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Reason Foundation

Electronic Procurement

How Technology is Changing Government Purchasing

Geoffrey Segal and Matthew D. Taylor
February 1, 2001

Governments have limited resources for providing services desired by an insatiable population. Agencies have two options:

Because most taxpayers are reluctant to pay more taxes due to the perceived waste and corruption that plague government operations, the second option seems more likely. Governments must find and implement innovative practices to address their inefficiencies.

Procurement, or rather, new, innovative techniques in procurement, is one area where governments can reduce inefficiencies in their service provision. Every government purchases—the problem is in how they do it. Most governments still use traditional purchase order methods, a slow, antiquated process requiring multiple levels of bureaucracy for almost any purchasing decision. These methods satisfy the goal of increased public accountablility, but increase the cost of procurement. This system does work, but neither efficiently nor effectively. Technology has made purchasing easier, cheaper, and more accountable through streamlined electronic procurement, with a digital or electronic paper trail recorded at every level of the transaction, but government agencies--particularly averse to change--have been slow to implement technology to improve the procurement process.

E-procurement

Current private sector procurement "best practices" use new technologies. Gone are the days of routing paper forms from desk to desk; the wave of the future is electronic procurement or e-procurement. This new process can benefit all facets of procurement, including selecting, bidding, payment, and inventory processes. Recently, the State of Massachusetts completed a 15-month pilot program and found that e-procurement cut processing costs for purchase orders from $110 for paper transactions to between $10 and $20 for online transactions.1 In the long run, as procurement becomes more efficient, taxpayers save money.

The Internet has revolutionized business-to-business (B2B) purchasing. Information reaches a larger audience more easily, increasing competition among vendors and driving down prices. By 2003, 10 to 20 percent of all U.S. B2B transactions will be done on the Internet, about $1.2 to $2.4 trillion worth of transactions.2

For the most part, governments have not yet grasped this phenomenon. Most governments use the Internet as a 21st century bulletin board, offering little more than phone numbers and addresses of department offices. Occasionally, some sites allow license renewals or fee payments. But this is just scratching the surface—only between one and 10 percent of government services are online. E-procurement has much to offer governments in increased accountability, cost savings, and improved efficiency. But, e-procurement has even greater potential for change—success with relatively small projects will give agencies the confidence to begin larger and more comprehensive e-government initiatives.

E-procurement can take many different forms, from already established e-commerce sites, like staples.com (for comparison shopping and purchasing), to establishing an online mall where a cooperative of government agencies can purchase items, sell excess goods, and receive bids on outstanding projects. New technology gives governments a vehicle for completing the complicated task of procurement at a lower per-unit cost.

Implementation

Implementing an e-procurement system requires designing it to interface and integrate with existing systems and deciding where to host it. Policy makers have several options for implementing an e-procurement system, including in-house hosting of services, contracting for design and/or hosting, a partnership with an already existing e-procurement system, or the use of already-available services.

Each of the models described above offers a different set of benefits and costs, while still constituting e-procurement systems and offering substantial net benefits relative to traditional procurement.

Benefits

Technology promises to revolutionize government procurement. Jim Passier, procurement manager for the State of Connecticut says, "I could order file folders, food, toilet paper and a motor without leaving the system."3 Governments can realize a variety of benefits including:

Table 1. Electronic Transactions Reduce Costs

  Airline Tickets Banking Bill Payment Life Insurance Software Distribution
Traditional $8 $1.08 $2.22-$3.32 $400-$700 $15
Telephone n/a $.54 n/a n/a $5
Internet $1 $.13 $.65-$1.10 $200-$350 $.20-$.50
Savings % 87 89 67-71 50 97-99

Source: Ciaran Ryan, "The Land of the (Nearly) Free," Government Technology E-Commerce Supplement, August 1999, p. 19.

Cost Savings

Increased Competition and Access

Administrative Savings

Enhanced Accountability

Factors to Consider

New technology is not free. Many existing systems will need hardware and software upgrades. Implementation costs include:

E-government: The Next Step

E-procurement is part of a larger "e-government" revolution; e-government promises to change the way government interacts with its citizens. Specifically e-government is any federal, state or local government application eliciting payment or documentation over the Internet.5 The availability of these services online is fundamentally changing the way government does business. Government agencies are offering a variety of services online, for example, Arizona DMV’s online car registration, Orange County’s online building permit application, paying taxes or fines. These efforts have resulted in better customer service at a lower per-transaction cost.

There are two types of e-government initiatives: internal and external. Internal initiatives are changes within an agency that do not directly benefit citizens, such as e-procurement. External reforms are more customer-based, resulting in better, more efficient customer service by government agencies.

E-procurement is catching on in government, although less quickly than seen in B2B transactions. By adopting the same e-business practices that have spurred record economic growth in the private sector, government-purchasing officers hope to improve efficiency and effectiveness. Business to government (B2G) transactions promise to be the next business-to-business (B2B) revolution in everyday processes. Consumers continue to grasp the idea of online shopping, realizing its ease, convenience and other benefits. Forrester Research Inc. estimates that by 2004, citizen driven e-commerce will reach $454 billion.6

Seeing the wave in front of them, governments are beginning to invest in new processes—"by 2006, federal, state, and local governments will collect $602 billion or 15 percent of total government fund collections—at the same time almost 14,000 e-government applications will be available nationwide."7 E-government pledges to improve government efficiency and effectiveness. E-procurement is a crucial internal step governments can and should take to utilize the power and promise of technology.

Conclusion

E-procurement practices are an ever more important part of government purchasing decisions and processes. Early experiences by governments at all levels, all across the nation show that well-thought out and implemented e-procurement can provide purchasing agencies a wide range of benefits. But, like any radical change in means or technologies, risks have to be considered and managed. Again, the experiences of governments that have experimented with and implemented e-procurement provides a valuable source of lessons learned for others.

Endnotes

1. Carol Anderson, "The eBuyer Era," Governing, September 2000, p. 72.

2. Larry Kosmont, Cities as Competitive e-Commerce Marketplaces, World Market Series Business Briefing, World Bank, p. 42.

3. Carol Anderson, "The eBuyer Era," Governing, September 2000, pg. 67.

4. Allen Abrahamson, Senior Systems Engineer, Microsoft, "Privacy and Security," address to Southern California Technology Forum, Los Angeles, December 5, 2000.

5. Jeremy Sharrard, "Sizing U.S. eGovernment," The Forrester Report, (Cambridge, MA: Forrester Research Inc, August 2000), p. 2.

6. Matthew R. Sanders, Analyst, Forrester Research Inc., Interview with authors, November 2000.

7. Jeremy Sharrard, "Sizing U.S. eGovernment," pp 6-8.

About the Authors

Geoffrey Segal is the director of government reform at Reason Foundation. Matthew Taylor is a research assistant in Reason's Privatization and Government Reform Center.



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