Capitalizing on E-Procurement Saves Dollars, Makes Sense

January 2001
By Maryann Lawlor
E-mail About the Author

Buying commercial products has evolved into, well, buying products commercially.

The technology, convenience and purchasing power of point-and-click personal shopping are being put to work for the taxpaying public. After closely examining trends in acquisition reform, a number of commercial enterprises are harnessing the potential of the Internet to deliver the goods better, faster and less expensively than government agencies can. However, some business leaders in this new entrepreneurial community object to competition from the government in the online marketplace. And, according to government guidelines issued by the U.S. Office of Management and Budget, they are right.

The reformation of government purchasing began with the products themselves. The demand for custom-made items gave way to purchasing commercial off-the-shelf items, which could be acquired faster and featured capabilities at lower costs. Although some specially developed systems are still necessary, today agencies are just as likely to send a purchase order directly to a computer store as they are to issue a request for proposals.

This revolution continues, but the movement’s momentum has shifted from products to processes. Inspired by the success of a multitude of popular consumer-focused Internet stores, private industry has begun opening virtual doors for government purchasers, and companies are out to do more than just automate the traditional procurement process. Their aim is to transform agency purchasing methods through the digital marketplace that is the World Wide Web.

Commercial firms that can reliably provide just-in-time logistics governmentwide could have a $19 billion impact on government spending annually. This is the amount the U.S. General Accounting Office (GAO) estimates is wasted in inventory warehousing each year. But the potential for savings does not stop there. The administrative costs of using traditional buying methods also add up to billions of dollars. According to the National Association of Purchasing Management, a single purchase transaction of $500 can cost an additional $150 to $200 in manual processing charges. The General Services Administration (GSA) estimates that as much as $110 billion could be saved annually by employing e-commerce techniques.

The advantages of online buying have not been lost on the U.S. federal government (SIGNAL, January 2001, page 25). The GSA has a Web site that provides agencies with an alternative to traditional buying procedures. However, business leaders are asking why government agencies are straying away from their primary missions and wandering into a field that is, by its very nature, the bailiwick of the commercial sector.

Cmdr. Mark Dowd, USNR, vice president of operations, eFederal Systems Inc., Washington, D.C., believes that the government should not be in the business of setting up retail stores—even virtual ones—because retailing is not its core competency. “Why is GSA selling commercial products? I want to know. Here’s a government agency charging other government agencies for procurement,” Cmdr. Dowd says. Revenue saved by using commercial providers can be invested in the true core competencies of an agency through investments in its people, training and new systems, he adds.

The commander’s firm developed eFederal.com, a commercial facilitator of government e-procurement. He believes that the government and his competitors are simply automating traditional procurement methods rather than reinventing the entire system. This approach does not take advantage of the valuable quality control that can now be added to the procurement system, he contends.

Rather than merely applying new technology to old processes, eFederal Systems developed eFederal.com from the ground up and based its design and content on feedback from government employees. eFederal.com personnel met with agency chief information officers to gather input and ideas. They also asked government employees what characteristics of online buying sites bothered them most. “It has to be people, processes, technology—in that order. People come first. Don’t even talk about the technology. The technology is there. Open standards and [being] Web-centric are really the only important things.

“You can’t just build a site and sit back and they will come. You have to go out and see people to keep the customer. And you have to show them how to use the technology. The Internet is storytelling. It’s sharing ideas and talking together. It’s not one-sided,” Cmdr. Dowd offers. He believes it is the business model that will revolutionize government purchasing.

“I compare it to Christopher Columbus and finding the New World. Most of our competitors look at it as a flat world. They have a stake in keeping the old way of thinking, like the mapmakers did in Columbus’ time. eFederal.com looks at it as a round world. We are completely Web-centric. When I go to the [U.S.] Navy or [U.S.] Defense Department and tell them that they don’t have to spend a penny to hire information technology professionals for the services to erect an e-mall, they can’t believe it. All of the technology is done on our side,” the commander explains.

This is an important point, Cmdr. Dowd contends, because of today’s shortage of available technical talent. “The government hasn’t even seen the problem it will have finding adequate numbers of information technology professionals yet. They’re going to have a severe shortage of people in the future. This is a fundamental difference between us and our competitors,” he states.

