When Amazon Meets Defense Acquisition
Unanswered questions persist about a House provision to allow Pentagon buyers to use proprietary online sales platforms.
Imagine simply flipping open your laptop, firing up your desktop computer or popping open an app on your mobile phone to order office supplies, equipment, or even contract services Amazon-style, two-day delivery included.
That day may not be too far off if a provision in the House version of the annual National Defense Authorization Act makes it into law.
The prospects for commercial online marketplaces in government got a lift in mid-July, when Alan Thomas, the Trump administration’s new chief of the General Services Administration’s Federal Acquisition Service, gave an enthusiastic thumbs-up to the proposal that his agency engage online marketplaces for all agencies to use.
The idea is ensconced in the House-passed version of the 2018 NDAA, which contains policy and suggested budget toplines for the Pentagon. The Senate Armed Services Committee’s version of the bill does not include the online marketplace provision, and it awaits a full Senate vote in September, after the August congressional recess.
The marketplace provision leads Section 801 of the House NDAA and originally was introduced as separate legislationby House Armed Services Committee Chairman Mac Thornberry, R-Texas. His version was Defense-only, but, in committee that vision was enlarged to encompass all of government with GSA as the lead. GSA has been working closely with Thornberry on the bill, according to a report from Federal News Radio.
The House-passed provision would have GSA engage at least two e-marketplaces for governmentwide use. None could be from government agencies. Instead, they would have to be run by commercial entities providing portals for buying commercial products they aggregate, distribute, sell or manufacture.
The marketplace contracts could be awarded without competition, while purchases on them automatically would satisfy requirements for full and open competition as long as two or more suppliers offered the same or a similar product.
The online markets would be required to:
- Be widely used in the private sector
- Enable frequent updates of suppliers, products and prices
- Permit sorting of suppliers’ offers by product, shipping price, delivery date and user reviews
- Never feature products or sellers based on a fee or other compensation
- Enable the government to control spending limits and approve and track orders
Marketplace providers would report purchase data monthly, including product descriptions and prices, date and time of orders, names of buyers or their organization and agency or department, authorizing officials, delivery addresses, the number of sellers of the product or its equivalent on the date of purchase. Purchases from small sellers would count toward agencies’ small business goals.
As the advent of online marketplaces appears more likely, questions are emerging about the effect of opening federal commerce to companies like Amazon Business, the burgeoning business-to-business (B2B) branch of Amazon:
- Will the online markets become a monopoly, limiting access to the federal market only to companies that pay them fees and accept their selling terms?
- How will agencies guard against their online spending going to companies that discriminate, use child labor, are human traffickers, are based in China or other restricted countries, or use counterfeit or unsecure parts?
- How might direct, online buying affect the role and work of procurement professionals?
- How would government e-markets affect the still-new category management initiative?
- How quickly will government adapt to online buying?
Who Can Compete?
The government won’t be alone in pondering an especially important question: Is there any other marketplace that can compete effectively with Amazon? Thornberry has been quite direct in his view that government should get aboard the online juggernaut. “If you’re buying office supplies, you ought to be able to go on Amazon and do it,” Thornberry said in announcing his bill.
As of the first quarter of this year, almost 40 percent of business buyers shopping online finished their purchases on Amazon. In 2015, 30 percent said that when they shopped online, they finished their purchases on distributors’ websites. But with Amazon’s rise, just 16 percent surveyed in 2017 did.
Grainger, one of the best-known and largest B2B providers, has been feeling the pain of Amazon’s expansion. Despite cutting prices about 4 percent on 25 percent to 30 percent of its industrial supplies earlier this year, Grainger net sales only increased 2 percent. Online sales were 51 percent of the company’s total in the first quarter of 2017, when the company reported a 15 percent Grainger.com sales uptick. Second quarter earnings were down 40 percent over the same period in 2016.
More specialized providers of industrial goods, such as fasteners distributor Fastenal and its rival, maintenance, repair and operations seller MSC Industrial Direct, recently have taken hits to their stock prices as analysts and shareholders factor Amazon’s exploding market power.
Ever since Amazon Business entered the online B2B market in 2015, analysts have predicted it would erode both the profits and market share of competitor online markets. And it has been making inroads in government as well. U.S. Communities, a buying cooperative for more than 55,000 state and local public-sector agencies, kicked off an Amazon deal in January that could run 11 years and rake in $5.5 billion.
Amazon is taking account of government procurement requirements related to behavioral attributes of the supply base. “Our job is to create a set of configurable, flexible technology solutions that ensure that when an individual is buying, they’re complying with said policy,” Amazon’s Daniel Smith told the National Contract Management Association’s Government Symposium last December. Smith, the general manager of worldwide education for Amazon Business, said his company wants to help federal buyers comply, but without creating a burdensome approval process.
Category Management Catalyst
Whether through Amazon Business or other providers, moving more government spending to online marketplaces could buttress the government-wide category management initiative. The initiative relies on analyzing, and thereby better managing, procurement spending in 10 commonly purchased categories, from construction and facilities to industrial products.
Online marketplaces monthly reporting of data on every government purchase would expand what agencies know about what they buy, who buys it how and what they actually pay. They could get more of their spending under management, as required by the category management program, and better track use of the program’s preferred, and sometimes mandated, best-in-class contracts.
The data could further illuminate price variance, common requirements, and other factors that could help in crafting deals that leverage governmentwide demand. The resulting contracts could be reflected on the online markets, which also could promote standardization, such as the six government computer configurations under the Governmentwide Strategic Solution for Desktops and Laptops.
Online market data would help agencies track whether their employees are taking advantage of the best category-managed deals. They also would enable more employees to buy many more items and services directly.
Widespread direct online buying could reduce the workload for contracting offices, thereby releasing resources to focus on mission-essential procurement unique to each agency (think flood mapping for FEMA, submarines for the Navy, etc.). This likely will hasten specialization within the procurement profession and possibly spur the hiring of specialists in particular markets.
Of course, as always is true in government, there are many moving parts in action all at once. Category management best-in-class contracts are continuing to be designated. Agencies are being measured on getting their spend under management. Other reforms are pending on Capitol Hill and within the administration. And all of it is occurring while online marketplaces are in the works.
Should the House NDAA provision be enacted, agencies are likely to move their spending online quickly. A recent study shows that companies moved 23 percent of their purchases to Amazon Business in the first year they began using it. People who already know and use online marketplaces find them as simple to use at work as at home.
That kind of rapid adoption could help accelerate one of the central tenets of acquisition reform: Buy commercial items in commercial fashion whenever possible.