Integrators Still Searching for Right E-Procurement Model

Integrators are casting about for the best business model for electronic procurement in the state and local government market, and neither they nor their clients have settled on a preferred model yet, according to company executives who develop e-procurement systems.The business model continues to move away from the self-funded approach that was popular a year ago. Gaining ground is a shared-risk approach that requires some financial investment from the customer as well as the contractor.David Grubb, a partner with Accenture Ltd., Hamilton, Bermuda, said companies are offering new or modified business models as they pursue opportunities this year in Florida, Massachusetts and New York. "We've seen a number of models out there that are either being considered or put in place," Grubb said. "It is mixed at this point. I don't know which will be the prevailing model." States have expressed interest in two types of self-funding models, according to company officials. The more common one is the supplier-based model that charges suppliers a fee to cover the cost of providing the solution. Also being discussed with customers this year is a buyer-based model that would charge public agencies a fee to cover the cost of providing the solution. Added to this is the desire by industry to have the government begin to share the risk by splitting initial development costs. "The whole market is going through a reassessment of what are the right marketing and financing models," said Larry Herman, managing director of KPMG Consulting Inc., McLean, Va.Thirty-one states are without a statewide e-procurement system, said Mike Skigen, eMaryland Marketplace program manager for Science Applications International Corp., San Diego. Skigen said the state and local government information technology market can expect to see an increase in the use of dynamic pricing tools, such as reverse auctions, in the next six to 12 months. "We're starting to see people asking for that," he said.Some e-procurement models also allow for dynamic pricing, in which the market sets the price based on supply and demand. The most prevalent dynamic pricing tool is the reverse auction, so called because vendors bid increasingly lower prices as they compete to become the government's supplier.Governments are interested in dynamic pricing because they have seen the savings that can be achieved with it in the commercial market, Grubb said. If deployed, reverse auctioning would likely be applied to the acquisition of supplies and not services, Skigen said. Contractors have not entirely abandoned the self-funded approach, relying on transaction fees to pay for the electronic solution. Accenture is discussing both supplier-fee and buyer-fee approaches with prospective customers, Grubb said. The company is integrating an e-procurement solution in North Carolina that uses the supplier transaction fee model, he said. SAIC, which deployed a self-funded model in Maryland, has bid a more traditional funding model rather than a self-funded model in Massachusetts that would require spending by the state government, Skigen said. Accenture received the highest score and KPMG Consulting received the next highest score of the 17 contractors that submitted bids in April to provide Florida with an e-procurement system. The two companies will be invited to negotiate with the state, said Florida officials. The state has not set a date for the award.Other integrators that bid on the project included National Information Consortium Inc., Overland Park, Kan.; Unisys Corp., Blue Bell, Pa.; IBM Corp., Armonk, N.Y.; American Management Systems Inc., Fairfax, Va.; and Deloitte Consulting, New York. Later this month, the new eMaryland Marketplace is slated to receive the National Association of State Chief Administrators' award for outstanding program in procurement. The Lexington, Ky., group will present the award at its annual conference in Breckenridge, Colo. Maryland's e-procurement system serves 39 state and local agencies, 414 users and 633 bidding vendors, according to the state Department of General Services. "It's a good chunk of the state agencies," said Mark Krysiak, deputy director, Maryland Department of General Services. Krysiak said one reason the project is being recognized is that it has successfully managed to reach out to local governments and state universities. Among the top non-state agency users are Anne Arundel County, the city of Baltimore and Towson State University, he said.So far, SAIC has invested about $1 million in the project, Skigen said. The company has been able to keep its initial investment in the self-funded project within reason by using off-the-shelf products that are configurable to state systems, he said.Fees are assessed on purchase orders for direct purchases and on a subscription basis for access to the bidding system, Krysiak said. Maryland and SAIC will share revenue from fees collected from system usage when the volume of purchasing exceeds $5 million, Krysiak said. Since it was established last year, the system has handled a total of $1.9 million, he said.Krysiak said eMaryland Marketplace was limited to purchases of less than $2,500 between March 2000 and May 2001, a restriction which was lifted June 1."We don't expect multimillion-dollar [purchasing] until several years into the project," said Krysiak, who said he expects the revenue-sharing threshold will be reached in fiscal 2004. "The business model that is in place in Maryland is experimental and unproven, but [it has] the potential to be lucrative to both the state and SAIC without putting an undue burden on the supplier community," Skigen said.Skigen said small and large companies have slowed their efforts to move their businesses to the Web in the current economic downturn. He said that when the economy rebounds, purchasing business on eMaryland Marketplace "will take off and explode."