Conservative Growth

Virtually every state has an e-procurement project under way or a system in operation, but most are taking a cautious approach to implementing the technology.

by / April 16, 2002
After several years of high expectations and modest returns, states are taking a more conservative approach toward electronic procurement. Rather than follow in the footsteps of the early innovators, who rushed to build electronic purchasing systems funded by transaction fees, only to find the results less than promising, a majority of the states are taking a go-slow approach. Out go the stand-alone e-catalog systems, so popular a little while back. In come the more conventional procurement systems that emphasize e-contracting and are modules of an overall state financial system.

This is one of the central findings in a recent, 50-state survey by the Center for Digital Government, the knowledge-management and research division of e.Republic. A majority of states are still without an operational e-procurement system, which can include an electronic contracting application for automated bid solicitation, notification and tabulation, or an electronic purchasing application, such as online catalogs for commodity products and services, or both.

But nearly all of these states are in some stage of the development or implementation process, according to Alia Mendonsa, a research analyst for the center. New Hampshire remains the lone holdout with no plans to build an e-procurement system.

What separates these projects from past efforts is the top-down, conservative approach taken by most states. Enterprise resource planning (ERP) systems play a much bigger role in how e-procurement is implemented. States are no longer turning to just e-government partners to build stand-alone procurement systems funded through transaction fees. Instead, they are asking large integrators to incorporate e-procurement into the much larger, enterprise financial systems states are now finding necessary to build.

For example, Minnesota, Montana, Nebraska and New Mexico are investigating how to integrate e-procurement into their overall budgeting and financial systems rather than build and fund a system separately through transaction fees. Missouri already has headed this way by launching e-procurement as part of a larger ERP system that comprises human resources, payroll, budgeting and planning. The system, known as SAM II, serves 32 agencies and departments and has already slashed some purchasing costs by as much as 50 percent.

States that have the furthest to go are focusing on the necessary legislative changes needed to make e-procurement a reality. In most cases, this involves revamping codes so they can receive bids electronically from suppliers. In some states, however, fears have arisen that online purchasing will open the floodgates to "old-boy" networks, where favored suppliers will receive preferential treatment from select buyers who have access to electronic bids that haven't been properly sealed. To avoid this potential problem, states are trying to develop electronic lock-boxes where bids can be stored and are safe from tampering.

Perhaps most telling about why states are moving cautiously toward e-procurement these days is the small group of states that had e-procurement, but no longer do. Massachusetts, Indiana and Michigan have all conducted pilot projects involving online catalog purchasing, but have ceased operations for one reason or another. Massachusetts, which jumped out in front of everyone with its EMall project, pulled the plug when it's partner Metiom, went under last year and the economy turned sour, reducing state revenue and funding to keep the project alive.

Operational Systems

Of the 15 states with operational e-procurement systems, about one-third have built just e-contracting applications that allow online vendor registration, e-mail notification, online posting and receipt of bids and bid tabulation capabilities. Typical is Arizona, which has said no to an online catalog system for the time being, instead opting to put its resources into e-contracting, which will eventually handle as much as 80 percent of the service-oriented solicitations the state receives annually.

The rest of the states with online procurement are running catalog systems, most of which are funded by transaction fees. These systems are beginning to handle a sizable amount of orders, but have seen problems crop up. For instance, one state reported that using e-catalogs for purchasing has significantly amplified the choices a buyer has when it comes time to make a purchase. As a result, buyers are spending more, not less, time trying to decide what to buy.

Other states have struggled with integrating e-procurement into state financial systems. Last year, Forrester Research reported that some states must deal with as many as 40 different accounting systems. Then there's the issue of agency acceptance. Build it and agencies don't necessarily just come and use it. They have to be trained and made comfortable with the new technology. Purchasing offices have to help agencies adopt and incorporate e-catalog procurement into their everyday business practices.

The payoff for e-procurement comes through cost savings and improved productivity. Forrester estimates that Web-based purchasing can slash printing and mailing costs by 75 percent. Although no state has been able to document those kinds of savings yet, a few states have estimated purchases that once cost $150 per transaction, no matter what the value of the purchase, would drop as low as $25 per transaction with e-procurement.

One benefit that has already occurred can be found at the local level. City and county governments have been encouraged to join with states and use the newly built procurement systems, and many have done so. In Texas, local use of the state's e-procurement system outstrips state agency activity 165 to 3.

Some states have tried to avoid that situation by mandating agencies use the system. But that approach only has taken place in a couple of states, Connecticut and North Carolina being the most noteworthy. In states where e-contracting is operating, use of the system is essentially mandated because of the way bids, solicitations and contracts are processed through a central purchasing office.

But it's clear states have their work cut out for them as they transition from the paper world of procurement to an electronic one. Many are finding it hard work to get everyone on board, from buyers and suppliers to aging, hard-to-integrate state financial systems. Yet once all their ducks are in a row, states should see a new world of possibilities open up.
Tod Newcombe Features Editor