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Pinching the e-Pennies

Agencies that use e-procurement find that buying online makes for saved dollars and good sense.

If, like the federal government, you're buying
more than $2 billion a year in goods and supplies, it's a good idea
to have sophisticated systems in place to manage the task.

A $2 billion year-long shopping trip comes with piles of paperwork
to manage, scores of vendors to oversee, countless bids and contracts
to manage, and price lists to track. The tasks can overwhelm even the
most efficient organization. "Overseeing procurement is a complex
and time-consuming process," says David Grant, director of
procurement for the Internal Revenue Service (IRS).

These days, an IRS employee can order
goods and services, including getting
approval and funding, with a few clicks of
a mouse. That wasn't always the case.

In the not-so-distant past, procurement
processes at the IRS were entangled in red
tape. Getting approval for a desk or a new
PC could take days, even weeks, Grant
recalls. The process devoured enormous
chunks of staff time and was prone to
errors and confusion.

"At times, we had people wandering
the hallways trying to chase down a key
executive who could approve a
requisition," he says. "If the executive was
in a meeting or out for the day, you were
out of luck."

Today, a sophisticated e-procurement
system is crumpling paper and manual
processes. Using a Web-based application
built in-house, an IRS employee can
electronically initiate an order and receive
approval and funding online. The
application then initiates the buying
transaction, notifies the financial system
and alerts the customer to be on the
lookout for the requested goods or
services.

The e-procurement application tracks
the status of the order throughout the
acquisition lifecycle, including final
payment to the vendor and notification to
procurement of closeout.

The results have been nothing less than
spectacular, Grant says. The old "
walk-around" method took an average of 85 days
from requisition to delivery. The average
now is between seven and 10 days.

The Web-based application is also
saving the agency money—millions of
dollars a year, Grant reports. "The system
has dramatically improved the way we
manage buying," he says.

Consolidating Suppliers

Scores of other federal agencies are taking
direct aim at the inefficiencies of paper
and manual processes, and boosting
the bottom line by heading online.
Increasingly, they're turning to
e-procurement to buy PCs, cell phones,
vehicles, heavy machinery, office supplies,
even services, according to Andrew
Bartels, vice president of Cambridge,
Mass.-based Forrester Research.

"E-procurement represents a major
opportunity for government agencies,"
Bartels says. "Although it is not yet
universal, it is on its way to becoming a
dominant tool."

E-procurement can reduce an
organization's indirect spending by 5 to
15 percent, and produce a triple-digit
return on investment, according to
Boston consulting firm AMR Research.
These gains typically result from linking
systems and processes, and consolidating
suppliers.

Too often, organizations that use
traditional procurement processes wind
up paying different prices for the same
items, depending on who orders a part,
component or product, and what catalog
or system it comes from. Using a single
system, agencies can negotiate lower
prices for volume buying.

The most common way for federal
agencies to connect employees with
approved suppliers, such as computer
retailers and office supply stores, is via
Web portals, although a few are building
proprietary systems that can handle bids
and automate forms online. There's no set
formula for e-procurement success, but
the right technology and tightly
integrated business processes can
simplify work, boost an agency's agility
and help ensure success.

"As e-government continues to gain
momentum, more federal agencies are
recognizing that e-procurement is
easier, faster and cheaper," says Priscilla
Magnusen, a federal analyst at Chantilly,
Va., consulting firm Input. "It's a perfect
fit in an era of tight budgets and
increased workloads."

Saving Dollars, Making Sense

Federal agencies are finding that old
procurement methods are too costly and
simply don't make sense anymore. In the
old paradigm, employees typically shuffle
through catalogs from various suppliers,
select items for purchase and fill out a
requisition form or purchase order. A
manager reviews the paperwork, and if
the request is approved, the purchasing
department forwards the paperwork to
the vendor by mail or fax. By then, prices
may have changed.

However, the pitfalls of conventional
procurement don't stop there. Multiple
orders mean multiple paperwork,
payments and shipping costs. Separate
orders from departments or divisions
reduce an agency's pricing power.
Instead of a single order for 100 desks, a
vendor might receive 50 orders, each for
two desks. "You wind up buying
piecemeal and paying more," the IRS'
Grant points out.

E-procurement can change all that. A
well-designed system can help with
research, automate purchasing and speed
workflow. Not every transaction and
process can work online—many federal
agencies have rules and restrictions that
prohibit or restrict e-commerce—but
it is possible to get a solid return
on investment on an e-procurement
initiative. "From office products to
healthcare, the opportunities are wide
open, and government is beginning to
recognize the fact," says Malcolm
Morrison, CEO of Morrison Informatics,
a Mechanicsburg, Pa., consulting firm
that works with government.

The General Services Administration
(GSA)clearly recognizes the value of
e-procurement, managing more than
14,000 contracts and four million items
through its GSA Advantage Web portal.
The online catalog lets buyers research
goods across multiple vendors and make
selections.

