Governments Poised for Widespread E-Procurement Usage

The Navy had planned to spend more than $3 million over five years on a contractor who could transport the personal effects of military personnel back and forth between Hawaii and Guam. But as the result of an April reverse auction through eBreviate, an Electronic Data Systems Corp. company, they'll pay just $2.1 million, a savings of about 30 percent.

Altogether, federal agencies spend $1.8 trillion every year on equipment and services needed to run the government. And like the Navy, agencies are looking to streamline the procurement process through online buying.

This trend is being driven by a reduced government work force, a desire to save money and a Clinton administration mandate ? now getting a serious push from the Bush White House ? directing agencies to implement some form of e-procurement by 2003.

"Without question, almost every federal agency has started the process," said Jim White, senior vice president of i2 Technologies, Dallas. "But it will be 12 to 18 months before virtually every government agency is up and running."

White estimated that at least half the states have implemented some form of e-procurement; and research firm Gartner Dataquest projected that number will grow to 42 by 2003. New York-based Jupiter Media Metrix estimates federal, state and local governments will spend $286.1 billion by 2005 on e-procurement and online purchasing.

An e-procurement frenzy actually swept through many government organizations about two years ago, but the initial enthusiasm has given way to a more clear-eyed view of its benefits and shortcomings, said industry analysts and officials. Governments and developers alike are incorporating early lessons into more mature iterations of e-procurement.

E-procurement systems use the Internet to automate the acquisition and management of goods and services. A related application called electronic sourcing employs Web technologies to identify, evaluate, negotiate and configure products, suppliers and services.

The federal government actually has been doing e-procurement for years, as an early and aggressive adopter of electronic data interchange, or EDI, a standard allowing organizations to exchange procurement and other data. But as Web-based procurement emerged in the late 1990s, it promised to overcome EDI's more troubling problems, such as getting small suppliers on board.

Early government pilots explored a variety of e-procurement applications and financial models, such as e-malls, electronic catalogs, auctions and marketplaces. Agencies also examined hosted e-procurement sites vs. run-your-own, and government paid sites vs. self-funded models.

One student of these developments has been the General Services Administration, which has been piloting various components in order to develop a viable offering for federal agencies.

GSA's recently completed auction pilot, Buyers.gov, answered several vexing questions, said Manny DeVera, deputy assistant commissioner for service development at the Federal Technology Service. It proved e-procurement's viability for the federal government and documented real savings, with GSA pilots cutting the prices of commodity goods by 12 percent to 48 percent.

The pilot also resolved lingering doubts about e-procurement legalities. "We found there is no prohibition from a policy perspective," such as compliance with Federal Acquisition Regulations, known as the FAR, and the Procurement Integrity Act, DeVera said.

Joe Quigg, sales group director of government for FreeMarkets Inc., Pittsburgh, said some states have passed legislation specifically to enable e-procurement.

GSA expects to award a contract for several different auction types to multiple vendors in September and will collect a 2 percent finder's fee from user agencies.

Other early adopter lessons:

? Fully self-funded e-procurement rarely works. "Two years ago, people were looking for a self-funded model to push the cost to suppliers," but they balked, Quigg said. More successful programs are agency-funded or shared-cost.

? E-procurement is rarely as simple. The burden of setting up suppliers, deciding how to list needed goods and maintaining the system were among the surprises. There's also been a large shift within the past year to include e-procurement as part of an integrated system, said Jim Perry, federal applications manager for Oracle Corp., Redwood Shores, Calif. "You can't just bolt it on," he said.

? Beware the dot-com. As a result of the recent dot-com failures, governments are wary of vendors without solid track records or financial histories.

? Public marketplaces, which dominated federal conversation about e-procurement two years ago, are giving way to private ones.

? Price isn't everything. "The original premise of government exchanges was to pressure supplier margins," said Sherry Amos, vice president of marketing for B2eMarkets, Rockville, Md., which is just entering the government market. Now total value is the focus.

Despite its more varied missions, government organizations have reaped some of the same benefits as commercial e-procurement users. Governments have been able to achieve wider market research and find the best value, rather than just the cheapest price. They also have been able to reduce both procurement costs as well as obtain lower prices because of increased competition and consolidated purchasing.

And governments have found it easier to attain employee compliance with procurement laws and regulations, while at the same time decreasing the cycle time for procurements.

Accenture Ltd., Hamilton, Bermuda, for example, has seen the costs of processing a purchase order decline by 50 percent to 70 percent for a typical government client adopting e-procurement, said David Grubb, a partner in the consulting firm's e-procurement practice. At the same time, the price of goods purchased by the government has declined 5 percent to 10 percent.

