Going, Going, Gone Online

Refining the front end of the supply chain in the public sector has received much attention lately, with agencies at all levels of government incorporating many of the e-procurement tools and techniques of leading private-sector firms. However, while forward logistics has received a great deal of investment and consideration, reverse logistics has been the oft-neglected part of the supply chain. Now, mimicking the best practices of reverse logistics found among private-sector firms, government agencies are realizing that online auctioning of the "castaway goods" they have stockpiled in their warehouses and yards can be an important element of remedying the nearly universal budget shortfalls faced at the local, state and federal levels.

Casey Coleman of FirstGov, a federal online portal, observes that online auctioning of government property represents a good deal for the taxpayer: "Not only does it raise money that can be used in place of tax dollars, but it also takes those items off our rolls so we no longer have to pay for [their] upkeep and maintenance."

Whether they've been held in dank warehouses, impound lots or remote locations, most public auctions by government agencies historically have been sparsely attended affairs, with the victors being those with the fortitude to actually show up and participate. As such, the financial returns of such auctions have been pitiful, often only cents on the dollar. Quite often, it will cost an agency more to catalog the items and stage the event than it will bring in from such physical auctions.

According to Bill Angrick, CEO of Liquidity Services, a privately held Washington, D.C.-based auction services provider, online surplus auctions produce returns 50 percent to 200 percent higher than in-person, physical auctions.

The 'eBay Economy'
Now, government agencies across the board are showing interest in moving such auctions into the 21st century, with a pronounced shift toward taking the events online, both to reduce their costs and widen the participation in such auctions. In fact, a study conducted late last year by the National Institute of Governmental Purchasing showed that twice as many governmental agencies had employed forward auctions for the sale of surplus assets and goods as had used the much-touted reverse auction method of procurement. Indeed, in what has been christened by BusinessWeek as the "eBay Economy," public-sector executives are now increasingly facing the question of why such auctions should not be held online, in light of both universal technological advances and budgetary difficulties.

What are governments auctioning online? The answer is everything--from a 1999 Lamborghini Diablo Roadster, which fetched $184,000, to a 2,002-acre ranch in Montana that went for $1.8 million in an auction for the U.S. Marshals Service, according to Bid4Assets. While the headlines are replete with tales of high-end government goods being auctioned online, such as luxury automobiles, private aircraft and even the State of Maryland's yacht, the real story is the wealth of surplus assets that are being sold at virtual auction events every day, including thousands of items running the gamut from household furnishings and electronics to cars, trucks and construction equipment to computers.

How are government agencies entering the online auction business? Some agencies at the state and local levels are literally just placing their surplus items on eBay. To date, at least 15 states and numerous cities and counties have made use of the eBay channel. This has mostly been done in a "go-it-alone" approach, with the work involved to place items on eBay and fulfill the sales process being done in-house.

The state of Oregon has even established an operation within its Division of Administrative Services to help other government agencies, including clients, such as the federal Bureau of Land Management and the city of Lynchburg, Va., to sell its surplus vehicles on eBay. This operation generates positive income for Oregon. According to Stacey Oller, business manager for the Oregon Surplus program, the operation is growing at 250 percent per year, with more than $7 million in annual sales. And Oregon is leveraging its knowledge of online marketing by becoming, in essence, a third-party service provider to other government agencies.

Many government executives, however, while recognizing the untapped value of their surplus and seized assets and the potential that online sales presents for deriving positive revenue, realize that the mission of their agencies is not to be eBay "power sellers." Thus, there is a great market opportunity for private-sector firms to engage government agencies in partnerships that can deliver more value.

"On the Internet, we can open up the bidding 24/7," observes Phil Franey, treasurer of Kern County, Calif. "It has provided more traffic and greater exposure. If done well, it's a 'no-brainer.'"

A major experiment in this area involves the DoD. Until recently, American military surplus was sold through physical auctions at more than 200 military facilities, both in the United States and abroad. After a competitive public process in mid-2001, however, the Defense Reutilization and Management Service (DRMS) entered into a unique partnership with Liquidity Services, awarding the company an exclusive contract to sell the wide panoply of items that become surplus for the armed forces and are not claimed by other federal, state and local agencies. Under terms of the contract, there is a split between the government (80 percent) and Liquidity Services (20 percent) of both the auctions' costs and net proceeds, according to the U.S. Army Logistics Management College. This maximizes the revenue and minimizes costs for both parties. Thomas H. Stanton, a Fellow of the Center for the Study of American Government at Johns Hopkins University, notes such an alignment is crucial to producing successful public-private partnerships.

