The “Amazon Amendment” could hand the retailer an unfair advantage in government procurement

Section 801 of the National Defense Authorization Act is a sweetheart deal for Amazon and is unfair to the retail industry

Hari Viswanath    5 mins

The “Amazon Amendment” could hand the retailer an unfair advantage in government procurement

Section 801 of the National Defense Authorization Act is a sweetheart deal for Amazon and is unfair to the retail industry

The United States Government Services Administration (GSA) can be thought of as one massive, mega buyer. Think of it this way — the agency’s operating budget is $20 billion, and is responsible for overseeing the US Government’s $66 billion spend on procurement annually — slightly less than half of Amazon’s net revenue in 2016.

Which is why two recent incidents should make you think.

In Fall 2016 Amazon hired U.S. Chief Acquisition Officer Anne Rung, who was effectively the top purchasing officer in the United States. She joined Amazon Business team in a “government-facing role as global leader of its public sector division”.

Then the House-passed version of the National Defense Authorization Act of 2017 (H.R. 2810 — FY18) included a little teensy section called Section 801 that instructed the GSA to:

contract with multiple commercial online marketplaces for the procurement of certain commercial-off-the-shelf (COTS) products

That’s a huge bombshell in the world of retail. It basically removes the condition that the GSA use competitive procedures to ensure that it is getting the best prices for off-the-shelf goods.

On an initial read, the bill seems well-intentioned (but don’t all government bills?) — including such “hits” like

The committee expects that by contracting with numerous marketplaces, there will be competition between marketplaces for procurement of COTS products, and government personnel will have streamlined access to suppliers, products, and prices from varying marketplaces

and

The committee believes that online marketplaces provide a substantial opportunity to greatly streamline procurement of COTS products. Namely, marketplaces generally ensure competition and price reasonableness, and therefore would obviate many of the time-consuming government-unique procurement processes GSA and the Department of Defense perform today. Additionally, departments and agencies would be required to accept the standard terms and conditions related to purchases on each marketplace.

Fun.

There’s a huge problem here though:

Firstly, Amazon has the lion’s-share of online marketplaces — the only other major marketplaces that might remotely qualify would be Walmart and maybe Target. So you’re looking at a duopoly at best, and a monopoly at worst. Imagine having one player getting a no-bid access to the roughly $55 billion available annually through the GSA procurement budget.

Imagine that.

Secondly, the bill problematically assumes that just by visiting the online marketplace, the procurement officer can bypass or satisfy the competitive procedures rules that most procurement agencies have to go through — because theoretically the marketplace has a multitude of sellers that would satisfy the competition requirements.

That’s a huge problem because online marketplaces — unlike their physical counterparts — aren’t free and open in the traditional sense. They’re essentially walled gardens where Amazon sets the rules and controls the play. As we’ve written extensively before, there’s a multitude of ways in which Amazon can wire the “buy box” to favor itself over the other sellers.

For example — even if the successful seller is a third-party supplier on Amazon, the retailer still gets 15–20% of the sale amount as commissions enabling it to earn billions in revenue without doing much in the way of actually supplying the US Government with anything useful.

Additionally, Amazon has access to mountains of data on buying patterns and decisions. For example, if it knows that the DoD likes to purchase tonnes of document pens in the beginning of fall, Amazon can hike up the prices of those particular pens, and still not fall afoul of procurement rules.

Thirdly, the reason why the GSA exists is that by publishing the GSA schedules (essentially established prices for most COTS products), the Government can get better prices than what’s available on the open market. That’s essentially leveraging the purchasing power inherent in the Government being the biggest buyer around.

That power is dramatically reduced if the GSA is forced to buy within a marketplace — that too a singular marketplace dominated by Amazon. Amazon can reduce the number of competing offers. It can reduce the number of potential sellers. The process is ultimately shrouded in the grey zone between a fully transparent marketplace and in-cart pricing.

It’s somewhat ironic as well that Amazon as a retailer has spent countless dollars in lobbying against sales tax payments to local and state governments, yet is involved in large scale government procurement at all levels — with its contract with US Communities — the government purchasing alliance and its launch of Amazon Business; the $499/year Prime-for-Business program that is squarely targeted at enterprise procurement teams.

Amazon the King of Retail with the Government in its embrace?

In the end, a competitive landscape for all is in the best interest of the US Government and its procurement agencies. While marketplaces hold promise in terms of reducing government red-tape in procurement, the current status-quo; with Amazon clearly dominating the field means that a more level playing field is needed; one in which other marketplaces like Walmart, Sears, and Target can compete in.

A significant area where that can make a difference is in product matching. By focussing more efforts in establishing good product matching and price comparison across different retailers, the GSA can realize better returns on investment, especially if it’s keen to foster an open marketplace where the buyers can find the best possible supplier at the most cost-effective rates.

At the end of the day, it is technology, not blatant rent-seeking that should determine how the Government procures goods and services for its daily operations. The Amazon amendment is audaciously anti-capitalist, favoring a player with a clear advantage and barriers to entry in the market, essentially handing it a guaranteed, secure source of revenue at the expense of the American taxpayer and the economy. Handing a no-bid contract to Amazon to operate a marketplace-for-government-procurement is a sure fire way to hand over the incredibly important purchasing power of the US Government to a private corporation, with zero checks-or-balances.

It’s sure as hell not the American way.

Semantics3 offers futuristic retail solutions — from product matching for price comparison to instant product catalog enrichment and AI-driven product categorization.

Published at: November 07, 2017

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