If the item sells for less than $2,500,
it qualifies as a micropurchase under the
Federal Acquisition Regulation. In that
case, an authorized federal employee
can place an order, and the system
instantly creates a purchase order using
electronic data interchange or generates
an electronic fax.

For purchases costing more than
$2,500, the system compels the buyer to
check the price list for three separate
contractors. For buyers, "it's a point-and-click proposition," says Patricia Mead,
assistant commissioner in charge of GSA's
Office of Acquisition Management.

GSA also creates branded sites for other
agencies. Such custom portals let an agency
consolidate buying and generate reporting
and business intelligence data about
transactions. The agency has also created
e-Buy, which lets federal buyers generate a
request for quotation for a wide range of
services and products offered through
GSA's Multiple Award Schedule program.

Certainly e-procurement is gaining
acceptance by federal agencies. Overall,
sales through GSA Advantage grew 21
percent in fiscal 2003, and postings on
e-Buy grew 136 percent.

Designing the Interface
When designing an e-procurement site,
doing a thorough upfront analysis—
mapping out technology, workflow and
business processes—is essential to avoid
project-killing pitfalls. That will greatly
increase the odds for success, says
Forrester's Bartels.

"An e-procurement system is not
something you can cobble together piece
by piece or category by category," he
points out.

One way to increase functionality and
reduce the ongoing expense of an
e-procurement system is to contract with
key vendors to create customized portals
or links. Employees should be greeted by
a customized site with approved
products and pricing. A mouse click on a
logo or vendor's name on a user's desktop
should instantly and transparently bring
up the requested page. The vendor is
responsible for maintaining the catalog
and keeping prices current.

"The goal is to remove the
administrative burden of conventional
procurement," says Morrison of Morrison
Informatics. Building in appropriate rules,
workflow and security will keep an
e-procurement portal from becoming a
wide-open invitation to a shopping spree.
The system must include the proper
controls and spending limits, based on
job classifications, roles or individual
responsibilities. It's also essential for the
system to be able to spot exceptions and
not simply rubber-stamp approval for
every transaction.

Building on their success in buying
goods via e-procurement systems, some
federal agencies are expanding the
systems to tackle the purchase of services.
The Navy, for example, is using NAVFAC
E-Solicitations, its five-year-old Web
portal, to solicit business opportunities
costing more than $25,000. These can
range from painting or repair projects to
the installation of lighting at bases.
Potential contractors can view the details
of a project, get the information needed to
submit a bid and view results.

"It is expanding the concept of
e-procurement and streamlining the
process," says Robert Little, senior
associate counsel for acquisition at the
Naval Facilities Engineering Command
in Washington.

As federal agencies adopt the technology
and become accustomed to e-procurement,
the savings and efficiency gains will grow.
According to e-procurement analyst
Morrison, huge opportunities remain, and
the federal government has only begun to
scratch the surface.

"Government is becoming more
sophisticated with its use of e-procurement
technology," Morrison says. "Systems are
becoming simpler and more powerful, and
are offering a greater return on investment
all the time. It's up to agencies to tap into
those opportunities."

PUT E-PROCUREMENT TO WORK

Setting up an effective e-procurement system
can present formidable challenges. Interviews
with e-procurement experts yield five major factors
that organizations must focus on to achieve
e-buying success:

CONTENT MANAGEMENT

A purchasing organization must oversee how it
publishes and presents information. Oversight
includes setting standards for keeping electronic
information up to date and requires ongoing attention
to ensure that information is displayed optimally to
make e-procurement a simple proposition.

WORKFLOW MANAGEMENT

An enterprise must focus on integrating
e-procurement into overall business processes,
with a focus on speed and performance across
internal departments and the supply chain. This
requires an effective network and software that
can route purchase orders, requisitions and
approvals quickly and efficiently.

SYSTEMS INTEGRATION

By tying together various systems, an organization
can optimize digital purchasing to better manage
inventory, purchasing, finance and other tasks. In
many instances, this requires links between legacy
systems and modern e-business solutions. When
done right, it creates functional connectivity
throughout the organization.

SUPPLIER INTEGRATION

A purchasing organization must manage supplier
relationships effectively. It must ensure that new
processes and systems work well for key suppliers,
while providing advantages and gains for all the
players in the procurement process.

INFORMATION ANALYSIS

By tapping into the data generated by a digital
purchasing system, a purchasing department
can better manage suppliers, secure better
pricing, handle audits and planning, anticipate
availability problems and improve the overall
purchasing process.

COST SAVINGS FROM
E-PROCUREMENT

Typical purchased goods,
including office supplies:
15% to 20%

Energy:
5%

Chemicals and adhesives:
15% to 20%

Corrugated paperboard:
Up to 32%

Metals and machinery
components:
19%

Maintenance, repair and
operations:
40%

Source: AMR Research

Dec 31 2009

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