A Public-Private Affair
Liquidity Services set up a special subsidiary, Government Liquidation, which oversees the storage, display, lotting and auctioning of military surplus items on a specially created auction site, www.govliquidation.com. The company's proprietary auction platform provides complete fulfillment solutions, including the handling of payments, shipments, and customer service and dispute resolutions. The auction site draws on Liquidity Services' established buyer base of more than 130,000 surplus buyers. Purchasers on the site run the gamut from individual bargain hunters and collectors to traditional liquidators. In fact, according to Liquidity Services' Angrick, one in four of the buyers on the company's site are eBay power sellers who buy surplus.

The results to date have been impressive for both the government and Government Liquidation, whose site generates $60 million annually in military surplus sales on approximately 400,000 individual items, spanning more than 600 commodity categories. In the first two years of operation, Government Liquidation's sales have exceeded the prior physical on-site prices by approximately 50 percent, enabling the company to deliver funds back to the federal coffers at a rate 47.1 percent higher than that projected in its contract with the DoD, according to data from Liquidity Services.

Indeed, the Government Liquidation-DoD partnership model may be the harbinger of things to come. It has been replicated in the United Kingdom, with Liquidity Services having entered into an agreement with the U.K. Ministry of Defense to sell its military surplus through a newly formed subsidiary, UK Surplus, at www.uksurplus.com. Now, with the Federal Asset Sales Initiative being one of the Bush administration's 25 e-Government Initiatives, the partnership may well become the mechanism for online sales of surplus throughout the federal government.

On the local level, one of the true success stories is that of San Clemente, Calif.-based Property Bureau. Headed by former law-enforcement officials, the firm is enticing city and county law-enforcement agencies by offering to take all the stolen and seized goods no longer needed for evidence and that go unclaimed. Once the goods come into one of the firm's two processing facilities in City of Industry, Calif., or Farmingdale, N.Y., the items are sorted and made available for sale on the firm's auction site at www.stealitback.com. The firm provides complete sales and fulfillment support, taking the burden entirely off the agencies.

What's Property Bureau selling on its site? Property Bureau's CEO Tom Lane, a former New York City police officer, says, "Anything that can be stolen will wind up on our site. More TVs, more transformers, sporting-goods equipment, radios, Walkmans, PlayStation 2s. On an hourly basis, these items are going up on our site."

According to Sgt. Dan Ford, who manages property for the Tulsa [Okla.] Police Department, Property Bureau "gets us out of the auction business." There, the old way meant that five officers had to put in two to three weeks of "intense overtime" to stage two physical auctions a year, which generated poor results. With Property Bureau, the new way has meant dramatically increased returns with lower costs to the agency, increased auction frequency and much wider participation. To date, Property Bureau has enlisted more than 300 police departments in 24 states to use its service, from New York to Wichita Falls, Texas. The results have been dramatic, according to Tom Fegan, a vice president with the firm, who notes that communities have seen online auctions produce results up to eight times greater than those generated through in-person auctions.

In sum, online surplus auctioning is becoming a focal point for public-sector leaders who see it as a way to use e-commerce technologies as a faster, better, cheaper way to dispose of goods, thus minimizing their hassles and maximizing their returns. The once sleepy government surplus market is creating great business opportunities for firms that can provide innovative long-term solutions to transform the way government agencies handle the variety of assets that arrive at the end of the governmental supply chain.

Top Auction Solution Providers
Bid4Assets
www.bid4assets.com

BidCorp
www.bidcorp.com

CWS Marketing Group
www.cwsmarketing.com

eBay
www.ebay.com

EG&G Technical Services
www.ustreas.gov/auctions/customs/egg.html

Government Surplus Assets
www.govassets4sale.com

Liquidity Services
www.liquidation.com

LightGov
www.egovmarkets.com

Property Bureau/www.propertyroom.com

5 Questions Public-Sector Executives Need To Ask

• How much is it costing to warehouse, catalog and administer surplus assets? Can these employees, space or operations be put to better use?
• What percentage of the estimated value of surplus assets are being recovered through physical auctions? What is it costing to conduct these auction events? How many participants (attendees, bidders) are there at such events?
• Are there any regulations on the books that would prevent your organization from shifting to online auctions?
• Does your agency retain the funds generated by surplus sales, or are the proceeds of such sales returned to a general fund?
• What functions could be done away with if you switched to third-party provider of surplus handling and sales solutions?

David C. Wyld ([email protected]) is the Louis H. Mayfield Professor of Management at Southeastern Louisiana University in Hammond, La., where he teaches about business strategy and e-commerce.