When School Districts Buy From Amazon, Are They Getting the Best Deal?...


When School Districts Buy From Amazon, Are They Getting the Best Deal? Maybe Not.

By Tina Nazerian     Aug 1, 2018

When School Districts Buy From Amazon, Are They Getting the Best Deal? Maybe Not.

Amazon has built its reputation by claiming cheaper prices and greater convenience for consumers. But a new report questions whether schools are getting the best deals by using the company.

Among the concerns raised in the report, published by the nonprofit Institute for Local Self-Reliance, are that the company uses its dynamic pricing model in a large public-sector contract—and that, ultimately, school districts risk not getting the best prices and local competitors lose out on business.

First, a recap. In 2017, Amazon won a five-year public sector contract with U.S. Communities, a cooperative purchasing program for local governments and school districts, with the option to renew for three additional two year periods. The contract covers office and classroom supplies as well as library books, technology and more. The report authors write that U.S. Communities estimated that the contract’s value could be worth $5.5 billion over a potential 11-year period.

Typically, these contracts set fixed prices for hundreds of commonly-purchased items. Yet according to the report authors, the contract with Amazon does not guarantee prices for any items. Instead, it uses dynamic pricing, which is subject to change, and thus could end up costing school districts more in the long run.

To test that assumption, the authors did a little research. They asked a firm that tracks the prices of office supplies across multiple retailers to see if a California school system would have gotten a better deal had it purchased the same supplies it got through a local supplier from Amazon Business instead. The firm found that the district would have paid 10 to 12 percent more had it gone to Amazon Business.

The report authors are concerned that with this contract, school districts won’t get volume discounts relative to the scale they’re buying items at. They bring up a hypothetical example of a large school district looking to buy toner cartridges. They might expect four orders of 200. On Amazon, they might get a one-size-fits-all bulk discount for the purchase but they don’t get to “negotiate for a better price based on the volume of the orders” they will place throughout the year.

In an email to EdSurge, an Amazon spokesperson writes that Amazon Business offers both single-unit and bulk discounts on “millions of eligible items,” and that the company’s dynamic pricing “helps to ensure competitiveness and best-value pricing for education and public sector organizations.”

However, Stacy Mitchell, one of the report’s authors, points to how that differs from independent office dealers.

“When [independent office dealers] are bidding on one of these contracts, what they’re often doing is going to their manufacturers, and saying ‘I need even better pricing than the volume pricing you’re already giving me in order to service this contract,’” Mitchell says. That extra layer of negotiation can help drive down prices for school districts.

The report authors also think that the contract awarding process was stacked in Amazon’s favor. The Request for Proposal, or RFP, looked for an “‘online marketplace for the purchases of products and services,’” such as classroom and office materials, but also grocery products, musical instruments and animal supplies—a broad range of product categories other bidders were unlikely to be able to match. Amazon’s proposal scored a 91.3 out of a possible 100; its next closest competitor for the contract scored a 36.7.

Aaron Silberman, a San Francisco-based lawyer who specializes in public contract law, says that generally, under any competitive bidding system, there’s a need to balance “what you really need versus the desire to have competition—because competition gets you higher quality, lower prices.” He points out that the more requirements there are in an RFP, the more likely it is that competition will be limited.

“You could determine that you really need x, and there’s one bidder that can possibly do that,” Silberman says. “But if you really, honestly and truly need x, if that’s a good faith determination and you can defend it, that’s not a problem.”

How Much School Districts Spend on Amazon

As part of the report, the authors also collected data from ten school districts that showed what they spent on Amazon in 2016, before the U.S. Communities contract was awarded, in order to show the retailer’s growing influence in the public sector. The spending—characterized as informal or “impromptu” by the report—ranged from $9,541 (Baltimore School District in Maryland) to more than $1.5 million (Denver Public Schools in Colorado).

Olivia LaVecchia, the other author, thinks the shift in spending to Amazon is troubling in general, and will “only increase” now that the school districts are signed onto the contract. In 2017, Denver Public Schools’ spending with Amazon jumped 77 percent to $2.8 million.