The firm’s approach also includes other fundamental differences. While other companies have been moving out of the brick-and-mortar world slowly, eFederal.com evolved in Internet time. After several months of research, the site was brought up in 72 days and currently features more than 130,000 products. Based on customer input, the company chose not to require purchasers to register with the site to place an order. Up-front pricing allows buyers to see their exact cost. There are no hidden administrative costs. In addition, unlike some similar firms, eFederal.com primarily works through two major distributors to provide all of their products. The site also includes convenient access to peripheral information that users often request through hot links to CNN, major newspaper sites and sources for procurement policy updates.

Other e-procurement facilitators take a slightly different approach. FedCenter.com, owned and operated by Digital Commerce Corporation, Herndon, Virginia, can be compared to a shopping mall that features several large anchor stores and a multitude of boutiques. According to Tony Bansal, the company’s president and chief executive officer, the idea developed about two years ago from conversations between the firm’s personnel and government employees. Although federal workers could buy online at home, when they went into their offices they were back to using the same old paper methods, Bansal offers.

The company solicited vendors that had contracts with the government and began listing them in one place on the Web. “We made it free to them [the buyers], because they don’t pay to use say, Amazon.com, why should a customer pay to buy for the government? Using the traditional approach, if government employees are going to buy without charge, they have to purchase directly from the seller off of a government contract. This site is like a governmentwide acquisition contract,” Bansal explains. Vendors benefit because they do not have to visit each agency, he adds.

As a pioneer in this marketplace, FedCenter.com had one main hurdle to overcome. Buyers were reluctant to visit the site because it featured so few vendors. At the same time, vendors were hesitant to join the site because of the lack of buyers. The company overcame this “Catch-22” dilemma by investing time and revenue in branding efforts, Bansal points out. Currently, the site features approximately 18 million line items from about 1,000 vendors.

Bansal agrees with Cmdr. Dowd that private industry should not have to compete with the government in the online procurement marketplace. “The private sector will lead because it makes sense to do so, and there is no conflict of interest. How would you feel if the SEC [Securities and Exchange Commission] were running the New York Stock Exchange or NASDAQ [National Association of Securities Dealers Automated Quotations]? The government should run the policy. I do not want the government competing with me. That is not the government’s role,” Bansal contends.

The Federal Activities Inventory Reform Act of 1998 supports this view. “In the process of governing, the government should not compete with its citizens. The competitive enterprise system, characterized by individual freedom and initiative, is the primary source of national economic strength. In recognition of this principle, it has been and continues to be the general policy of the government to rely on commercial sources to supply the products and services the government needs,” it states.

In addition to offering savings, FedCenter.com as well as other commercial procurement sites also allow agencies to improve their buying decisions. “With the traditional procurement process, agencies had to get three quotes that were filed away in a file cabinet and had to be looked up every time a purchase was about to be made. Now, they can get hundreds of quotes. Say they want to buy 100 laptops, and they have a contract with 10 vendors. They can go out to all of the vendors at the same time and say that they know that the current contract says a certain price, but ask if the vendor can do better. In the case of the laptops, they have an easy way to reverse bid each time,” Bansal explains.

Although FedCenter.com offers this reverse-bid opportunity to its customers, it is still considered a catalog-based purchasing mechanism. Vendors must maintain their information at the site. However, other companies have entered the digital marketplace as a straight reverse-bidding site for government agencies.

At FedBid.com, buyers post their purchase requests, including the bidding time limit, on the Web where vendors can review them and bid using a dynamic, real-time system. The site, a division of Procurement Technologies Incorporated, Germantown, Maryland, allows vendors to monitor the bidding process continuously and make decisions about whether they should continue to bid.

According to Phillip J. Fuster, president and chief executive officer, FedBid.com, the reverse-bidding approach offers several benefits for both vendors and customers. “You as a vendor do not have to update the site with the products that you have or the contracts that you have. Also, you can know if you are the low bid or if you want to lower the bid and can figure out how low you can afford to go,” Fuster explains.

Agencies gain several advantages from this system. Monetary savings have been the most obvious benefit. During the first 60 days the site was active, a 16 percent savings was realized on a total of $1.4 million in products. One example is a posting by the U.S. Treasury Department. The organization posted a request for printers. Seventeen bidders posted 33 bids, and the agency was able to acquire the products for 8 percent less than GSA offerings cost.

