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Submission For The Record of FedBid, Inc.

Chairman Coffman, Chairman Hanna, Ranking Member Kirkpatrick, Ranking Member Meng, and Members of the committees, thank you for the opportunity to provide written testimony on the topic of reverse auction use within the Federal Government and provide commentary regarding the recently published Government Accountability Office (GAO) report GAO-14-108 on reverse auctions (GAO Report).

  1. INTRODUCTION

What is a reverse auction? A reverse auction is a competitive process in which a buyer solicits bids from sellers during a period of time set by the buyer. During the reverse auction, sellers have the opportunity to submit a single bid or multiple bids that decrease in price. Unlike a forward auction, like eBay®, in which a seller is selling a product or service and buyers submit competing bids, thereby driving the price up, a reverse auction involves sellers submitting competing bids and driving the price down. An online or electronic reverse auction creates considerable process efficiencies, as seller bids and rebids can be submitted quickly, with real-time information provided to sellers regarding their relative competitive position. In the case of FedBid, sellers are notified whether they ‘lead’ or ‘lag’ to the low bid or buyer target price, and are not shown the identity or pricing of competitors.

It is important to note that, in the case of FedBid, buyers are not required to make award to the lowest bid or even to make award at all. If they have opted to apply best value award criteria, buyers can make award to any seller whose bid, based on the stated award criteria (which can include past performance, technical capability, delivery, etc. in addition to price) provides the most advantageous terms. In addition, at the close of any buy, the buyer can decide to make award, cancel the buy, or repost the buy with different requirements or under a different acquisition scenario.

Although reverse auctioning currently addresses only a very small percentage of Federal spending, it provides an important alternative to traditional procurement methods.  With the continuing contraction of the Federal procurement workforce and ongoing budgetary pressures, many agencies have come to realize that traditional means of sourcing, competing and procuring everyday goods and simple services needed to support agency operations just do not work well enough.

How groundbreaking is the government’s use of reverse auctioning? As a commercial best practice used by almost all Fortune 500 companies, online reverse auctioning has been around for decades. The Federal government finally removed its prohibition on reverse auctioning as part of the 1997 Federal Acquisition Regulation (FAR) re-write, and then, in 2004, Office of Management and Budget’s Office of Federal Procurement Policy (OFPP) issued a memorandum asking Federal agencies to “explore increasing the use of commercially available online procurement services”, including reverse auctions. In 2005, both the GAO (MTB Group, Inc., B-295463 (February 23, 2005)) and the Court of Federal Claims (MTB Group, Inc. v. United States, 65 Fed. Cl. 516, 523-24 (2005)) determined that reverse auctions are permissible methods of procurement. To date, agencies have used online reverse auctions to purchase billions of dollars worth of commercial goods and services, from IT products to tattoo removal machines and from lawn care to lab rats.

In fact, when looking at the overall process of online reverse auctioning in comparison with the traditional buying process, the dramatic differences occur in the process and data automation and NOT within the procurement process itself. As with traditional acquisition methods, the agency buyer using reverse auctions works within established contracting procedures and maintains complete control over the purchasing process, including what to compete, which acquisition scenario to use, which award criteria to use (including other than low price technically acceptable, or LPTA) and to which seller to make award. When using FedBid to conduct reverse auctions, agencies typically use simplified acquisition procedures, as the vast majority of auctions on FedBid are for requirements below the simplified acquisition threshold (SAT) of $150,000. 

What makes reverse auctioning so attractive as an alternative procurement method?  Because of the high degree of process automation, information access and uniformity and ease of use inherent in this form of electronic commerce, reverse auctions provide a number of advantages over traditional procurement methods for firm-fixed price purchases of commercial item goods and simple services. These advantages include cost savings, operational efficiencies, increased small business utilization, and better transparency, accountability and control over agency spend.

  1. SAVINGS
  1. Cost Savings through Dynamic Competition

The aspect of reverse auctions that seems to attract the most attention is cost savings, and promoting competition is universally regarded as the key to driving high-quality purchasing results, including lower cost. The FAR recognizes this dynamic, providing as one if the guiding principles for the Federal Acquisition System to “Satisfy the customer in terms of cost quality, and timeliness of the delivered product or service, by, for example…[p]romoting competition”  (FAR 1.102(b)).  It also cites promoting competition in the acquisition process as a means of satisfying the customer in terms of cost, quality, and timeliness of the delivered product or service as a “performance standard” within the Federal Acquisition System (FAR 1.102-2).

