October 16, 2020 Public Contract Law Journal

Empowering the End-User as Procurement Agent Through E-Commerce

by Abraham Latimer Young

Abraham Young is a Major in the United States Army Judge Advocate General’s Corps, having served on active duty for over seventeen years. His education includes, B.A., 2003, Wheaton College, Wheaton, IL; M.B.A, 2007, University of Mary; J.D., 2010, George Mason School of Law; LL.M., 2015, The U.S. Army Judge Advocate General’s School; LL.M., 2019, The George Washington University Law School. This article is based on a thesis that was submitted in partial satisfaction of the requirements for the degree of Master of Laws in Government Procurement at The George Washington University Law School. The views expressed in this paper are solely those of the author and do not reflect the official policy or position of the United States Army, Department of Defense, or U.S. Government.

This article is dedicated to the author’s wife, Gabriela, and children, Daniela, Jonathan, Evangeline, Liliana, and William, and to military families like them, who steadfastly bear the burdens of military service.

Many thanks are due to Professor Christopher Yukins for his insightful discussions on the wide-ranging disciplines covered in this article, and for patience while reviewing multiple drafts. His advice and guidance increased both the clarity of the ideas and the precision of their expression. Any remaining oversights, of course, are the author’s.

Abstract

Public procurement is an example of the principal-agent paradigm, in which a principal employs an agent to make decisions on behalf of the principal. This agency relationship has been scrutinized from countless academic angles because of the intractable problems it creates, referred to generally as the “agency problem.” In this problem, almost invariably, the agent will diverge from the principal’s optimal outcome, out of the agent’s selfish interests. The agency problem inevitably causes residual losses, despite extensive efforts and costs in monitoring the performance of procurement agents and sanctioning aberrant agents. Whereas in the commercial sector, costs and losses due to the agency problem are borne by the principal, and thus efficiently managed, the residual loss in government procurement often falls on the end-user (that is, the individual who actually uses the procured item). The agency problem creates large inefficiencies that are inconspicuous precisely because the burden is on the end-user. Granting procurement authority directly to the end-user could eliminate multiple levels of cumulative agency costs. By allowing users to purchase directly from electronic marketplaces, the government could make more efficient use of public funds and acquisition resources.

I. Introduction

Public procurements pose a practical conundrum because of the “agency problem,” in which agents employed by the principal to help accomplish the agency’s mission almost invariably stray from the agency’s optimal outcome due to selfish interests.1 Specifically, in the U.S. federal procurement system, the equipment acquired is often not what users would have chosen themselves, despite the efforts of countless members of the acquisition workforce. This is particularly the case for individual equipment used in the military services, because these purchases do not attract the media coverage of large procurements, and no functional feedback system ensures consistent high quality.2 Often, the quality of individual military equipment is so poor that service members prefer to purchase commercially available substitutes with their own money — often from electronic marketplaces.3 This opens the door to an obvious question: why not allow users to purchase directly from commercial marketplaces, bypassing an inherently flawed procurement system?

The government currently can work only through agents in purchasing items, such as military uniforms and pieces of equipment, for individual service members.4 This article describes the costs of agent-centered procurements in the military. It argues that unrecognized burdens caused by the agency problem are borne by individual end-users and thus are organizationally invisible in the procurement system. Ultimately, this article argues for empowering individual end-users in appropriate circumstances to make individual bestvalue determinations5 — which is precisely what the federal government proposes to do in the current initiative that would open electronic marketplaces to government users using government purchase cards.6 This approach would eliminate layers of aggregated agency costs and merge the agent’s incentives with the end-user’s particular preferences. This approach would also help ensure a well-considered choice by trading a disinterested purchasing agent for a user with personal experience and an anticipation of actually using the product. This would allow the government to benefit from a thriving competitive market that already exists, while simultaneously providing users with high-quality goods and services.

Eliminating layers of agents has remarkable implications for efficiency in procurement. To say that this would double efficiency in the procurement of individual equipment might seem like a bold claim, but the author believes it is possible to achieve this with a simple, readily available approach. However, it requires jettisoning an antiquated procurement system in exchange for a twenty-first-century approach.

To make sense of this potentially massive shift in procurement strategy, this article begins in Section II with a case study of the procurement system for individual military equipment from the perspective of a U.S. service member. Section III explores the various costs and burdens caused by the principal-agent procurement paradigm, focusing on the detrimental impacts on the final outcome. These detrimental impacts, referred to as residual loss, are the result of a series of agents’ decisions, each of which diverges from the optimal outcome. This article argues that the residual loss is borne by the end-user in the government procurement context, rather than the principal, thus creating a “moral hazard” — an opportunity for the agent to exploit his position. To dispel the common notion that agent’s performance can be corrected simply with better monitoring or sanctions, this article, using the lens of other disciplines, highlights the less understood pitfalls of agent performance. Section IV discusses current trends in procurement reform, such as creating a government e-commerce platform and reducing the regulatory burden on smaller value government purchases, as well as considering how these trends pave the way for a solution to the agency problem. Section V ultimately proposes that the agency problem could be mitigated by granting procurement authority directly to the end-user. Government users could make purchasing choices based on the experience of others through an e-commerce platform. Doing so would reduce waste and unnecessary burdens on the acquisition workforce, and increase competition-based quality and innovation. To use an American aphorism, walking a mile in a service member’s boots is a good place to begin.

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