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Private solutions for public procurement

by Richard Bray

Electronic procurement promises public organizations a host of benefits, from better internal controls to faster processing to better prices, through aggregated buying power, informed decisions, reduced transaction costs and simplified business processes. For suppliers, the benefits include all the above, as well as the promise of faster payment, better product visibility and potential access to a wider range of buyers.

E-procurement is big business and growing fast. Global business-to-business (B2B) sales will reach US$6 trillion by 2004, up from US$919 billion forecast for this year, according to the consulting group Gartner Inc.

IDC Research says global demand for e-marketplace services will reach US$15 billion by 2004, so it is no surprise that there are literally dozens of vendors serving the e-procurement market, ranging from giants like Oracle, i2, Ariba and Commerce One, to smaller companies with specialized software.

Based in the United Kingdom, Andy Kyte is a Gartner Inc. vice-president and B2B research director. He says, "The public sector potentially, and eventually, has the greatest benefits to gain from the use of electronic procurement, because they have very high total expenditure and in general highly distributed points of order. The challenge for any procurement organization is to leverage the total spent to get the best possible price for the volume by delivering easy-to-use services to the point of budget use." But it is clear that governments face some obstacles and pitfalls on their way to e-procurement solutions that deliver all the potential benefits.

Private clubs

Electronic Data Interchange (EDI) was first introduced about 30 years ago, allowing the world's giant corporations to move data back and forth to selected suppliers on private networks. The rise of Internet technology some 10 years ago heralded the creation of extranets, which democratized purchasing somewhat because a whole new class of suppliers could afford the necessary hardware and software to attach to their big customers' networks.

Jacob Blum, an E-business Strategist with software vendor SAP Canada, says, "EDI only enabled large companies that could afford to put an EDI system into their supplier-buyer network and their supply chain. The Internet enables - and this is wonderful for government - the 'mom and pop' shops to play, and you know government has a mandated policy to distribute their purchasing fairly."

Today, websites called e-Marketplaces have the potential to allow any business anywhere to transact business with any buyer.

The basic e-Marketplaces are what Forrester Consulting calls "procurement malls" - generalist sites with products any organization would use, from pencils to computers to travel. Canadian examples would be Procuron or TD MarketSite, and Forrester believes only one or two will survive in any given market.

Next up the B2B chain are "commodity malls," where things like oil or bulk chemicals are bought and sold. More of these will remain in business. The next category is the "industrial facilitators" - sites that are very integrated with a narrow industry niche, like pipelines or engineering drawings. Still more of these will survive.

Forrester places "vertical hubs" at the top of the list by the number of potential survivors, with several hundred sites providing comprehensive services to entire industries like auto parts, travel, aviation, shipping or specialty chemicals.

Public and private lives

Derek Knowles is a senior principal with AMS Canada, an international IT consulting firm that has implemented public sector e-procurement solutions in the United States at the state and municipal level, as well as a massive, ongoing purchase-automation project for the federal Department of Defense. For the Canadian federal government, it provided the ABE system (Automated Buying Environment).

Of e-procurement, Knowles says, "I think the areas that I see it being successful in are industries that have the fewest suppliers - where you are only dealing with a few and, probably, you are buying in large volumes so that the transaction count stays down."

That highlights a fundamental difference between public and private procurement - particularly at the federal level. Government wants to deal with as many suppliers as possible with a high degree of openness, while many private businesses want to develop closer relations with fewer suppliers.

MERX is Canada's official electronic tendering service, where governments at every level post contract opportunities. Created in 1997 by Cebra, a Bank of Montreal subsidiary, the service now provides 1,500 tender opportunities on any given day, and connects more than 50,000 businesses and government buyers. In terms of a complete e-procurement model, today's MERX provides just the first element - sourcing - says Colette Lepine, government group sales manager for Cebra. "So when you look at that, you talk about bid management, RFP's, contract terms and conditions, the finalization of that and the awards process."

However, she indicates that MERX is now looking beyond that approach to include things like electronic bid submissions, auction and catalogue capabilities. "That would include things like billing and payment processing, so all of these elements are going to become a part of the MERX marketplace over the next year, two years, depending. We are positioned today to take advantage of [our] very specific market - the businesses that are part of our community now."

The moms and the pops

Jay Yoon is president of Electronic Tender Network (ETN), a Canadian company offering electronic procurement solutions through application service providers (ASP) as well as licence-based software, covering the process from creation of a requisition through to payment. About 500 organizations use ETN products, with most using them to meet AIT (Agreement on Internal Trade) requirements on the electronic bidding side. His larger public sector clients include the Hamilton Health Science Centre, the Region of York and the City of Vaughan, near Toronto.

Yoon is highly aware of the differing needs of both public and private sector clients. "The difference is that the unlike private sector buyers, public sector buyers cannot just go out and buy," he says. "Even the smallest local municipalities as well as school boards - most have something called the purchasing bylaw. If a procurement system is designed by the private sector, it is going to have a hard time adjusting to the public sector because of that requirement."

