The Future of COTS Procurement: The Proposed Section 846 Business Models
On March 16, 2018, the General Services Administration (“GSA”) and the Office of Management and Budget (“OMB”) released their Phase 1 Implementation Plan (the “Plan”) for “Procurement Through E-Commerce Portals” as directed by Section 846 of the National Defense Authorization Act for FY 2018. As we have written on this blog many times before, Section 846 (or Section 801 as it was known previously) will change the way the Federal Government buys commercially-available-off-the-shelf (“COTS”) products under the Simplified Acquisition Threshold (“SAT”). Section 846 directs GSA to establish one (or several) “e-commerce portals,” owned and operated commercially, through which the Government will procure COTS products under the SAT. The Plan is the general public’s first glimpse of how GSA envisions this program working, and the first of several critical steps to bring the “e-commerce portals” program online.
The Plan describes the three business models GSA/OMB currently views as viable options for the “e-commerce portal(s).” Although still in the early stages of planning, the Plan provides some detail as to how each model could work, with the caveat that further research in Phase 2 will impact the model chosen. Each model possesses unique characteristics and unique pros and cons.
Set forth below is a summary of each model, accompanied by a comparison to a current buying experience.
E-Commerce Model: Under this model, a portal contract awardee controls all aspects of sales through its portal. Through the portal, the awardee would sell its proprietary products (or wholesale products), and administer all aspects of the transaction, including order fulfillment, shipping, and invoicing. Third parties would not compete for sales in this model, but rather would compete to provide wholesale products to the portal provider(s). Under this model, the portal provider mainly generates profits through the sale of products.
- Analysis: This model feels the most like online shopping through a commercial retailer’s website. All business flows through the contract awardee and, by GSA/OMB’s own admission, this model allows for “little to no horizontal price comparison.”
E-Procurement Model: Under this model, the portal contract awardee administers the program under a “software-as-a-service” model. The portal provider does not sell any products, but rather operates the platform through which third parties sell products to the Government. Under this model, the portal provider generates profits through transaction commissions and subscription/listing fees.
- Analysis: This model feels the most like the current GSA Schedules program. The portal provider, though a contractor itself, does not compete for awards. The portal provider earns commissions on each sale (or fees for each listing, or both), so, theoretically, it encourage as many vendors as possible to list products and compete for business, without concern for which company actually wins individual awards. Oddly, this model both feels the most like “business as usual” (due to the resemblance to the Schedules program) and the most foreign (the Federal Government never has utilized technology in procurement to this extent, and therefore a software company would have to adapt existing software to meet the marketplace requirements).
E-Marketplace Model: Under this model, the portal contract awardee administers the “online marketplace” where Government end-users can purchase both the portal provider’s products as well as products listed on the marketplace by third party vendors. The portal provider and third party vendors each are responsible for fulfilling its own orders, but the portal provider can offer to perform these services for the third party vendor. Under this model, the portal provider generates profits both through the sale of their own products, as well as the fees charged in connection with the sales of third party products (e.g., commissions on each transaction, supplier listing fees, shipping/administrative fees paid by the third party vendors, etc.).
- Analysis: This model combines elements of the other two models. Portal providers generate profits both through sales of their own products and through commissions paid by third party vendors, and these third party vendors have the ability to compete for individual awards.
Regardless of which model is chosen, one thing is clear: the resulting contract(s) will spawn heated competition. Even under the E-Marketplace model, through which the portal provider would not sell its own products, the awardee likely will become a top 20 Federal contractor as a result of the revenue from this contract alone (some rough math: 5% commission on $50 billion in sales equals $2.5 billion annually). Should the portal awardee also be allowed to sell its proprietary products, for example under the E-Procurement model, that profit percentage will increase significantly.
GSA/OMB now move into Phase 2 research. All companies having a stake in the Federal COTS marketplace – from manufacturers to resellers to e-commerce portal providers – would do well to follow this still unfolding story closely.