Fuster describes an even more dramatic example. One agency entered the auction arena with a request for $1 million of Oracle licenses. The first bid came in at $960,000, which was considered a very good price. However, by the end of the bidding, the final bid was $640,000, a 30 percent savings. “That’s really the power that a real-time system can provide,” he says.

FedBid.com also offers value-added services. For example, the company exercises a level of due diligence that includes obtaining a Dunn and Bradstreet rating on its vendors. This information is available on the site to assist customers in screening sellers. In addition, vendors are not paid for products until the customer is satisfied. If the wrong items are delivered, for example, FedBid.com issues a credit and arranges for any incorrect equipment to be picked up. The firm also facilitates dialogue between buyers and sellers and, through an arrangement with Federal Express, handles the shipping of all goods.

Agencies reap additional benefits when data about their purchasing habits are collected. Government buyers can review the database to determine what items are being purchased, how much is being saved, and how many small businesses they have been buying from to verify that they are meeting small business participation goals.

Verity Incorporated, Sunnyvale, California, is one company whose technology powers the knowledge management capabilities behind many of the e-procurement sites. Although the company’s technology does not directly support the purchasing side of sites such as FedCenter.com or GSAAdvantage.gov, it does provide the search capabilities and coordinates the information from various contracts and puts it into a single location for the customers.

Dr. Ashok Chandra, Verity’s senior vice president of development and new business activities, believes that organizations are at the threshold of a new world that values the ability to extract knowledge from data. “The direction knowledge management is taking is as a social network. The value is not just in the bits and bytes. The value is in what they represent—buying habits, government information. Extracting value out of that social network is where e-procurement is going,” Chandra offers.

Cmdr. Dowd and Bansal agree that the future of the e-procurement industry includes a winnowing of numerous commercial start-ups that are entering the market today. The commander predicts that his company is in it for the long haul. “Will there be consolidation of other companies? Absolutely yes. The red tape with the government is great. So, there will be a lot of dot-coms that will jump into the fray, and they will fall by the wayside,” he offers.

Bansal concurs. “The venture capital markets are getting smaller, so there will be some consolidation in the next year or so. But the general trend is that it’s good for citizens and good for the government,” he concludes.

 

Military Embraces Electronic Acquisition Reform

Representatives of the U.S. Defense Department believe that e-procurement will redefine how that organization does business but recognize that the revolution must take place at a deeper level than just the technology. Discussions among more than 100 government and industry representatives at an e-commerce conference concluded that technology is the easiest part of changes in acquisition procedures. Helping the procurement people accept and take full advantage of the benefits of this new way of doing business must be a primary focus for all government agencies, including the Defense Department.

According to Stan Z. Soloway, deputy undersecretary of defense for acquisition reform, e-procurement is not only about automating old acquisition methods but also about re-engineering all of the processes associated with procurement and then maximizing the use of information technology. “If the new process does not enable that end-user to perform the mission better, in less time and at less expense, then it was not successful,” Soloway says. To accomplish this task, agencies must invest in new training and education as well as continuing senior leadership communications, he adds.

Although the Defense Department has not yet issued departmentwide guidelines, the entire organization is monitoring the changes in procurement very closely, he states. “Not only are we monitoring these companies, we are also trying to integrate them into our overall e-procurement model. … We are building an e-business architecture that is a slice of the DOD [Department of Defense] global information grid that will define the information technology architecture framework for the department. This framework will guide the revolution to electronic business operations in DOD in the sense that systems, processes and technology will now have specific standards and guidelines to follow,” Soloway explains.

Government and industry representatives agree that the chief benefits of e-procurement are cost and time savings. However, Soloway points out that it offers more subtle advantages as well. Taking advantage of e-business techniques allows end-users to reallocate scarce operations and maintenance dollars to shortfalls they immediately identify or, if done at the department level, reallocate the funds to support procurement programs.

Soloway offers some advice to companies that are considering a move into the business-to-government marketplace. He suggests that firms keep the Defense Department’s Joint Electronic Commerce Program Office as well as the service and agency chief information officers and senior procurement officials informed about products and capabilities. Companies should also team with the major enterprise resource planning providers as plug-ins. Finally, Soloway recommends that firms keep pace with Defense Department security improvements, particularly in the area of public key infrastructure for both access control and digital signatures.