Procuration Nation

Left for dead after the dot-come bust, e-procurement makes a comeback.

by / September 7, 2006 0
One of the nice things about living in medieval Europe, assuming you were a noble, was the simplicity of procuring what was needed for the kingdom. From the noble's perspective, the process of acquiring items meant little more than ordering the peasants and serfs to do it. Need a new cottage? Make the peasants build it. Pork chops for lunch? The serfs will see to it. None of that cumbersome democracy ever got in the way.

For those of us living under the yoke of freedom, however, transparency in government means that procurement -- what is purchased, how it's purchased and for how much -- is always under scrutiny. It has always been a thorny, paper-rich procedure for government. The fact that procurement professionals exist attests to the fact that when democratic governments buy anything, it is generally a complicated affair.

Until a few years ago, little had changed from the days of writing purchase orders with a feather pen by candlelight. Every purchase left a paper trail of often formidable size and uncertain expense. Finally in the 1990s came the idea of e-procurement -- a process wherein government acquires goods electronically. Since everyone loves computers and they solve so many problems, e-procurement was an overnight sensation ... well, not exactly.

But a number of state and local governments are starting to take a second look at e-procurement. And others -- such as Virginia, North Carolina and San Diego County, Calif. -- continue to build on the successes of taking their procurement process online, serving as models to others.

E-Procurement Redux
Like many Web technologies that emerged in the late 1990s, e-procurement was ahead of its time, but not by much. State governments were investigating or even piloting e-procurement systems when the dot-com bubble burst, sending most running back to traditional purchasing methods. But in recent months, e-procurement has experienced a second coming, which is partially attributed to a new approach to the procurement process known as strategic sourcing.

Strategic sourcing can be defined as a methodical, precise strategy designed to identify the best products and services for the best value while improving levels of service quality. Most experts agree that strategic sourcing and e-procurement complement each other.

Gary Lambert is a leading authority on e-procurement and strategic sourcing. As a former state procurement official and current vice president of consulting at procurement solutions provider CGI-AMS, Lambert is well versed in the potential of strategic sourcing and e-procurement.

"I look at strategic sourcing as an approach and a discipline to the procurement process," Lambert explained. "It's a tool that's used to actually make a determination about the best way to procure goods and services for government. It's really a discipline that helps you make a decision about the most efficient way to actually do that procurement, and how it will provide you with the best value at the end of the day."

Strategic sourcing is one of those technocratic terms that seems complicated and pretentious, which is why some prefer to call it "spend management." As Lambert said, it's really little more than designing a process in which a government can purchase the best goods and services for the best price. And e-procurement is merely the purchasing process done electronically -- eliminating complexity, cutting cost and improving financial management.

Sounds simple, so why isn't everyone doing it yet?

"I don't think there's any question that it's proven technology," said J.D. Williams, director of state and local government for Oracle. "You're down on what you're not up on. Those who are up on it, through their private business experience, or what they know about other states, will see the benefits of this," he said. "I think there will be a lot of this occurring after this election. If you're down on it because you don't have the experience yet, it's going to take more of a learning curve."

Like other e-government initiatives, e-procurement is past the point of novelty. Indeed, at this point, some warn that governments failing to implement an e-procurement strategy will continue to fall further behind.

E-procurement's benefits are obvious, according to its proponents. Like e-government in general, e-procurement -- combined with sound strategic sourcing -- can streamline government like never before, while simultaneously cutting costs and improving service.

In his 2002 paper State Government E-Procurement in the Information Age, Texas A&M assistant professor M. Jae Moon noted that federal and state government procurement costs exceed $1 trillion annually. Moon reported that in 1998, the federal government alone made nearly 30 million purchases, 98 percent of which were valued at $25,000 or less.

The volume of procurement transactions is huge. Now add to the mix the global war on terrorism and the hundreds of billions of dollars associated, and one arrives at a staggering number of procurement transactions.

Moon and others suggest a wide array of benefits for states and localities that implement e-procurement systems, including cost and time savings; more choices of vendors; improved efficiency; better spending management thanks to strategic sourcing; improved metrics; and, of course, a drastic reduction in paper-based transactions.

Among the many reasons most early e-procurement projects failed, the two biggest were the fact that many, if not most, in government were still largely unschooled in the ways of the Web and computers in general; and second, e-procurement's original promise was that it would be self-funding via small transaction fees. The problem with the self-funded model is that it requires a large and constant supply of vendors paying for the system with each transaction. And since most early e-procurement systems were departmental as opposed to enterprisewide, the volume of transactions just wasn't there.

"Suppliers really didn't like it," said Oracle Industry Solutions Executive Bob Sabo. "There's no such thing as a free lunch."

Lambert said the idea of self-funding was just not enough to persuade technology-wary politicians of e-procurement's value, though some like North Carolina have had success.

"I'm not sure that argument back in the 1990s was strong enough to carry the day, and I'm not sure it's going to be strong enough today," he said. "An e-procurement system, just like a financial system, is an enterprisewide investment. It really is an enterprisewide tool to support the procurement activity of a government. I think back then it was a new approach to getting a new system. It's a hard model to execute, it's a hard model to maintain [and now] I think people are looking at it as a nice way to offset some of the investment."

Self-funding was -- and is -- a nice idea, but it can no longer act as a stand-in for a quality business case when implementing an e-procurement system. As elected officials grow more comfortable with technology, self-funding becomes little more than a beneficial side effect while the true power of e-procurement's cost-cutting efficiency takes center stage.

