Can ERP Save E-Procurement?

Electronic procurement has proven far more complicated and expensive than expected. Some states are banking on ERP to solve the problem. But is it enough?

by / September 24, 2002
You can't look at an e-procurement system the same way you can other government facilities, such as a library, a wastewater treatment plant or a courthouse. But if someone were to choose a public building that best reflects the state of e-procurement today, it might be a convention center. Not just any convention center, but one of those that sits silently downtown somewhere, built with high hopes that it would revitalize the urban core, but never quite achieving its original purpose. Its marquee lists just a handful of events. Meanwhile there's little traffic in or out of the gleaming, modern but eerily quiet building.

Some would argue that e-procurement hasn't reached white elephant status yet, but something is clearly wrong. A number of systems have been turned off for lack of business. Others launched with great expectations and lots of money - both public and private - have been either scaled back or have yet to reach their targets in terms of usage and revenue.

The dark rumblings have grown louder in recent months with the termination of South Carolina's e-procurement system in June, followed by the announcement from NIC Inc., that it was exiting the e-procurement business in the U.S. Then there was the report issued by Virginia's auditor of public accounts that found only 1.5 percent of the state's purchases were transacted using a state-of-the-art $14.9 million procurement system.

These problems follow on the heels of pilot project shutdowns in Massachusetts, Indiana and Michigan. Last year, the city of Los Angeles' new $11 million procurement and inventory management system ran into a series of glitches resulting in billing problems and late payments to suppliers as well as inventory shortages.

The extent of these difficulties is reflected in the latest survey on e-commerce by the National Institute of Governmental Purchasing, which revealed a significant slowdown in e-procurement projects. The survey, released in April, showed the percentage of government purchasing agencies using some form of e-commerce remained virtually unchanged between 2001 and 2002. More troubling was the fact that e-catalog purchasing in government dropped 19 percent in 2002.


Transaction Fee Trouble
Right now, transaction fee systems face the biggest difficulties. These e-procurement applications rely on fees from suppliers to pay for operations. Typically, a supplier pays an annual fee to use the system and another fee for each transaction. But many suppliers have balked at paying these charges. As a result, purchasing officials have run into trouble recruiting suppliers to use their e-procurement systems.

Many of these systems were rolled out just as the economy sank, reducing tax revenue quickly and significantly. In turn, states and localities have slashed spending to avoid red ink, which has had a negative impact on fee-based procurement systems, said Gary Lambert, senior consultant with AMS. "As budgets go soft and revenue goes down, the result is fewer transactions and reduced income for e-procurement vendors, such as NIC," he said.

Lambert also pointed out that a number of states signed contracts that promised to make up the difference if minimum revenue targets from transaction fees weren't met. "Not hitting those numbers means the state has to come up with the revenue from public coffers," he added. That could be a real problem for some states that have such clauses in their e-procurement contracts.

But are suppliers and the economy solely to blame? A different view on the problem comes from NIC, the e-government firm that announced its withdrawal from the government e-procurement market. The problem isn't with a soft economy or skittish suppliers, but with weak government policies, said Christopher Neff, NIC's director of integrated marketing.

"E-procurement's problem lies with government's inability to muster the political will to mandate the use of e-procurement by both agencies and suppliers and its unwillingness to manage institutional change as procurement systems are converted from a manual process into an electronic one," he said. "Without that mandate, participation levels never rose to the level to make e-procurement a success."

In contrast, Neff pointed out that NIC is actively engaged in e-procurement in Europe, particularly in the United Kingdom where Prime Minister Tony Blair has set a mandate to put government, including procurement, online.


Procurement Goes ERP
With so many flaws in e-procurement systems funded through transaction fees, a growing number of state and local government officials are rethinking their views on e-procurement, and trying to come up with a new strategy to make it work.

One concept that's beginning to take hold in a cluster of states involves enterprise resource planning (ERP) systems. ERP brings together the business practices of an organization's financial, accounting, budget, payroll and procurement functions. Thanks to a new generation of ERP software specifically geared toward government needs, state and local governments are beginning to implement systems that link virtually all agencies and departments under one integrated system.