As a commercial best practice, reverse auctioning is particularly effective in promoting competition through the concept of dynamic bidding, which enables sellers to not only submit an initial bid, but also to submit multiple re-bids – either through an automated re-bidding function or manually – based on some indicator of relative pricing. In FedBid, sellers can re-bid manually or use an automatic rebidding feature that enables them to establish a bid range, including a minimum bid price. The system does not display competitor names or pricing, but simply indicates relative price positioning through a ‘lead’ or ‘lag’ notification, enabling a seller to rebid if it lags to another seller or the buyer’s target price. The relative pricing indicator approach helps protects against collusion and “winner’s curse” situations by encouraging sellers to rebid, but to do so by reviewing their own pricing structure rather than that of another party.

Even with the built-in competition aspect of reverse auctioning, the process in and of itself certainly does not guarantee competition in every circumstance. Rather, the nature of the purchase must provide a reasonable expectation of competitiveness, or the reverse auction process will have minimal, if any, impact on cost of the purchased item. For example, if the purchase is for a specific brand name product, there must be multiple manufacturers or authorized resellers. If a buyer is purchasing a product manufactured by one company and a direct sales model, there will be no competition, regardless of the acquisition method employed. As another example, specific to the Federal market, if the purchase is being made through a certain contract vehicle, there must be multiple suppliers under that contract that actually sell the required item as opposed to just being in the general item category.  Not infrequently, a contract may include multiple sellers in a product category but provide little overlap of specific products. As yet another example, if a particular brand of product is being purchased through a contract vehicle using an economic set-aside, the combination of multiple limiting factors may easily restrict competition to a single supplier.

Although the average Federal buy on the FedBid marketplace during FY13 resulted in push notifications to 3,447 sellers with profiles matching the buy requirements, the appropriate seller community is determined by each buyer. Depending on the characteristics of the buy, the size of that seller community can be reduced or expanded accordingly. The GAO Report mentions an example of a Department of Homeland Security contracting officer using multiple successive acquisition scenarios to increase the number of potential bidders in an auction. In that example, the buyer’s first posting of auction solicited from among a small group of multiple award contract holders; the first repost of the auction increased the potential pool to GSA Schedule holders; and the second repost broadened the potential pool still further to include all sellers eligible for Federal award. The result of this approach was increasingly robust competition, which ultimately provided the best price after 21 bidders submitted 74 bids. The advantage of using an online reverse auction tool in this case was that the buyer was able to quickly and easily repost the buy to broaden the eligible seller community after evaluating the results of the prior posting, literally with a couple of clicks of the mouse.

  1. The Role of the FedBid Fee in Achieving Savings

FedBid’s 100% performance-based transactional fee structure plays a key role in validating buy results, including savings. FedBid receives a transactional fee, consisting of not more than 3% of the transaction, but only if the buyer: 1) determines that the reverse auction has met the competition, savings and other buyer generated criteria for the procurement and 2) selects a winning seller. Once the buyer selects a seller, it issues an order to the selected seller for delivery of the commodity or service. When the buyer receives the procured items or services, it pays to the selected seller the total bid amount, which includes the transactional fee. FedBid then collects from the selected seller the transactional fee. There are no fees for buyers or sellers to register, view, or post/bid on an auction, and sellers incur no out-of-pocket costs to use FedBid.

FedBid’s 0-3% fee structure enables FedBid to adjust its fee downward to address situations in which the buyer has met its competition and other procurement goals through FedBid but the fee has caused the selected seller’s bid to exceed a target price based on an actual market research quote or official published contract price. In such cases, FedBid reserves the right to reduce or remove its fee so that the awarded price will not exceed the target price. Accordingly, the fee can be as low as 0% on a given transaction.  Because FedBid is only paid upon award and the buyer can cancel the buy or repost at any time, FedBid’s fee model is risk-free for the buyer – effectively guaranteeing that the buyer will not pay more using FedBid than if they purchase offline.  In addition, FedBid limits fee cost to Federal agencies, capping fees per auction at $10,000, so that fee is never a primary factor in considering whether to use reverse auctioning – even for larger procurements.