As attitudes about technology in government have matured, so too has e-procurement. Gone are the days of merely posting bids and RFPs online. Today governments looking at e-procurement will find many useful tools, such as online reverse auctions where vendors compete for government dollars. Enterprisewide e-procurement systems are being built into enterprise resource planning packages, giving administrators a holistic view of every purchase, and ensuring purchases comply with existing equipment and agency directives.

And with November elections looming, 2006 might be e-procurement's breakout year. If the anticipated widespread leadership change becomes a reality, many doors may open for those advocating e-procurement.

"I really do believe that if governments don't do it, they're going to quickly lag behind," Lambert warned. "With the 36 gubernatorial elections coming up, we're going to see a greater demand for information from those newly elected officials about what we're spending our money on, how does that break down, how do we compare to other people? And without a procurement system ... staff is not going to be able to respond quickly to those questions."

For governments that take the potential of e-procurement seriously, there are many models of success to follow. In fact, some have done so well that other countries are taking notice, as is the case in North Carolina.

E-Procurement Paradigms
"There's always been a really strong case for e-procurement, it just makes solid business sense," said Ron Bell, director of the Virginia Department of General Services Division of Purchases and Supply. "When you look at all the benefits for suppliers and buyers, how can you not do that? For the efficiency of government, even supplier efficiency, that whole supply chain management piece. When we look at the return on investment from all of that, the efficiency and the cost-avoidance for the taxpayers, there's no way [to not do it]."

Virginia's version of e-procurement, called eVA, is one of the most highly respected e-procurement Web sites in the country. The development team in Virginia avoided departmental silos and focused on building an enterprisewide solution that brought the state's finances, technology and procurement together, which Bell said are three disciplines required for a successful e-procurement system.

Leadership plays a pivotal role in any statewide project, and e-procurement is no different.

"In Virginia we've been very fortunate; we've had support from three governors now, members of our Legislature and a lot of our agencies we work with," said Rebecca Barnett, the eVA's business manager. "Another critical success factor has been our core team. The third success factor is a true partnership with your vendor. In our case we've partnered with CGI-AMS."

The eVA project is a virtual, enterprisewide network where all the state's procurement information can be accessed by buyers and suppliers. In addition to state government agencies, local governments, school systems, universities and nonprofits can all buy through eVA.

With strategic sourcing, eVA helps Virginia identify the best sources for the best products. It also helps to eliminate maverick purchasing and enforce compatibility to ensure anything purchased by the state can be used enterprisewide.

As a result, the state is saving millions and doing nearly all its procurement online.

"We're receiving more bids now than we did before because now our suppliers have greater access and visibility over the procurements in the commonwealth by being able to use the e-procurement system to see that," explained Jan Fatouros, director of the Virginia DGS Information Systems and Services. "About 80-plus percent of our purchase orders are delivered electronically. The first metrics performance study we did -- and we threw out everything we could to try and make it as conservative as possible -- but for our fiscal 2004, we saved $69 million through use of the system. That's just in reduction of the cost of goods and services. We're in the process of doing a study for fiscal 2005 and fiscal 2006, and preliminary results look like the savings for that will be somewhere between $30 million and $40 million."

Virginia isn't the only state successfully using e-procurement. North Carolina worked with Accenture to build an e-procurement system that went live in 2001. Since then, it has grown to include more than 13,500 users, 47,500 vendors and 240 government entities. All told, more than $6.5 billion has been spent via NC E-Procurement, as the system is known.

"We were the early pioneers, and we proved that it can be successful," said Tina McLamb, North Carolina's e-procurement program manager. "We recently did a benefits analysis, and we looked at process efficiencies and cost-savings ... and we've found we've saved $347 million in prices in the first four years of our operation."

Interestingly North Carolina pulled off the self-funded model as well, charging a 1.75 percent transaction fee, which, McLamb said, "pretty much pays for our system."

The state's e-procurement program has attracted global attention. "I get calls from other countries -- we've actually had people from Italy visit us to talk about our system," she said. "I recently did a presentation for the Canadian revenue agency; they had asked me to come there to tell them what we have done here."

For McLamb, several key elements are required for a successful e-procurement system.

"Allocating enough money for the initial implementation, getting approval and the appropriate sponsorship from the governor's office or elected officials, a strong change management program to help the agencies with the new process and the system, training, a strong vendor outreach program ... always have your key stakeholders involved from the very beginning, that's important, and be sure to communicate with them," she said.

McLamb's suggestions would likely resonate with Winston McColl, director of purchasing and contracting for San Diego County, Calif., which has employed an e-procurement system since the days of bulletin boards and Prodigy.

McColl came to San Diego County in 2001, and while happy to see an e-procurement already in place, he knew more could be done.

"In 2001 we had a good system, but it was not as great as I would have liked it to be," he said. "Even with posting on the Internet, we were still spending $50,000 to $75,000 a year on postage just mailing out bids, and I said, 'This is foolish. I've got the Internet, why am I spending this money?'"

The county chose an Oracle solution to boost the power of e-procurement for both the county and cities within the county.

"With the Oracle interface we have, its fairly seamless for us to turn a requisition around internally and post it on the Internet, and then add additional documents to it through a Web address," McColl said. "We're able to significantly save money because I don't have to take six or eight months to put a bid or proposal on the street."

McColl is also taking advantage of tools like reverse auctions to save the county millions.

"I'm a big user over the last three or four years using reverse auctions -- I've saved significant dollars using reverse auctions to buy vehicles, to cut down trees in the forest," McColl said. "I probably saved $20 million to $30 million for the county by just bidding out the removal of trees because after our terrible fire storms [of 2003] ... We try to use all these e-procurement tools to drive down cost."
Chad Vander Veen

Chad Vander Veen is the former editor of FutureStructure.