E-Procurement Rising?

Maryland and Connecticut are proving full-fledged online procurement systems work. Will other states follow?

by / July 17, 2001
It may be some time before electronic procurement has an impact in state and local government, but for those who were the first to try, the results are encouraging. Maryland and Connecticut, two states that have launched online bidding and catalog purchasing systems, report a recent groundswell of support for the technology among buyers and sellers.

"We are growing exponentially," said Mark Krysiak, deputy director of Marylands procurement and contracting. "We have about 60 government agencies trained to use the system and about 260 active buyers. Thats about 10 percent of all buyers in the state."

About 300 vendors are actively bidding on contracts and selling through catalogs, according to Krysiak. That number represents about 20 percent of vendors the state has on file, but they make up nearly 50 percent of the states existing suppliers.

In Connecticut, a similar story is unfolding. Since the states online catalog system, Orderlink, went live in 1999, more than 114 suppliers have subscribed to list their products electronically. Starting slowly, government buyers purchased only $70,000 worth of supplies in the first month. But by March 2001, buyers spent $3 million in one month, according to Jim Passier, the states procurement manager. "Our objective is to do $50 million in online procurement by the end of the year," he said.

While such a promising start seems to bode well for electronic procurement in state and local government, having just two states purchasing and taking bids online is hardly a ringing endorsement. Thirty-one states have yet to plan, build or launch an online procurement system, according to the Center for Digital Government, the knowledge-management and research division of e.Republic.

Its not known why these states have decided to wait, but their reasons may be found in a report issued in March by Jupiter Research. "[Most procurement managers] see little advantage in moving online, in part because their existing suppliers are not there," according to the report. Nearly half of those surveyed said they would do less than 20 percent of their procurements online for at least the next two years.

Biding Their Time

Besides the lack of existing suppliers, buyers gave several reasons why they are reluctant to go online, including lack of knowledge about Internet markets, limited product offerings and lack of trust.

Buyers are very aware of the value online procurement can deliver, including lower product costs, more choices and reduced cycle times, but they are still unwilling to commit, according to Jean-Gabriel Henry, an analyst with Jupiter. "Buyers are not going to use an e-procurement system just because its a better solution. It requires education and training to make them feel comfortable, and that takes an awful lot of energy," he said.

The problem, according to Henry, is that the suppliers who are online havent done a good job telling the buyers they are available online, nor have they made the effort to show buyers how to use them in an online environment they can trust while getting value from e-purchasing. But Henry believes the obstacles to online procurement will be overcome, and he expects the business to really take off by 2003.

In Maryland, lack of commitment hasnt been a problem. The governor called for the state to deliver at least 50 percent of government services over the Internet by 2002 and 80 percent by 2004. That was more than enough to jumpstart e-procurement, according to Krysiak. In March 2000, the state signed a contract with SAIC to host a self-funded portal, called eMaryland Marketplace, which allows buyers from state and local government agencies to use an interactive bidding engine and to purchase commodity supplies from electronic catalogs. SAIC worked with Metiom Inc., KPMG, Early Morning Software Inc. and International Technologies Inc. to create the portal with its various procurement components.

Vendors can subscribe to the interactive bidding module for a base fee of $150 or $225 for the premium service. Suppliers who place their catalogs on eMaryland Marketplace pay a $3.50 per order transaction fee. These fees go directly to the portals host, SAIC. When revenue from the system exceeds $5 million, a fee-sharing formula kicks in with some revenue going to the state.

Subscriptions to use the bidding service have been readily accepted by the vendor community, but companies that sell low-cost items on the e-catalog have complained about the transaction fee, according to Krysiak. "Overall, we feel the fees make sense, given that suppliers can leverage our system and save ... the cost of printing anything out or [re-entering] data," he said.

Selling the System

When eMaryland Marketplace started, Krysiak predicted that the states core vendors would sign up during the first year of operation. That has turned out to be true. "We also have a few hundred other vendors who just watch the solicitations, and when they see a posting for something they sell, they join," he said.

One valuable lesson Maryland has learned concerns the timing for bringing new buyers and sellers online. "We first thought we would use the shotgun approach and send a notice to all vendors and tell them to come and join," Krysiak explained. "But as we brought up the buyers and found they wanted to buy one type of commodity and the suppliers were selling something entirely different, they werent happy."

Now, buyers and sellers are brought online through a targeted rollout plan. Buyers are happy because the supplies they specialize in are available when they start purchasing online. And sellers are content because they get a faster return on their investment once their catalog appears on the eMaryland Marketplace.

But although bringing suppliers online went well, convincing buyers to use eMaryland Marketplace hasnt been so easy. "The hardest part is convincing people to convert now to save themselves the time six months down the road," said Krysiak. "People are really reluctant to change, so we are going through the traditional issues of changing mindsets."

In Connecticut, it has also taken some time to convince buyers that going online is worth the change. "Id say that suppliers are a little more comfortable with it than buyers," said Passier.

But convincing suppliers to sell online took some work as well. "It was an issue in the beginning when they werent sure what this was and whether it would work," Passier added. "But once word got out that it did work, all resistance evaporated."

Connecticut launched Orderlink in 1999. The system was developed and hosted by Digital Commerce. Now in its third year of operation, the state hopes to conduct at least $50 million in online purchasing and has a long term goal of conducting $100 million in purchases once major contracts from the states school districts are online.

Orderlink is open to all Connecticut municipalities and school districts. Already, state and local buyers are beginning to reap some benefits, according to Passier. Vendors are offering bigger discounts thanks to the larger volume of business they can conduct online. And suppliers are finding they have been able to lower data-entry costs, receive orders faster and sell to a larger market.

In Maryland, Krysiak points to the results gained by Anne Arundel County when it posted bids for the first time online this year and immediately saved $12,000 with a few clicks of the mouse. As word about savings continues to spread throughout government in Maryland, Krysiak expects more of the states $5 billion in annual commodity purchases to take place online.
Tod Newcombe Features Editor