The GAO Report raises an issue of a transaction being subject to two fees if an agency uses FedBid in conjunction with, for example, Schedule contracts. However, FedBid’s performance-based fee structure means that no fee is incurred unless the agency realizes true value in using the reverse auction process. As part of the FedBid Terms of Use, FedBid specifically guarantees that it will reduce or remove its fee if it is notified that the fee causes the total price to exceed the seller's published contract price.  Government-wide FedBid receives no fee on approximately 20% of all awarded buys. In the Veterans Health Administration (VHA), which employs a more restrictive competitive approach through its contract hierarchy, FedBid receives no fee on approximately 35% of actions, regardless of cost savings or competition.  In fact, for the average GSA/Federal Supply Schedules (FSS) buy, FedBid collects a $414 fee, but yields an average of $5,072 in savings, providing a 12x return on investment.  Overall, FedBid helps Federal agencies save nearly 10%, including $121 million in FY12 and $160 million in FY13.

Finally, it is important to emphasize that the FedBid fee is the only way FedBid gets paid on Federal purchases. Because it is 100% performance-based, FedBid does not get paid on canceled, reposted or zero fee buys, even though it has performed all services required to compete the buy on FedBid. Those services include provision, operation and management of the FedBid online marketplace and its reverse auction and related functionality; buyer training (in-person, remote and online) and onsite and remote support; seller sourcing, recruitment, training (in-person, remote and online) and support; market support; helpdesk services; quality assurance; reporting; marketplace application feature development and site enhancements; system development, operations, maintenance and upgrades; and, applicable customer system interface development. In other words, FedBid doesn’t just promise results; it delivers.

  1. Operational Efficiencies through Managed Automation

The GAO Report mentions that “agency officials stated that using reverse auctions reduced some of the time that would otherwise be spent on the acquisition”[1] and that “[a]gency acquisition officials told us that using a contractor for their reverse auctions reduced some of their administrative duties and allowed senior contracting officers to spend more time on complex acquisitions.”[2]  This aspect of savings – operational savings through improved process efficiencies – in fact, is often a major driver of agency use of reverse auctions, and the FedBid marketplace in particular. Studies conducted by Department of State, Navy, and Customs and Border Protection (CBP) have all validated both the direct impact on time savings for procurements conducted through FedBid as well as secondary impact of improving operations by being able to utilize that time savings to better negotiate complex procurements, perform contract due diligence and closeout, or conduct training. The study conducted by CBP found that, on average, buyers could save approximately 8 hours per buy competed through the FedBid marketplace. This time savings is particularly critical during the fourth quarter of the government’s fiscal year, when most procurement is conducted. As mentioned in the GAO Report, “According to agency officials, reverse auctions, which can take as little as an hour for uncomplicated purchases, can facilitate the timely award of contracts at the end of the year.”[3]

Why does reverse auctioning through FedBid save so much time? The platform effectively automates the communication and competition and documentation aspects of the procurement process through an intuitive web-based interface.  Accordingly, buyers across the government can process thousands of auctions simultaneously, each involving multiple sellers submitting multiple bids on multiple items. Buyers simply perform market research as usual, post requirements according to the acquisition scenario of their choice, then review bid results, perform due diligence and make award. Buyers can access all of their reverse auction activity 24 hours a day, without any practical limitation on the number of requirements posted on the site or the number of auctions running through the site, and all marketplace data is reportable to the buying agency. In addition to the automation, FedBid provides comprehensive support services to both buyers and sellers and complete management of the marketplace.

  1. SMALL BUSINESS UTILIZATION

Although the FAR requires a fair and open procurement process that encourages maximum participation by sellers, traditional procurement techniques available to the government buyer make that a difficult standard for buyers to achieve and maintain.  Actively notifying sellers of appropriate opportunities and ensuring that minimum response goals are met is time consuming, and traditional offline bid and proposal processes are cumbersome.  In fact, even with the advent of FedBizOpps, which serves as the online publication site (or governmentwide point of entry) for Federal procurements, access issues remain.  Publication to FedBizOpps is generally not required for awards under FSS or other authorized multiple award contracts, and while the site provides static notification, sellers must still actively search the site for opportunities corresponding with their offerings.

Traditional process limitations and inefficiencies, coupled with an increasing workload and decreasing numbers of procurement personnel, typically mean that most competitive commodity procurements involve a relatively small number of sellers.  It also means that sellers who would like to participate in those procurements have a more difficult time tracking them and competing for award.  For small businesses, with limited sales and marketing budgets, participation in Federal acquisitions is even more difficult. Thus, even in spite of the government’s ambitious set-aside programs and small business utilization mandates, Federal agencies continue to fall short of their goals to increase small business participation.

