Companies Ditch Self-Funding Model for E-Procurement

Many systems integrators are abandoning the self-funding model for electronic procurement, and now are asking their state and local government customers either to split the funding costs or provide a financial guarantee on their investment, according to analysts and industry officials. This approach to e-procurement projects marks a pronounced shift from this time last year when dot-coms and integrators, eager to grab market share, agreed to undertake projects without direct funding from the government. The companies expected to recoup their costs with transaction fees charged to users of the online purchasing systems, but found this approach did not adequately cover their investment."States that had earmarked e-procurement projects as unfunded will have to look for other means, because not as many [companies] are willing to bid an unfunded model," said Michael Skigen, vice president of Internet and e-commerce solutions for Science Applications International Corp. of San Diego.Forty-two states will embark on some form of e-procurement project by 2003, according to Gartner Dataquest of Stamford, Conn. "The groundswell [in the state and local market] is building quickly," said David Grubb, a partner with Accenture of Chicago. He said he expects demand for online buying systems to eventually explode, just like it did in the commercial sector.The states that haven't undertaken e-procurement are waiting to see if its early adopters have figured out the process of transferring it to the public sector, said Rishi Sood, principal analyst at Gartner Dataquest.Last year, major e-procurement projects were in Maryland, Massachusetts and Washington, followed this year by California, North Carolina and Virginia. The need to dedicate traditional IT funding for e-procurement may prove a significant challenge to state and local governments, said analysts and industry officials.The launch of a statewide e-procurement project typically requires an initial investment of between $5 million and $15 million, said analysts and industry officials. However, related costs for continued support and training can make the costs of these systems substantially higher, said Grubb. The investment associated with these systems may increase further if state and local governments try to tie procurement systems to back-end financials that are part of legacy systems or enterprise resource planning systems."Sooner or later, electronic procurement will have to be connected with back-end financial systems, and this will require money from the [state] legislature," said Amy Santonella, research analyst of e-government strategies at Meta Group, Stamford, Conn. "There's no way around it."Very few of the governments that have installed or are installing e-procurement systems have made plans to connect them to enterprise resource planning systems, said Lawrence Herman, managing director of KPMG Consulting Inc., McLean, Va.Although integration of e-procurement systems to ERP is getting in- creased attention as states re-engineer their business process requirements, it is not a new a requirement, said Bill Kilmartin, a vice president with American Management Systems Inc. of Fairfax, Va. "It was there a year ago," he said.Yet the improvements that e-procurement offers to government operations are so appealing, governments will continue to want them even though they may have trouble financing them, analysts and industry officials said."With the tight economy, the need for savings from procurement is accentuated," Herman said. "So the question is whether states are going to step up their investment in order to increase their savings."One advantage of e-procurement is it provides governments with improved cost analysis, Sood said. Another advantage is it allows them to establish jurisdictionwide systems that force agencies to adhere to a standards-based approach that is embodied in the Internet. The integrators that deliver e-procurement solutions are keenly aware of the lessons learned from projects launched last year by both integrators and dot-coms. These lessons were set forth in a presentation Herman gave at the second annual State and Local Government E-Procurement Conference held in March in Arlington, Va.Among the lessons learned: Free or no-cost portals are failing to meet expectations; Migrating private-sector e-procurement practices to the public sector often fails to achieve desired results; Supplier adoption is more difficult than previously thought.Furthermore, Herman said that no best-in-class e-procurement solution has gained widespread adoption in the state and local marketplace. One emerging trend in e-procurement is the ability of contractors to supply one or more functional components that a government customer would request for its e-procurement system, Kilmartin said.Functional components include e-catalogs, e-malls and marketplaces, asset and inventory management and vendor management and registration."Not everybody is asking for the same thing," he said.With the exception of AMS, integrators are bidding new e-procurement projects with multiple software vendors and vice versa, Herman said.AMS will continue to bid projects exclusively with software developed by Ariba Inc. of Mountain View, Calif., Kilmartin said. Both Accenture and AMS launched projects in large states in the past two months. AMS began the first phase of an e-procurement site that initially will be used by six agencies in Virginia. The system has three major components: e-catalog, vendor notification and registration, and solicitation management software, said Kilmartin. Last year, AMS installed a system for the state of Washington. Accenture, using Ariba software, launched CAL-Buy for California. In northern Carolina, Accenture is integrating an e-procurement system hosted by Epylon Inc. of San Francisco.SAIC, which with KPMG built E-Maryland Marketplace, is pursuing additional projects in California, New York and Pennsylvania, Skigen said. The California opportunity involves universities, not state agencies, he said.All of the integrators in this space are expected to have responded to a request for proposal issued by Florida that was due April 15, said analysts and industry officials."It's the next big test in the marketplace," said AMS' Kilmartin.