By making e-procurement part of the ERP package, purchasing departments have found that funding technology is no longer something they have to shoulder on their own. Instead, it's an enterprise issue that requires state funding, usually in the form of money taken from general appropriations. And the solution is now part of a bigger package, where it's possible to achieve greater savings, efficiency and productivity.

When the National Association of State Comptrollers conducted its 2002 Survey on ERP, 72 percent of the 25 states that responded said they were either planning, implementing or operating ERP. Of those, six states indicated e-purchasing was a component of their ERP system.

According to Lambert, not only are ERP projects usually better funded than stand-alone e-procurement systems, but they give government a certain amount of flexibility in deciding how to proceed. "State folks are segmenting procurement into three parts and then figuring out what they can afford at the moment," he said.

Jurisdictions can choose between a vendor module, which handles registration, notification and receipt of information and bids; a contract management module, which uses Web tools to receive and evaluate bids as well as perform other contract-related functions; or, an e-catalog system, which allows agencies to purchase commodity goods and services.

Missouri, which implemented one of the first statewide ERP systems in the country, has an online e-procurement system that is linked with the accounting portion of the ERP package, built by AMS. Vendors can register online once and have their identification data centrally stored in the state's financial/accounting system, said Jim Miluski CPPO, director, Division of Purchasing and Materials Management.

The system doesn't have an e-catalog module, nor is the system capable of electronically transmitting accounting data to vendors. However, it does offer email notification of commodity orders.

Miluski believes the other enhancements will occur over time. "Right now, e-procurement works in terms of allowing us to reach a broader spectrum of suppliers," he said. "But you have to remember that procurement is a subjective methodology. No machine can take over the entire function of our department."

In Pennsylvania, a much more ambitious ERP/procurement project is underway. Launched on July 1, Imagine PA is a $167 million statewide accounting, budgeting, human resources, payroll and purchasing system built by IBM and KPMG using software from SAP. Sharon Minnich, deputy secretary for procurement in the Department of General Services, described the e-procurement portion as "an end-to-end solution" that includes all aspects of vendor services and contract management, from registration to invoice payment.

Any vendor who does business with the state is now listed in a centralized database, so that everything from registration to payments is handled faster and more accurately. As a result, the phrase "customer service" has taken on a new meaning, Minnich said. "For example, agencies now can view more data on a particular purchase and respond more quickly to vendor queries," she explained.

For Don Edmiston, project director of Imagine PA, having a centralized procurement system that's integrated with a statewide accounting system means something bigger. "Cash management is the key now," he said. "With invoices going through our treasury more quickly, Pennsylvania can pay current liabilities with current cash."

Imagine PA, which is funded entirely through general appropriations (no transaction fees), delivers other procurement benefits as well. These include improved invoice status checking, fewer manual approval steps, electronic forms submission capability and simplified bidding procedures. It all adds up to a more rapid procurement process that's also more accurate, Minnich pointed out.

Always looking at the big picture, Edmiston explained that the end result will allow Pennsylvania to remain more competitive in the constant battle to keep firms happy doing business in the Keystone State. "Vendors are going to want to do business here," he predicted. "In addition, our workforce is going to be better trained [using ERP] and we'll be able to hold down costs while providing a better customer focus."


Mandating E-Procurement?
If Pennsylvania's e-procurement system can achieve its goals, it will be one of the first to have done so. Most state and local government purchasing officials agree that cost savings and better productivity are chief benefits from e-procurement. Yet project after project that has grown from pilot phase to production system has struggled.

A big issue has been supplier cooperation. Many states have underestimated how hard it is to get suppliers on board an e-procurement system, according to Lambert. "It comes down to asking suppliers to change their business. That's a big difference from asking them to use some technology." He also cautions that ERP projects are time-consuming and expensive. Not every state and local government will choose that path for launching e-procurement. While the long-term benefits can be substantial, integrating e-procurement with a centralized accounting system isn't necessary in the short term, Lambert added.

At the same time, Neff warns that government will continue to stumble when it comes to e-procurement as long as the leaders don't mandate its use. He pointed out that NIC's e-government portal business is doing very well, in large part because governors and mayors fully supported the concept and got their agency heads to use the technology. That's not been the case with e-procurement. "Electronic purchasing won't work until government embraces the technology and changes," he said.
Tod Newcombe Features Editor