According to Gary Lambert, senior principle of state and local solutions at American Management Systems Inc., Fairfax, Va., most studies show governments spend $100 to $150 to develop a purchase order. Using e-procurement, Massachusetts reduced its purchase order processing costs to $20, Lambert said.

Software developers providing e-procurement solutions to government include Ariba Inc., Sunnyvale, Calif.; Clarus Corp., Suwanee, Ga.; CommerceOne Inc., Pleasanton, Calif.; and i2 Technologies. Enterprise resource planning vendors, such as Oracle, PeopleSoft Inc., Pleasanton, Calif., and SAP AG, Waldorf, Germany, have also upgraded their procurement modules for e-procurement.

In the e-sourcing arena, players include B2eMarkets, Frictionless Commerce, FreeMarkets and SAS Institute Inc., Cary, N.C.

Many of these companies reach the market largely through systems integrators, such as Accenture (formerly Andersen Consulting), AMS, CapGemini Ernst & Young, Computer Sciences Corp., Deloitte Consulting, IBM Corp., KPMG Consulting Inc., EDS, PricewaterhouseCoopers and Science Applications International Corp., although there is a fair amount of direct selling as well.

Developers and systems integrators have extended e-procurement applications to meet government needs to comply with FAR regulation and Section 508 provisions requiring government Web sites to be accessible to people with disabilities. The applications also can help with auditing and tracking minority, women-owned and local vendors.

Applications also allow for different administrative styles, from Virginia's decentralized procurement to Massachusetts' highly centralized model.

Last May, Washington state launched an e-procurement application from American Management Systems and Ariba for use by its purchasing co-op, which includes state agencies as well as political subdivisions in both Washington and Oregon.

"Each entity can create its own business rules and determine which supplier catalogs it wants to see," said Bill Joplin, state purchasing manager for the Department of General Administration, Office of State Procurement.

Washington's project illustrates the hybrid financial model. Joplin's group paid AMS $848,000 to set up the system. His office and AMS now collect user subscription and transaction fees and one half of 1 percent of the order value from subscribers. Suppliers' exposure to many potential customers on users' desktops, an increase in order accuracy and reduced returns more than justify the fees they pay, he said.

More recent application modifications and requests for quotation reflect the lessons learned in pilots. For example, in RFQs, "encumbrance accounting and integration with legacy systems are requirements now," said Greg Myers, Oracle's vice president of e-procurement sales.

Expectations are riding high for the next generation of projects. The Navy, already an experienced e-procurement user, hopes to drive $250 million in administrative costs out of procurement through the implementation of a private, multiple-award contracts marketplace for Naval Sea Systems Command between 2001 and 2005.

The marketplace, which cost $3 million to build, was developed in nine weeks by prime contractor CommerceOne, along with CSC, IBM and Exostar LLC, Herndon, Va.

In the short term, expect more pilots and small deployments. That will give way to larger rollouts 12 to 36 months out, providers predicted.

The federal mandate is key. "Suppliers don't want to get involved until they are guaranteed people will buy," said Paul Brubaker, president of e-government solutions at CommerceOne. "Almost always, when participation in a marketplace is mandated, it's successful."

At the tail end of these rollouts, smaller agencies will begin combining their e-procurement systems to attain economies of scale,
something states are already beginning to do, Brubaker said. Virginia, for example, is encouraging its universities to transition to the state e-procurement solution, eVA.

Despite more aggressive adoption, opinions on ideal financial and hosting models still vary.

Another lingering issue is lack of interoperability among solutions, a problem expected to shake out over the next few years, as well as "the ever-changing landscape of technology," said Mary Mitchell, program executive for electronic government policy in the GSA's Office of Governmentwide Policy.

"Part of the issue is how you keep the environment open enough to take advantage of new promising capabilities," she said.

While the masses get solutions off the ground, early adopters will move into strategic sourcing to capitalize on the information e-procurement systems are amassing, said Accenture's Grubb.

The states have been somewhat more aggressive than the federal government in moving to strategic sourcing. Washington, for example, plans to use its e-procurement and strategic sourcing applications to improve the informal quote process and get a handle on where its dollars go.

Before, "we knew who we were paying, but not what we were buying" and had no way to get that information, said Joplin.

Governments with upcoming e-procurement opportunities include Florida and Massachusetts, which were in the throes of the request for proposal process at presstime. The Agriculture Department is also in the bidding process.

"There is quite a lot of short- to medium-term opportunity," said David Hope-Ross, senior analyst with Gartner Inc.

Despite the remaining obstacles, e-procurement is in many ways ideal for government, Hope-Ross said. "Online RFPs, strategic negotiation, reverse auctions all play into the competitive bidding requirements of government organizations," he said.

"Electronic procurement is low-hanging fruit," said CommerceOne's Brubaker. "Everybody is looking for Web-based applications that they can derive benefits from quickly. This is the one."