate buying technique? The Federal Aviation Administration clearly would not want to choose a vendor to build an air traffic control system by auction. Attention must also be paid to where or whether auctions fit into contracts, such as large blanket purchase agreements or indefinite-delivery, indefinite-quantity contracts, in which the government is leveraging its buying power through quantity buying of a large number of items over time.

I predict online auctions will attain a place in the federal acquisition toolbox. It is another example of the interplay between the spread of e-commerce in people's personal lives and its acceptance within government. Anyone who has bought a book through Amazon.com has become familiar with e-commerce features such as shopping carts, making it easier for that person to use an electronic mall as a government buyer. Similarly, anyone who has used eBay will become comfortable with online auctions.

--Kelman was the administrator of the Office of Federal Procurement Policy from 1993 to 1997. He is now Weatherhead Professor of Public Management at Harvard's Kennedy School of Government.