Yoon points out that e-procurement systems are built to serve big organizations, whose cost to process a purchase order conventionally ranges between $120 to $170. Their supplier companies will pay whatever they must to provide catalogues compatible with their big customers' e-procurement systems. "But that eliminates almost 90 percent of the small businesses that deal with the public sector, so the catalogue-based marketplaces are sort of out of the question to effectively implement the e-procurement system in public sector organizations."

Dave Johnson, director of consulting services for CGI Inc., an IT consulting company, says, "Provincially, some want to rationalize the number of vendors for efficiency and effectiveness. They do differ quite a bit. At the municipal level there is very much a 'buy local' thing and not so many leave it that open to widespread competition."

Knowles points out, "People don't realize 'content management' or 'supplier management' is a big problem. Your suppliers are at least half of this and they have to put their goods up on the Web and they have to maintain it. The whole gist of it, and the reason a lot of people bought into this is, 'by the way, the suppliers will manage your catalogues for you,' which is a big level of effort."

Knowles says suppliers are now discovering that it requires a great deal of effort and commitment to maintain catalogues. This is not an obstacle for larger suppliers who have already prepared catalogues in various formats.

"The problem that we are discovering with the government implementations that we have done are the smaller suppliers, the 'mom and pop' shops or the firm with 20 employees. They are kind of being told that if you don't get on this site with your catalogue, you won't get any business. It is a real issue," he says.

The public sector challenge

Jacob Blum of SAP Canada identifies the common denominator between the public and private sector in an e-procurement initiative as the desire to drive down costs, particularly transactional costs.

"Usually when I go in to a public sector client, I'll talk about maverick buying but also about the actual dollar value to procure the items," Blum says. "For example, if someone in the city council's office wants to buy a stapler, the processes that they have to go through internally in order to purchase stapler ends up costing about $110 for a $6 stapler. If they wanted to, they could just walk across the street to Grand and Toy and buy that stapler for $6. But that in turn messes up the whole procurement policy process in that governmental entity. The challenge that you face in the public sector ... is usually the political and territorial haggling that goes along from department to department. There needs to be interdepartmental cooperation in order to get the full value of e-procurement solutions that SAP offers."

Dave Johnson comments on the current state of electronic procurement in government, saying, "There is an awful lot of SneakerNet (manual processing) in the middle of that whole thing, so a big part of what the government is trying to do is make the thing work in an automated way. They have to make significant investments in order to be able to do that, and just the rudiments of electronic procurement aren't totally there." Johnson says government initially needs a thorough inventory of existing, 'legacy' systems and databases to decide what can be improved and what must be replaced.

"There is no way the government, on their own, is going to achieve this with a bunch of coders in a back room somewhere," he says. "You have to buy equipment, subscribe to services and assemble a total solution that satisfies the total requirement and is flexible enough to accommodate the value proposition to the individual departments. Otherwise you don't get the adoption rate, you don't get buy-in."

Gartner's Kyte says, "Do not underestimate public sector procurement complexity - public sector procurement managers have a very, very tough job to fulfil because everybody is constantly auditing them. They are hemmed in by mandatory regulations, legal restrictions that they have to fulfil and these regulations have been brought in over 100 years of professional administration of the state."

Gartner advises clients not to implement on basis of lower prices, identifying self-service as a first objective, because it improves productivity of employees. The Gartner message is give high-cost knowledge workers easy access to the relatively low-cost items they need to do their assignments.

"If you want to negotiate low prices," Kyte says, "you don't have to implement e-procurement to do that. It should be about creating a sustainable relationship with suppliers with whom you have excellent communication."

Getting there from here

Early movers are learning that it takes a lot of hard work to take the e-procurement models down from vendors' PowerPoint slides and turn them into reality.

"The rate of progress in the development of both the software and the services and the consultancy in the marketplace is not even as fast as I thought last fall [2000]," Kyte says. "It is still a relatively immature discipline. Consequently we believe that, in general, large organizations are going to take at least three years to get 50 percent of their indirect procurement under the control of an e-procurement solution."

Knowles agrees, saying that when people talk about "end-to-end" e-procurement, "they are talking not only the ABE-like system which is strictly for managing competitive bids, but they are including the more comprehensive offerings. Once those contracts are in place, people can buy off them, tying it into the financial systems, of which there are three or four in the federal government, right through to feeding inventory and fixed asset systems. And to date there isn't even a product out there that does all that. It's all an integration exercise."

Richard Bray is an Ottawa-based freelance writer specializing in the IT sector. He has been published in magazines and newspapers in Australia, the United States and Canada and is now editor of Ottawa Computes. Before freelancing, he worked as a producer, reporter and senior writer for CBC in Toronto.



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