Purchasing and Reputation Systems

What is the problem?

One of the problems that Public Administration faces is how better to select vendors or service providers. Governments are responsible for the careful spending of taxpayer's dollars. That responsibility is even more critical now with the current state of the economy. What is the best way to get the job done for the least cost? Perhaps the establishment of reputation systems based on vendors' past performance could be an additional tool for purchasers.

What is the current approach?

The existing process for inviting companies to bid is good. A request for proposals (RFP) is sent out to companies that provide the commodity or service required. The responses that are returned within the time frame are reviewed. However, this is the place where the system breaks down. It is the policy for most municipalities to select the low bidder almost exclusively, with very few exceptions. That is not always the best thing. Some vendors will underbid to make sure they get the job. This can lead to cost overruns on service projects, because the vendor will submit change orders later in the project for unexpected or unplanned costs. The job has to be completed, so it may be the case that the change orders will be approved and the project cost could increase beyond what another bidder's cost might have been.

What should the new approach be?

Sites already exist that can help consumers verify if the company that they intend to do business with is reputable. Two of them are the Better Business Bureau (BBB), and the Registrar of Contractors (ROC). However, these sites do not have information on every company in business. To rectify that, if customers are required to give a rating after they have completed their transaction with a business, information could be compiled and posted on a site accessible to any who are interested. Questions asked could include whether the job was completed on time, on budget, and with good customer service. Individual statistics as well as an overall rating could help consumers decide if they wish to do business with a specific vendor. In addition to the current process, having this information could assist municipalities in deciding what the likeliness is that a vendor will be able to complete the job as bid. This new approach is a combination of two of the four constraints Lessig introduced in his book, Code 2.0, Market and Norms.

Reputation systems do work. Ebay, Amazon, and other sites like them use them very successfully. Whether or not reputation systems are a viable option for this suggested application is unknown. Maybe an ambitious entrepreneur will think this is a great idea and start a new project.

References:

Lessig, Lawrence. Code 2.0. Chapter 7, "What Things Regulate", p. 122.