Online buying's a boom or bust proposition

Online buying's a boom or bust proposition<@VM>Pennsylvania reaps millions in savings with reverse auctions

Hidden costs, red tape stall growth of states'
e-procurement efforts


By Trudy Walsh and

Wilson P. Dizard III

GCN Staff

It sounds so easy. Online procurement systems will save time, money, paper and postage, right? A point, a click and away you go, right? That's the promise of electronic commerce.


Online procurement has saved Connecticut 'a couple of hundred grand a year,' procurement director Jim Passier says.


Not so fast, some procurement officials in state and local governments say. Some states, for example, Connecticut and Pennsylvania, have indeed saved money by cutting administrative costs through online procurement systems. But Massachusetts, for one, saw its pilot electronic-mall program fizzle in part because of a dearth of buyers. Although states have embraced electronic transactions of all kinds, electronic procurement is a part of the e-commerce movement with particularly strong appeal.

Connecticut has saved 'a couple of hundred grand a year' by putting its contracts and procurement systems online, said Jim Passier, Connecticut's director of procurement services. His agency has a total yearly budget of $2.3 million.

'We're not a big state, so that's a lot of taxpayer money saved,' Passier said. Most of the savings came from reduced advertising, printing, binding and postage costs, he said.

Connecticut went live with its online procurement system in November, using software and services from Digital Commerce Corp. The Herndon, Va., company sold Connecticut its OrderLink software, now called StateGovCenter, said Bill Browne, vice president of Digital Commerce's StateGovCenter division.

Written in Hypertext Markup Language, the site, at orderlink.dmx.com, lets any Connecticut agency, town, school or hospital buy products through approved state contracts. Five hundred users have signed up for the system, choosing products from 130 vendors, Passier said.

'We set out to allow a purchase within four clicks of a mouse,' Browne said. 'And we've accomplished that.' The e-commerce site offers more than a half million items, from Hewlett-Packard Co. printers to plastic foam cups.

Digital Commerce gets a fee from vendors, Passier said. Connecticut does not pay the company money directly, although the state did provide Digital Commerce with a small amount of money for start-up costs, Passier said.

Connecticut's online contracting system lets the state's 168 towns post their bids online as Adobe Portable Document Format forms. The state has about a thousand contracts online, and the service is free to vendors.

Massachusetts tries again

Massachusetts is revising its concept of the e-mall, a way to consolidate contracts and catalogs onto one Web site, following a disappointing experiment. The state embarked on its pilot Multi-State E-Mall in April 1998.

The idea'to save money by including buyers from five states to buy in bulk'sounded feasible. Idaho, New York, Texas and Utah teamed up with Massachusetts to offer purchasing and requisition services through a single Web portal.

Massachusetts officials learned a few hard lessons from snags in the e-mall pilot. First of all, a bulk-buying operation saves money only if enough people shop. From October 1998 through May last year, government buyers made only 20 transactions on the pilot e-mall, at www.emall.isa.us.

The disappointing experience with the pilot
e-mall prompted Idaho, New York, Texas and Utah to pull out of the project, at least for now. Massachusetts is relaunching the e-mall in two phases, limiting the first phase of the project to Massachusetts state agencies, as well as the state's 351 cities and towns. Phase 2 will be open to government buyers in all states.

The pilot also required states to use digital certificates, which proved burdensome to maintain, said Joe Quigg, vice president for government sales at Intelisys Electronic Commerce LLC of New York, the company that recently won a contract to roll out production of a revamped e-mall for Massachusetts.

Used in conjunction with a public-key encryption system, digital certificates are issued by third- party organizations known as certification authorities, after the CA verifies that a public key belongs to an owner.

The certification process usually requires several layers of identification, including driver's licenses, fingerprints and notarizations. The permanent e-mall will use the Secure Sockets Layer 3 protocol, which Quigg said would be sufficient security.

Massachusetts pays Intelisys a monthly licensing fee.

Hewlett-Packard will host the revamped e-mall, still at the same uniform resource locator as the pilot, www.emall.isa.us. The e-mall uses middleware from OnDisplay Inc. of San Ramon, Calif., and financial software from American Management Systems Inc. of Fairfax, Va.

Quigg said one of the most important lessons learned from the e-mall pilot was that government needs a wide range of suppliers, from huge companies down to small shops.

'The reason we didn't participate in Massachusetts' E-Mall pilot was because we have a strong commitment to small businesses here in Connecticut,' Passier said. 'The E-Mall just didn't offer a lot of support for small business.'