  1. FedBid’s Impact on Small Business Utilization

FedBid helps buyers meet the challenge of finding and engaging small businesses, with instant access to thousands of small businesses across every socio-economic, product and service category. The GAO Report finds that reverse auctions provide “high rate of awards to small businesses.”[4] In fact, about 86% of FY12 acquisitions using reverse auctions—16,906 of 19,688—went to small businesses, in keeping with the FAR requirement that acquisitions of supplies or services with expected values of more than $3,000 but not over $150,000 are reserved for small businesses, with some exceptions.[5] These acquisitions accounted for $661 million (80%) of the dollar value of all reverse auction awards.”[6] During FY12, Federal agencies awarded $1.03 billion to small businesses through FedBid, with 18% ($240 million) to VOSBs, including 14% ($181 million) to SDVOSBs. During FY13, the small business award volume number grew to $1.25 billion, with 27% ($333 million) to VOSBs, including 21% ($259 million) to SDVOSBs.

These statistics have been remarkably consistent year-over-year for more than a decade. FedBid attributes this to three primary attributes of the marketplace: i) relatively low dollar size of the buys, including an average buy size of $44,825 during the study timeframe of FY12, which means more reseller participation and reduced need for commercial financing; ii) ease of access – the opportunities are readily available and simply aggregated without access costs; and iii) ease of use – the marketplace is relatively simple and efficient to use.

FedBid is completely free for sellers to register and use and provides a central location for businesses to filter, search and bid on tens of thousands of solicitations from Federal, state and local and commercial buyers. Federal buyers are able to automatically post combined synopsis/solicitations to FedBizOpps as required by regulation, and FedBid proactively contacts sellers when opportunities arise, using seller-selected profile criteria to communicate complete, detailed information for each procurement. This approach minimizes seller resources required to pursue each opportunity and compete for business, increasing opportunity awareness while lowering sales costs.  In addition, because the services are web-based, there is no software to load, and sellers need only Internet access and a browser to participate. Automated bidding and other time-saving features enable sellers to compete on multiple simultaneous opportunities with fewer resources and fewer costs.

  1. FedBid’s Impact on VHA’s Small Business Utilization

As today’s hearing focuses on use of reverse auctions by the VHA, it is notable that FedBid has had a materially positive impact on VHA’s utilization of small businesses – particularly with respect to VHA purchases below the SAT of $150,000, which makes up the vast majority of VHA’s purchases through FedBid. The chart, below, compares all VHA awards for purchases below the SAT with VHA awards for purchases below the SAT made using FedBid during FY12, which was the time period under review by GAO. The data shows that VHA’s use of FedBid resulted in:

  • A higher share of awards and dollars to small businesses, including VOSBs and SDVOSBs;
  • Greater FSS utilization pursuant to agency policy; and
  • Broader supplier utilization, with most awards to other than top 5% of suppliers.

Incidentally, the data for FY13 shows very similar results, albeit with a higher comparative percentage of awards and dollar volume through FedBid

 

FY12 Purchases by VHA  $3,000-$150,000

Metric

All VHA Purchases as Reported in FPDS[7]

VHA Purchases Using FedBid

Total Number of Awards

136,043

6,994

Total Amount of Awards 

$2,747,165,200

$171,817,992

Awards to top 5% of Suppliers (%)

$1.73B (63%)

$81.83M (48%)

FSS Contract Utilization (%)                        

$854.6M (31%)

$78.80M (46%)

  • Large Business Volume (%)

$405.6M (47%)

$18.74M (24%)

  • Small Business Volume (%)

$449.0M (55%)

$60.05M (76%)

  • VOSB Volume (%)

$128.6M (15%)

$18.35M (23%)

  • SDVOSB Volume (%)

$80.80M (10%)

$12.15M (15%)

Non-FSS Contract Utilization (%)

$1.89B (69%)

$93.02M (54%)

  • Large Business Volume (%)

$1.015B (54%)

$10.15M (11%)

  • Small Business Volume (%)

$876.9M (46%)

$82.87M (89%)

  • VOSB Volume (%)

$361.9M (19%)

$30.97M (33%)

  • SDVOSB Volume (%)

$285.4M (15%)

$25.63M (28%)

 

 

  1. TRANSPARENCY,  ACCOUNTABILITY AND CONTROL

Beyond the benefits of the reverse auction process, reverse auction platforms are data rich tools that can provide agencies with real-time controls over the purchasing process and comprehensive data that can be used to manage their organizations better and make smarter procurement decisions.

