Are commercial online marketplaces in the government’s future?

By Steve Charles, immixGroup co-founder

Proposed legislation out of the House Armed Services Committee would give the Department of Defense and other federal agencies the ability to buy commercial items (COTS) via online marketplaces without contracting officers having to determine price reasonableness before ordering. To make sure prices paid are competitive at the time, the marketplaces would provide all kinds of data to the government, including posted prices for similar, competitive items on the system at the time of sale. Suppliers would be able to update pricing in real-time.

DOD has long complained about GSA Schedule contracts, as well as GSA’s online marketplace, GSA Advantage, arguing that it’s not a real marketplace.  Product catalogs are not current, pricing is not maintained in real-time and many of the contractors lack strategic relationships with the manufacturers of the products represented.  Agencies put in orders on GSA Advantage, only to learn two weeks later that those ordered items are not actually available. Even people at GSA have told me that it’s much more reliable and cheaper for them to leverage the micro-purchase rules and use commercial shopping sites.

In a recent hearing, a Congressman asked why federal government buyers can’t just go online, shop and buy commercial items like every day consumers, whether the “marketplace” is Amazon, Grainger, Home Depot, Northern Tool or Staples. And why does the order size have to be limited to $3,500?

What this means for industry

While private sector players are applauding, those that have built businesses to cater to the government’s unique procurement processes above the micro-purchase threshold, such as contract vehicles, pricing justifications, interfacing with procurement systems, finance systems and reporting systems, are wondering how they should be thinking about their future business models.

The good news is that the House Armed Services Committee appears open to understanding real-world implications of how product distribution channels operate in disparate industries– and that some products, like enterprise information technology solutions, while practically 100 percent commercial, may not fit neatly into a one-size-fits-all marketplace.

It’s also promising that the committee seems receptive to the reality that differences exist between industries and that industry-specific marketplaces should be considered.  The committee also seems dedicated to the idea that each original equipment manufacturer (OEM) has a constantly evolving channel program to leverage value-add intermediaries to serve large enterprises and that the federal government should be able to leverage those commercial best practices. For example, if an OEM authorizes dealers to perform certain sales, marketing and service activities as part of its go-to-market strategy, their participation should be included in the online marketplace that the government uses for those products too.

Since the goal is for federal supply chains to mirror those of large private sector enterprises, manufacturers should be weighing in with substantive content on how they serve large enterprises through their channels of distribution. This way the government can get in sync.

Sticking with online commercial practices means the government will be required to use commercial terms and conditions to the extent they don’t conflict with other federal laws.  This would be a rub for suppliers of intellectual property involving license grants, which are product-specific and disclaim the implied warranties of the Uniform Commercial Code.  While product-specific terms should flow from the intellectual property rights owner of the software to the end-customer through the marketplaces, coming to an agreement on how certain commercial terms apply to federal licensors is something that will need to be addressed before enterprise Independent Software Vendors (ISVs) want their products licensed through the current vision of these online marketplaces.

Where the bill stands now

To date, this legislation has been kept broad-based, high-level and short on specifics to provide a legal framework that can pass the test of time. The committee will be working with stakeholders to refine the language over the next few months and could get rolled into the 2018 National Defense Authorization Act (NDAA), the traditional vehicle for annual procurement legislation updates.  It will likely morph in conference when House and Senate Armed Services Committee staffs negotiate the final language based on the significant input already provided from both the buy-side and the sell-side actors in the ecosystem.  We recommend that OEMs and ISVs think about all of this in light of their channel vision and the role of online marketplaces in enterprise supply chains. 

Some may ask, “Where did this come from?” Recall that Section 809 of the 2016 NDAA created an advisory panel to recommend procurement law changes to continue to evolve the system. In a recent hearing, the panel urged Congress to “go bold.”  This is definitely that.

For more guidance on public policy affecting the government IT community, reach out to immixGroup’s Market Intelligence team. And please weigh in on the debate in the comments below.