Coordination Is King

In a recent white paper, I stated that we are experiencing a paradigm shift, and the nature of power is changing. Sun Tzu, the ancient Chinese general, says power comes from formation. The general creates power by intelligently placing his assets--his soldiers and weapons--in the right formation before battle. Power has never been a function of what we control and own. But until recently controlling and owning things has been the most efficient way to coordinate them.

New companies and solutions are arising that make it easier for us to coordinate the uncoordinated, to create power without owning, in both the public and private sectors. The most obvious ones are the ones we read about in the Wall Street Journal and that we interact with daily: Facebook, Twitter, LinkedIn, etc.

But to grow too enthralled with these exciting innovators is to risk missing out on some other exciting, and equally promising, emerging companies. These are companies that are transforming the darker corners of the economy. Shying away from the glamour and attention of what we prefer to refer to when we talk about social media.

Consider, for example, FedBid, which is helping governments reinvent how they buy things. The company enables federal agencies to procure products and commodities through a full-service online marketplace using a reverse auction process in which vendors vie to provide the government with what it needs.

Let's say you are a buyer supporting scientists working on a government project, and they request 20 ferrets for an experiment. Your guidelines require you to get quotes from at least three different providers, but you usually buy lab equipment, IT equipment and other more mainstream requirements, and you have no idea where to find ferrets. Besides, you have 20 other purchase requisitions in the queue, all for much higher dollar items and complex services. How do you find the time between cutting orders and negotiating service contracts to effectively source ferrets and manage the bidding process?

Today you can turn to FedBid. Go online, quickly specify your acquisition scenario, describe your requirements, and post your buy onto the marketplace. FedBid notifies qualified ferret providers, who compete to provide you what you need at the best value. They compete not only to give you the best price but also to deliver the exact ferrets you need when you need them.

The amount of goods sold through reverse auctions has grown by more than 50% between 2008 and 2010. FedBid is helping to lead this growth. Government agencies purchased $1.15 billion worth of products and commodities through the company's online marketplace in 2010. This volume has been growing at more than 25% a year for the last several years.

I had a chance to interview Glenn Richardson, FedBid's president. A former military man, Glenn spent a career as a partner in several large consulting firms, and then was drawn to FedBid's promise. "We are truly a game changer," Glenn explains. "By improving the competitive process, we have been able to maximize the value of every tax dollar used to make purchases through FedBid."

Although the company is viewed as a technology forum, it made a number of strategic decisions that helped to avoid getting washed away in the early 2000s with the many other reverse auction providers that fell when the .com boom ended. The company uses technology, for example, but only as the marketplace enabler. What differentiates it is the company's patented streamlined competitive process and the comprehensive services underlying that process.

Other sites may let you post that you are looking for ferrets, but FedBid completely manages the competitive process, with resources that source ferret providers and get them into the marketplace, provide full support to users throughout, and perform quality assurance during and after the competition. While other reverse auction providers focused on large transactions, which they treated as individual events that may take several days or weeks to stage, FedBid focused on a higher volume of smaller purchases, using a more efficient process to support buys from a few thousand dollars to a few hundred thousand dollars.

Glenn states that his company helps the government save over 10% on average. They also help users save time by enabling them to set up a bidding process in a few minutes when doing so the old-fashioned way might have taken several hours and resulted in much less robust competition and much more administrative work.

The company is not alone in this space, and we cannot know for sure that FedBid will remain the fastest surfer on this wave, but they do give us a window into how even the federal government is adopting the new outthinker mindset.

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2 Comments

  • Dee

     

    Teaming arrangements can be very important in acquiring
    government contracts also.  As procurement
    officers bundle more and more contracts to decrease cost and increase efficiencies,
    it’s important for small businesses to have access to teaming partners (PartnersInDemand.com)
    to access the larger contracts.

  • Eric Sullivan

    The key question for FedBid that remains unasked and
    unanswered is this: Is the key selling point - the savings - being understood,
    documented, analyzed, and communicated accurately to senior officials and other
    decision makers? Is every tax dollar really being maximized by purchasing through FedBid and is 10% really being saved on average? Or might the savings not really be what is indicated?  This is a topic
    that merits further investigation for the following reasons.

    First, FedBid typically calculates savings based on an
    Independent Government Estimate (IGE). It is widely the case in the federal
    acquisition community that IGE’s for commodities (the primary substance of FedBid reverse-auctions) are typically based on a
    single commercial quote to provide the items required. Thus, IGEs for these
    items are neither independent nor do they originate within the Government. That
    doesn't make for a good benchmark for estimating savings.

    Second, and much more importantly, calculating savings off
    of an IGE does not equate to real savings. To calculate the real, realized
    savings of reverse-auctions, one needs to compare the savings from
    reverse-auctions to what would have been saved by the Government in the absence
    of reverse auctions. There needs to be a valid benchmark. Calculating savings
    off of an IGE and indicating that the use of reverse-auctions saved a certain
    amount as if that entire amount is new savings that would not have otherwise
    been realized ignores the fact that standard procurement methods other than
    reverse-auctions typically already save a significant amount off of the IGE due
    to the benefit of competition requirements! To demonstrate real savings, the
    outcomes of reverse-auctions need to be compared to a benchmark showing
    procurement outcomes and savings in the absence of reverse-auctions. This has
    not been done anywhere in the Federal Government to the best of my knowledge,
    nor do the academic studies often mentioned calculate savings based on a
    benchmark that demonstrates real, realized savings.

    Third, there is no accounting for the potentially costly
    impact of the fees charged by FedBid. FedBid imposes a fee up to 3% on sellers
    when the winning bid is below the IGE (the poor benchmark). Any smart business is going to account
    for this fee in their bids and pass along the cost to the Government, thus
    resulting in instances where the Government pays up to 3% more than they
    otherwise would have due to this fee. Thus, these fees will offset any savings
    and the question of whether any real savings are being realized cannot be
    answered unless a benchmark to procurements in the absence of FedBid is used.
    Making matters worse for the Government, companies are now accounting for an additional fee up to
    3% in any quotes they provide to the Government and that are then used as an
    IGE. The result: up to 3% higher prices less any savings from reverse
    auctioning. There are instances where reverse-auctions have indeed cost the
    Government more than they would have without using a reverse-auction because of
    this and these occurrences are not being accounted for in the calculations of
    supposed savings from reverse-auctions like FedBid.

    Fourth, there is no accounting for the federal tax revenue
    implications which offset a small but not insignificant portion of any savings
    garnered through the use of a reverse-auction tool. It seems counterintuitive
    but the expected savings are not actually as high as they seem on the surface
    due to the reduction in federal tax revenue.

    Fifth, while the estimated time savings from the use of
    reverse-auctions sounds very appealing, there is also an offsetting cost of
    training for personnel on the use of reverse-auctions as well as the cost of
    Government personnel dedicated in whole or part to managing the interface between the Government
    and the reverse-auction provider. These costs are not being accounted for in
    the supposed savings of reverse-auctions.

    In sum, the real value of reverse-auctions is not understood
    because the real, realized savings of reverse-auctions have not been
    documented, let alone analyzed and then used for deciding how, when, and to
    what extent to move forward with reverse-auctions in federal Government
    procurement. The FC Expert would do well to explore this further.