As E-Buying Takes Root, Companies Dig for Pay Dirt

By Steve LeSueur, Staff WriterThe leading providers of electronic procurement solutions in the private sector are setting their sights on an expected ground-swell of new projects among state and local governments in the coming year.As many as a dozen governments are reviewing proposals or laying plans for e-procurement projects that would allow government employees to buy goods and services online, according to Mark Danis, a partner with KPMG International of Amsterdam. And that number is likely to "double in the next six months," said Danis, who heads up e-procurement for KPMG's public-sector clients.Recent months have witnessed a flurry of new partnerships and strategic alliances, as systems integrators and e-procurement software companies scramble to take advantage of this burgeoning opportunity."Virtually every government with whom we speak is interested," said Bill Kilmartin, a vice president with American Management Systems Inc. of Fairfax, Va. "The interest among cities and counties is just the same as in the states."Last month, AMS announced a partnership with Ariba Inc. of Mountain View, Calif., to create a Web-based marketplace, called Buysense.com, for governments and their suppliers. The Buysense partners hope to generate $50 million in revenue during the next three years, he said. The service is slated to become operational this month or next. Among the states planning to move soon with pilot projects or production systems are Maine, Maryland, Massachusetts, South Carolina, Texas and Washington, industry officials said. Others mentioned as likely candidates during the year are Arizona, Colorado, Delaware, Michigan, New York, Oregon, Utah and Virginia. Some of these projects will be statewide, while others will be initiated by individual agencies. A consortium of Midwest states and another of Southwest states also are considering cooperative online purchasing, said Danis, who declined to name the states. "E-procurement is a very dynamic marketplace in terms of players, offerings and procurement models," said Ken Mitchell, a partner with Andersen Consulting, Chicago.Companies that found success in the commercial sector are introducing their solutions to governments, said James Macaulay, a government analyst with Dataquest, a research arm of the GartnerGroup, Stamford, Conn."It is going to be one of the big opportunities in the states next year," he said.Three prominent names in business-to-business e-commerce, Ariba, Commerce One Inc. and Intelisys Electronic Commerce Inc. already have made inroads in the public sector. These companies build software and solutions that make online purchasing easier.Ariba and Andersen Consulting, for example, have worked together on a $14 million project to provide e-procurement to California's 250 agencies. The California State-wide Procurement Network was put on hold last year by a governor's order halting new information technology projects until after year 2000 problems are resolved. This prompted speculation that the project will not be revived.Ken Hunt, a spokesman for the Department of General Services, said last month the state still intends to pursue an e-procurement initiative, but "whether it will be this particular project will have to be determined."Ariba's partnership with AMS not only gives the company a strong foothold in the state and local market, but also the federal market, said Wendell Meeks, national channel manager for Ariba. "AMS makes a strong partner to operate in the government sector," he said. Commerce One also has experience in the public sector, having landed a $2 million contract in 1998 to provide Los Angeles County with e-procurement capabilities. The Walnut Creek, Calif.-based company is reportedly teaming with Andersen Consulting to bid on the Washington project, though an official from Andersen would not confirm this. Officials from Commerce One could not be reached for comment. Both Ariba and Commerce One have seen their stock prices skyrocket since the companies went public last year. After hitting a low of $30.50 per share in August, Ariba's stock zoomed to $200 near year's end. Commerce One shares, which dipped to $8.81 in an August slump, soared to nearly $300 after a 3-for-1 year-end split.Intelisys teamed with Science Applications International Corp. of San Diego to provide e-procurement solutions for the Massachusetts E-Mall pilot project, which was completed this past fall, and for San Diego State University. The two companies also teamed for a pilot project in Maryland. Meanwhile, the state government of South Australia in November selected Intelisys and KPMG for the first e-procurement project ever in Australia."We're pursuing virtually every state and local government opportunity that's out there," said Joe Quigg, vice president of government sector sales for New York-based Intelisys. He said the company's partners in the public sector include KPMG, SAIC, and IBM Corp. of Armonk, N.Y. Erskine Bowles, former White House chief of staff for President Clinton, was elected Intelisys chairman of the board in December, further underscoring the company's "strong government presence," said Quigg.Oracle Corp., Redwood Shores, Calif., also wants to play in this market, said David Gragan, senior manager for state and local e-commerce solutions. Although the company's only state and local customer at this time is the University of Pennsylvania, it has provided e-procurement solutions to more than 300 private-sector customers and is chasing a number of state procurements. 'We're bidding on every one where they want a portal solution," Gragan said.PublicPurchasing.Net, a start-up company based in Bethesda, Md., is aiming solely at the government market. The company already has Montgomery County, Pa., as a customer and soon will announce two additional customers, including a major eastern city, said Basil Nikas, chief executive officer.These companies are offering self-funding e-procurement solutions in which governments will pay little, if any, costs. Instead, the vendors will bear the upfront costs for installing the systems and then recoup their investments largely through modest transaction fees paid each time government buyers make online purchases. "The transaction-based model is a good model because the public sector needs no- or low-cost solutions," said Gragan.The suppliers, not the governments, will pay the transactions fees, industry officials said. The suppliers are willing to pay fees because e-procurement reduces their own costs and gives them access to the government market."E-commerce levels the playing field for small businesses by allowing them to get in on government purchasing," said Nikas.Governments also are attracted to e-procurement by the allure of savings. In the private sector, e-procurement is generating savings of up to 25 percent and has reduced significantly the purchasing cycle, Mitchell said. E-Procurement has "got a clear and compelling business case," he said. The field is wide open for systems integrators and software companies trying to break into the e-procurement market, industry officials said. No one company or team has established an unshakable foothold."I regard all the players as 'wannabes' right now," said Tom Davies, a senior vice president with Current Analysis, a market research company in Sterling, Va.Companies will compete based on their business models as much as technology, he said. "The front-runners today will need to keep up with later entrants who will come into the market in the months ahead," he said.