Hal Friedlander, the co-founder and CEO of the Technology for Education Consortium, doesn’t think the criticism in the report is all that new. To a great extent, he explains, it appears that what the authors call out in Amazon’s approach is similar to what people criticize Amazon for in consumer markets—that it’s dominant.

“The lines of criticism seem clearly established in every market that they’ve entered, which is they don’t necessarily offer the free market that they claim, they offer an engineered market that clearly drives the advantage to Amazon,” Friedlander says. “And in doing so, maybe you’re deceiving the buyers into thinking they’re getting better prices and better service that they would elsewhere.”

Friedlander, who used to be the chief information officer at New York City’s Department of Education, has worked with many district leaders on buying technology for students. He says on a personal level, he is sympathetic to the idea that it is important for procurement staff at school districts to support local businesses.

However, he says he also believes staff members are “being pretty smart” about what their needs are. Price is important, he says, but there are other factors, such as shipment distribution, which buyers have to evaluate as well during the procurement process.

The Price of Convenience

Many people associate Amazon with convenience, in part due to the free two-day shipping that comes standard with its Prime service. Amazon’s U.S. Communities contract, however, doesn’t guarantee delivery times. Currently, school districts and other organizations that use the contract can get free two-day shipping on eligible items. But in the future, they’ll need to pay for a Business Prime account to receive the free two-day shipping at all. (A previous U.S. Communities contract promised next-day delivery).

While school districts that sign onto this contract don’t exclusively have to use Amazon for their procurement needs, Friedlander says going to three different places to order three different items is “more cumbersome.” The school district has to evaluate if using the Amazon contract, versus managing multiple contracts for supplies, reduces the overhead cost and simplifies the process enough to even things out.

Co-author Mitchell says that although the contract isn’t exclusive and school districts can buy from elsewhere, it’s not feasible for employees to shop around without “wasting a bunch of time doing that comparison shopping.” And, she adds, it’s not realistic to expect an administrator to know whether or not employees compared prices.

“The problem with this contract is it lures school districts into a false sense of security,” Mitchell says. “Because this contract actually doesn’t do any of the things that you need, and the very reasons that you [enter a] contract in the first place are not present here—there are no guaranteed fixed prices, there are no volume discounts, there’s no transparency, it wasn’t a competitive bid.”

John Helmholdt is a spokesperson for Grand Rapids Public Schools, which spent $172,507 on Amazon in 2016, before Amazon even secured the U.S. Communities contract. He tells EdSurge that while the district has signed onto the contract, the board of education and the superintendent encourage the use of local vendors based in Grand Rapids. He says about 52 percent of the district’s spending is with local vendors, and about 37 percent of it is with Amazon.

“It is certainly a large number,” he says about the district’s spending on Amazon. “But you’ll see the district has a strong commitment to locally-owned businesses. And so we’re kind of doing a little bit of the best of both worlds.”

Future Competition

The report notes that half the products sold on Amazon are through third-party sellers, who are listed on the company’s Marketplace platform. In the contract with U.S. Communities, “Amazon makes the case that the internal competition that happens between Marketplace sellers on its platform keeps prices low.”

However, the report finds multiple instances of Amazon undermining that competition, including evidence of the company prioritizing its own offerings in search results, extracting concessions from suppliers and using data from its third-party merchants to better compete against them.

Amazon is having success now in the procurement space, but Friedlander points to ProcureK12, which sells schools materials such as chalk and calculators, as an example of an up-and-coming competitor. He thinks in the future, other e-commerce marketplaces targeted to school districts will arrive to level the playing field. Those companies, he says, will be able to leverage their in-depth knowledge about how schools buy items, and the unique challenges they face.

“I think the pitch is going to be, yeah, you can buy from Amazon, but then you don’t get the company that’s sensitive to your needs as part of a community and not just an average buyer.”

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