Utah, one of the participants in Massachusetts' pilot e-mall, decided to opt out of the permanent e-mall because the state lacked a general fund to participate, said Douglas Richins, director of Utah's Purchasing Division.

'We wanted to seek a more self-funded model,' he said. 'Massachusetts had a special general fund appropriated to finance the permanent e-mall, and they expected other participants to have the same kind of fund.' Utah last month issued a request for proposals for a joint e-mall with Colorado that would be self-funding.

Buffalo Grove, Ill., a city of 43,000 35 miles outside of Chicago, considers its internal e-procurement system a success more in time and labor savings than cost savings, said Robert Giddens, the city's chief information officer. Four years ago, city officials had to type purchase orders on four-part carbons. Then they had to send one of each to the accounts payable department, the village manager and the city's chief executive officer for approval.

'It took about a week and a half to buy a small printer,' Giddens said.

Taking Notes

In 1996 the city spent $11,000 on a Lotus Notes collaborative platform that reduced purchasing time to one day, Giddens said. The city runs Lotus Notes versions 4.6.5 and 5 on an HP 600-MHz NetServer LC3 with 300M of RAM and an HP Procurve hub and switch. The system runs Novell NetWare and Microsoft Windows NT 4.0 using TCP/IP and NetWare's Sequence Packet Exchange protocol.

Buffalo Grove's latest struggle is with credit cards. MasterCard and most credit card companies charge a 4 percent service charge, Giddens said. 'Well, that's fine in private industry. But the government can't charge you $104 for a $100 baseball bat. The government's job is not to create a profit'it's to break even.' Buffalo Grove resolved the problem by accepting debit cards, which do not charge a service fee.

Despite several states' online efforts, Michael Erbschloe, vice president of research for Computer Economics Inc., an information technology research organization in Carlsbad, Calif., thinks government procurement processes will slow the race to e-procurement.

'The big obstacle here is the way government procures,' Erbschloe said. 'Procurement ports work well when someone wants to buy quickly, has less structured bidding requirements and isn't looking for long-term contracts. The government runs counter to all three of those principles.'

Erbschloe cautions government officials against thinking that e-procurement will be a silver bullet. 'I've had government folks tell me at conferences, 'Asking us to change our procurement rules is like asking us to move the North Pole.' That's how hard it is to get the legislature to change these processes,' he said.

In light of the recent volatility in the dot-com world, other advisers caution state and local governments to choose their online partners carefully.

James G. Dee, formerly CIO of Pennsylvania and now president of Computer Advisory Services in Harrisburg, Pa., said: 'In all disciplines of technology it's a matter of time before the shakeout comes and the big guys come in and take over. The fewer and the better will rise to the top.'

Risk of a shakeout

State officials should be careful as they craft contracts with e-procurement providers, said Thomas M. Bostick, executive director of Georgianet, the state's Web site.

'Based on what I've seen, as far as the number of companies, there probably is going to be a shakeout,' he said. The amount of risk a state faces from the failure of its private e-commerce partner depends on the extent to which the state has risked money on the deal, he said.

'If a state has relied on a company to provide goods and services through an auction and the company goes away, the state probably will have to pay a higher price for those goods and services from another source,' Bostick said.

The search for an all-purpose procurement portal has thus far eluded state and local governments. As yet, an Amazon.com or eBay.com has not proven to be the electronic salvation of the government procurement world the way these sites have in the consumer world. And like the recent emergence of bankrupt dot-coms in the retail world, the predicted shakeout among vendors could be brutal.

'I think eventually four vendors will wind up with 90 percent of the business,' Passier said.Online auction sites are not just for trading Beanie Babies anymore. Pennsylvania procurement officials estimate they have saved $11 million on commodity purchases through a reverse-auction system hosted on the Web by FreeMarkets Inc. of Pittsburgh, said Samantha Elliott, spokeswoman for Pennsylvania's Department of General Services.

In reverse auctions sellers compete to win a government contract by progressively bidding down the price of a strictly specified product.

A year ago, the commonwealth held a reverse auction to buy aluminum for license plates, Elliott said. The state followed up with auctions for anthracite coal, rock salt, construction, telecommunications, office furniture, and other goods.



To date, Pennsylvania has held 10 online reverse auctions with FreeMarkets.

FreeMarkets developed the auction software, Java-enabled BidWare 3.0. Vendors have to be invited by a buyer to participate. FreeMarkets registers each supplier with a user name and password. More than 4,000 suppliers from 50 countries have participated in Freemarkets' auctions.

Auctions are highly competitive markets, and that competition is what drives prices down, said Ted Carter, director of FreeMarkets' public sector.

'Trudy Walsh

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