By Steve Kelman

Blog archive

The Lectern: "The Danger of Discounts" -- this is all we need!

On returning from Sweden, a copy of the November 5 issue of FCW was in my mail pile, featuring an extremely depressing column by Jonathan Aronie, the IT contractor lawyer, called "The Danger of Discounts."


The basic point of the column was that, although it is fully legal for vendors to offer government customers discounts off GSA list prices for quantity buys, agency buying-commitments, or even as temporary price breaks to deal (say) with slumping sales, Aronie believes that it is dangerous for vendors to do so, in the current procurement climate, because it creates the risk that in subsequent GSA schedule negotiations, GSA may demand that the temporary/special discount prices become the GSA schedule list prices.


One of the finest legacies of the procurement reforms of the 1990's was elimination of the so-called "price reduction clause" in the GSA schedules, which paved the way for massive discounting off the schedules and created a bonanza for agencies and taxpayers. (We owe this change to then-GSA Administrator, the late Roger Johnson, a high-tech CEO whom President Clinton appointed to head GSA. Today, Johnson's memory is honored in academia by a chair with his name at the University of California at Irvine, Johnson's home town, filled with great distinction by the brilliant organization studies/public management scholar Martha Feldman.)


GSA list prices are not very good because they are the "best" prices a company offers to customers who make no purchase commitment. The fact of widespread discounting off GSA schedule list prices for agencies willing actually to make a quantity-buying commitment means that, for anybody who actually knows anything about procurement, the hubbub about Sun Microsystems GSA list prices has always seemed removed from the realities of federal buying.


Although I'm not a lawyer and my observations here should definitely not be taken as legal advice, my own reaction was that Aronie was painting an unlikely scenario, since firms are not required to offer GSA the best prices they offer commercial customers who make large buying commitments -- prices that are typically way below GSA list prices -- so why should prices to the government trigger such an effect?


Nonetheless, lawyers are paid to provide their clients with worse-case scenarios. It is certainly plausible to believe that, in the current procurement environment, many firms will follow the advice of lawyers such as Aronie and hesitate to offer government customers the kinds of discounts they have been offering ever since Roger Johnson eliminated the price reduction clause in 1996.


Thanks a lot, Senator Grassley, and thanks a lot, POGO, for your good work on behalf of the taxpayer, making companies afraid to offer discounts to the government.


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Posted by Steve Kelman on Nov 12, 2007 at 12:08 PM


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