Procurement Hits Some Snags

Although electronic procurement offers valuable benefits, problems persist.

by / April 16, 2002
It was late October, and Ron Hawley was understandably nervous. North Carolina was about to launch an ambitious electronic procurement project. As chief information officer, Hawley was overseeing the development of a $58 million system designed to run the state's entire purchasing system. If all went well, North Carolina would reap the benefits of technology and the Internet, resulting in potentially huge cost savings through improved efficiencies and volume purchasing agreements with suppliers.
Hawley was sure the state had done its job right. It had a solid relationship with partner Accenture, which was taking on some of the project's financial risk; the Web-based solution had been integrated with the state government's key financial system; and more than 7,000 suppliers had been signed up to sell their goods and services online to state and local government institutions throughout North Carolina.
Still, a sense of uncertainty hung in the air on that late October afternoon. "There's the unusual nervousness that precedes the launch of any major technology project," said Hawley. "But there's a great deal of excitement and recognition we've done our job and done it well. We're ready to go."

E-Procurement Taking Hits
Apprehension is filling the minds of many state CIOs and procurement directors lately, as plans are unveiled for new e-procurement systems. Considered one of the hottest areas of electronic commerce in government, e-procurement has been taking some hits lately in several different areas.
Consider the following: Metiom and Digital Commerce, two major electronic commerce firms in the government market, declared bankruptcy last year, both victims of the dot-com implosion. Metiom had contracts with Massachusetts, Maryland and Indiana to provide self-funding e-procurement systems for commodity purchases. Massachusetts and Indiana have gone out to bid again for new contracts. Maryland, so far, has been unaffected by Metiom's financial difficulties because their system is run by prime contractor SAIC. Digital Commerce, which has contracts with Connecticut and the Metropolitan Washington Council of Governments, has been working with the courts to stay in operation, but its future is uncertain.
These governments and others like them opted for e-procurement systems that were paid for upfront by e-commerce vendors, which planned to finance their investments through transaction fees, usually a small percentage of the purchase. State and local government purchasing offices, which have lacked the millions of tax dollars to pay for such systems in the past, found the self-funding model attractive because it gave them immediate access to the online world of e-commerce.
And dot-com vendors were so eager to tap into the potentially lucrative world of government purchasing they offered these services without some kind of guarantee in return, according to Jeremy Sharrard, an analyst with Forrester Research. "States weren't held accountable for building up activity and the vendors just hoped to pay for the system through transaction fees," he said.
That hasn't happened, as was evident in Massachusetts, which had an e-procurement system longer than any other state, yet managed to generate just a few hundred thousand dollars worth of transactions from the handful of suppliers who signed on. As Massachusetts discovered, just having a high-tech procurement system wasn't enough to attract suppliers both in numbers and kind.
Along with Massachusetts, Los Angeles County was one of the first governments to launch an online catalog, only to see the project fizzle partly because too few suppliers were willing to do the leg work and put their products into an electronic catalog format. In January last year, Government Technology reported that the county was spending an inordinate amount of time trying to bring suppliers up to speed for e-commerce ("Getting Through the Maze," January 2001). By fall, the county's purchasing department had pulled the plug on the project, putting an end to the their goal of purchasing online a large portion of the $650 million spent on supplies each year.
Ironically, many small suppliers are interested in selling online with government, while large suppliers are dragging their feet, according to Pat Kohler, president of the National Association of State Purchasing Officials (NASPO) and director of purchasing of Washington. "Smaller suppliers see the benefit from wider access through the electronic catalogs," she said. But the larger suppliers, many of whom have already created electronic catalogs of their own, aren't as willing to rework their formats for government use, she added.
There's a bigger problem, however. Unlike the private sector, which has used the transition to e-procurement to cut down on the number of suppliers they use, the opposite is happening in government. Online buying is attracting suppliers of different sizes, but few have a vision of what's involved in terms of creating and maintaining electronic catalogs of products, according to Sharrard. That can lead to the sort of situation that occurred in Los Angeles County. "Commerce One just didn't do the thinking about the supplier enablement piece," he explained. The result has been more work for government purchasing agencies than anticipated.
Other problems have plagued the startup of e-procurement. States with decentralized bureaucracies have run into difficulties aggregating the purchasing volume necessary to make e-procurement pay. A half-dozen e-procurement agreements with suppliers just don't have the same leverage as a single contract that covers the entire state, including local governments.
In addition, many states face the onerous task of trying to run e-procurement on top of a fragmented accounting system. Some states have as many as 40 separate systems, according to a report published by Forrester Research. "States will struggle to integrate purchasing with existing systems or be forced to implement a statewide ERP (enterprise resource planning) system," the report pointed out.

Benefits that Slash and Streamline
The opportunities for cutting costs and improving productivity are enormous once e-procurement is successfully implemented. Forrester estimates Web-based purchasing will allow governments to slash printing and mailing budgets by 75 percent, and that's almost an immediate savings. By streamlining the work processes associated with purchasing, governments can cut the cost of administering a purchase order by 50 percent, to $50 or less.
In North Carolina, Hawley foresees almost limitless benefits from efficiencies gained by having a statewide e-procurement system. Another major benefit for North Carolina is its ability to capture valuable information about the state's purchasing habits. "This system will enable us to build a real understanding of how the state goes about acquiring what it does," he said. "Once we do that, then we can get much better strategies in place on how we acquire goods so we can keep the prices down."
A number of experts view North Carolina's e-procurement project as a future model for other states. With Accenture assuming 30 percent of any shortfall in revenue the system is expected to generate, people like Sharrard see the arrangement as much more workable compared to some of the flawed models of the past. "I like Accenture's plan of setting targets the state has to meet," he commented.
Indeed, North Carolina had lined up nearly 7,000 suppliers to use the system, a number that far exceeds any generated by other states with e-procurement systems. With those numbers, the state hopes to drive a significant amount of purchasing traffic on to its Web-based system. It also doesn't hurt that the state has mandated all agencies to use the system.
But according to Sharrard, those efforts don't always guarantee success. "Rolling out an e-procurement catalog isn't the answer alone," he said. "The best bet is for governments to take a good hard look at what it is they are buying, what the buying practices are and then try to attach a procurement strategy on top of their legal and regulatory realities."