Electronic Procurement

How Technology is Changing Government Purchasing

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

  • Acquire more resources from an overburdened tax base; or
  • Become more efficient in their current resource allocation.

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.

  • In-house hosting of services. Under this structure, the agency purchases all of the hardware and software required to implement an e-procurement system. Maintenance and design are done in-house with agency staff. This approach offers the benefits of better security and control of the data, as the entire system is maintained in-house. Starting and implementing an in-house system calls for significant expenditures on equipment and labor resources, for both up-front capital and continual maintenance.
  • Contracting for services. Under this model, the agency contracts with a private firm for design services, hosting, or both.

    • Contracting for design. A private firm integrates the systems and designs the web interface, while the agency maintains control of the data and the hosting of the e-procurement system. Under this structure the agency must keep staff for maintenance.
    • Contracting for hosting. The agency designs and integrates its e-procurement system, then contracts with a private firm for maintenance and hosting of the system. This model allows the agency to design the system to its specifications, contracting maintenance to a private firm. The downfall is that employees with the necessary expertise and skills to design and integrate the system are hard to come by.
    • Contracting for design and hosting. The agency contracts with a private firm to maintain and design the hardware and software for the e-procurement system. Typically, the firm hosts the majority of the hardware offsite. This option requires less up-front capital expenditures—as well as lower ongoing staff expenses for system maintenance. Costs are predictable, as outlined in the contract. Data integrity is an issue, however, as the hardware is typically maintained off-site, thereby limiting the agency’s control of the data.
  • Partnerships. Many partnerships already exist at the regional or state level. These partnerships take advantage of cooperative purchasing along with sharing of resources and expertise. Depending on the type of system, there may be conflicts with integration of existing IT systems within the agency.
  • Utilize already available services. This is the simplest and least expensive form of e-procurement. Under this model, agencies use e-commerce sites, such as Officedepot.com or Staples.com. This option offers the agency benefits from online purchasing, such as price comparisons and delivery services. There would be few costs associated with the integration of this type of system because most agencies already have internet connections from which these purchases could be made. In addition, many available services offer purchasing group control options so that procurement managers can monitor within and across agencies.

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

  • Easier cost comparison among bidders, catalogues, etc. These cost comparisons promote lowest-bidder acceptance and quality-control across suppliers. Reduced uses of paper, postage, printing, and copying will save tremendous amounts of money.
  • Just-in-time procurement. Gone are the days of the mule train and costly warehousing. Technology enables procurement to occur more often—delivery overnight, or within days in most cases. This practice is more effective and cost-efficient. Expensive warehousing costs (i.e. staff and space) can be avoided with e-procurement.
  • Reduction of off-contract buying. Many employees purchase goods off contract, not realizing the savings that have been negotiated in the contracts because of the process necessary to procure the goods. E-procurement will reduce the incentive for employees to engage in off-contract buying because the transaction costs of purchasing under the contract will fall.
  • Bulk or "warehouse" purchasing. One of the most promising benefits of e-procurement comes with government agency procurement collaboration. Governments can easily join together to purchase goods, enhancing their ability to negotiate lower prices from vendors, thereby cutting costs. Much like consumer warehouse clubs, per-unit cost decreases as quantity increases. Teaming up drives down costs and saves money. Technology makes it possible for cooperative agreements across city, county, or even state lines.

Increased Competition and Access

  • Wider "market" participation. Governments traditionally only advertise bids in local papers, necessarily limiting the number of potential bidders. The Internet is limitless—agencies can reach more bidders, resulting in more competition and lower costs.
  • Greater Access. The Internet is always open. Vendors would have access to government bid information at their convenience, expanding the reach of government to new vendors and participants. Greater access would lead to further competition among vendors, driving costs down even further.

Administrative Savings

  • Faster transactions. Traditional paper purchase order systems are plagued with delays. E-procurement allows purchases to be conducted almost instantaneously once authorization is granted.
  • Paperwork reduction. By removing the need for multiple forms, staff time is freed up, increasing overall institutional efficiency.
  • Easier management of purchasing and costs. The details of each procurement decision will be at the manager’s fingertips on the computer, allowing the manager to examine total expenditures quickly and efficiently, rather than filed away in paper form.

Enhanced Accountability

  • By conducting business online, government agencies can show constituents how their taxpayer dollars are being spent much more easily. This transparency will encourage accountability for cost overruns and waste.

Factors to Consider

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

  • Economic Costs. Though e-procurement can entail substantial up-front costs, savings come from reducing the cost of subsequent transactions, generating benefits in expanded or improved service levels. Moreover, with a purchasing consortium or partnership, the initial costs can be spread out over more transactions.
    • New infrastructure. A small investment in new hardware and/or software may be needed to initiate e-procurement.
    • Training. Staff may need training on new equipment, software, and processes to ensure maximum efficiency.
  • Other factors.
    • Political capital. Changes in statutes may be required to empower governments to implement a new procurement system. Other political barriers, including union pressures, can make implementation difficult and time-consuming.
    • Security/privacy. Policies should be clearly established before implementation. Privacy statements are essential to the success of any e-government application. The Organization for Economic Co-operation and Development and LinkExchange have created "privacy wizards"—how-to guides establishing privacy policy statements. Other organizations like the Electronic Frontier Foundation also provide examples and assistance in writing policies.

      To protect against fraud or theft, agencies must employ the latest technologies and preventative measures to ensure that data are not compromised. Allen Abrahamson, of Microsoft, suggests the following steps to ensure e-government security:4
      • Always use a strong password on administrator and network logon accounts, no blank passwords, and don't ever give anyone your logon password or leave it unprotected (like on a post-it note on your desk).
      • Use virus protection software and update it regularly.
      • Always wear and use your employee badge and make sure others do the same by stopping tailgaters.
      • Escort your visitors at all times.
      • When using Win NT, lock your workstation every time you leave your desk, or if using Win98/95, enable the password-protected screensaver feature.
      • Be cautious about opening mail attachments from anyone you don't know. They could contain viruses or worse.
      • If there is evidence that your computer or files have been entered or tampered with in your absence, report it immediately.
      • Be careful not to reveal sensitive company information by 'talking shop' in a public place or forwarding sensitive mail to an outside destination. Never auto-forward e-mail outside of the corporate network.
      • When using RAS, don't maintain perpetual connections to the corporate network through a phone line.
      • Avoid 'gullibility traps' when using the Internet. Don't leave personal information (like your mail password!) on a questionable site and don't enter a site if you are at all suspicious about it.
  • Flexibility. Not all suppliers have the ability to conduct business on the Internet. Governments may need to keep traditional methods of operation.

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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