With respect to tactical operations, FedBid provides agency contracting officials and management with real-time access to all procurements utilizing the marketplace. Through the Supervisor Dashboard, agency management can review and manage each step of the purchasing process for every buy – before the buy is posted to the marketplace for competition, during the competitive process, after the buy closes but before award, and after award. The dashboard enables them to review and comment on, transfer, or take direct control of the buy.  If there are policies related to contract hierarchies, set-aside preferences or other acquisition strategies, management can confirm that those are followed for each buy.

Whereas platform features help improve operations on the individual buy level, it is the data that can provide a significant impact on agency acquisition strategy. Not surprisingly, the basis for the GAO Report on use of reverse auctions is data provided by the reverse auction services provider, FedBid. In fact, the breadth and depth of the procurement data processed and provided through FedBid to agency customers provides those organizations with a tremendous resource by which they can analyze their spend – what they are buying, when and how they are buying it, from whom, for how much – down to the unit pricing of each line item. This type of centrally accessible granular information regarding agency spend is available nowhere else in government procurement. Notably, the GAO Report mentions that another agency using a different reverse auction platform was unable to provide the data necessary for reviewing its reverse auction activity because “the agency collected only summary level information…providing the data for each auction would require them to review all contract files to determine whether a reverse auction had been used.”[8] This lack of data access and reporting capability is not limited to a single agency and a specific platform; it simply reflects the normal state of informational limitations within the typical agency procurement environment.

In contrast, FedBid prepares and electronically distributes to customers weekly, monthly and/or annual reports summarizing and detailing procurement activities for the previous desired time period, including, but not limited to, all posted, awarded, and cancelled procurements with the date of action, total dollar amount, name of buyer including buying division, and for awarded buys, the name of selected seller, business size, contract vehicle utilized, and percentage savings based on a total target price set by the buyer. An example of a reporting deliverable is an Agency Operations Report, which provides a detailed purchase history (monthly, annual, and multi-year) of the purchasing activity of the agency, division and/or individual buyers. Standard data fields include: FedBid ID Number, Description, Contract Type, Internal Reference Number, Start Date, End Date, Target Price, Final Price, Selected Seller, Number of Bidders, Number of Bids, Number of No Bids, Socioeconomic data, and Savings. FedBid also provides buyers with all acquisition related data necessary for addressing seller issues and disputes, including those involving bid protests, alternative dispute resolution or other legal action.

Reports themselves can be customized at the agency request, or agencies can consume raw data from FedBid and create their own reports. In either case, the available data can help agencies perform valuable analysis to determine the most effective acquisition scenarios for specific item types, the most advantageous timing for purchasing certain goods and services, whether the agency is meeting its socio-economic utilization goals, or whether a contract vehicle provides adequate competition for particular goods and/or services. That information can then inform agency action to adjust purchase timing, increase or adjust use of set-asides, or award additional contracts under a contract vehicle.

  1. CONCLUSION

Reverse auctioning is not a cure-all for government procurement; rather, it is proven method for purchasing the types of commercial goods and simple services that Federal agencies use every day to support their operations. Its effectiveness as a procurement method is dependent on the circumstances of each purchase, and it should be approached with the same care and professionalism expected of any other government procurement. The FAR has laid out the both general principles and specific processes that apply not only to traditional procurement methods, but also to use of innovative methods such as online reverse auctions. With proper use of reverse auctions, procurement professionals can maximize competition and savings and increase small business utilization. And just as critically, agency management can use the comprehensive data from those reverse auctions to improve transparency of its procurement processes and actions, better gauge the effectiveness of its procurement strategies and practices, and craft specific means of improving agency performance.

                                       Respectfully submitted,

                                       Luther D. Tupponce
                                       Chief Administrative Officer and General Counsel

                                       FedBid, Inc.
                                       8500 Leesburg Pike, 6th Floor
                                       Vienna, VA  22182
                                       703-738-6886

 



[1] GAO Report at 18.

[2] Id. at 12.

[3] Id.

[4] Id. at 5.

[5] FAR § 19.502-2(a) states each acquisition of supplies or services that has an anticipated dollar value exceeding $3,000, but not over $150,000 is reserved for small business concerns and shall be set aside for small business unless the contracting officer determines there is not a reasonable expectation of obtaining offers from two or more responsible small business concerns that are competitive in terms of market prices, quality, and delivery.

[6] GAO Report at 9.

[7] The Federal Procurement Data System (FPDS) data also includes purchases conducted using FedBid.

[8] Id. at 1.