State of Change

State of Change

Anyone who doubts the promise of Multi-State EMall need only peek into the 10th-floor office of Project Manager Nancy Burke in Boston. There, piled floor to ceiling, are black-and-white cow-print boxes of Gateway computers, all picked up at a bargain-basement price thanks to an EMall-related deal with the state of Utah.

The principle behind the five-state online procurement pilot is simple: More buyers means more buyer clout, and that means lower prices. EMall, which started in April 1998, had its first live transaction in October 1998 and ended last month, was an effort to prove that, if multiple states throw their buying power together in an online mall, they will save money with lower prices and save time with an easier purchasing system.

But despite the clarity of the underlying principle, its proof is not yet in the pudding; the operation of EMall has been hindered by the stuff that drags on all business, virtual or otherwise. State regulations make it difficult for buyers in one state to buy from vendors brought to EMall by another state. Cumbersome technological hurdles have caused some vendors to quit the project altogether. Add to that the possibility that another, similar system could deliver all the advantages of EMall at a lower cost. And, finally, partner states have failed to commit to EMall, at least until they have a better idea of the costs of participation.

Now, at the end of the pilot test, all of these snags-real or imagined-combine to threaten EMall's evolution from a pilot project to a fully functioning procurement system.

"For this multistate mall to move forward," says Burke, who is the director of MIS of the Operational Services Division for the commonwealth of Massachusetts, "Massachusetts needs a commitment from other states that they would be willing to participate in a self-sustaining model-one where there would be some initial investment but where, in the long term, the payback would more than offset that investment."

And while EMall architects in Massachusetts say they are pleased with the pilot, EMall coordinators in the four other states-Idaho, New York, Texas and Utah-are reserved in their praise. Not one will commit to sticking with the project if it does proceed to the next phase.

The EMall pilot project, a year-long $400,000 venture between the states and 20 suppliers, reveals the difficulties of evaluating the potential of an e-commerce system when the assessment is based only on a scaled-down prototype and is burdened with the kind of cultural baggage that litters organisations as large and as slow as state governments. Many of the problems of the EMall pilot are familiar to change agents who have tried to use Web technology to move business to a more efficient level, and they will continue to plague that majority of startup ventures that lack the funding to build a complete and final project right out of the gate.

Attention EMall Shoppers

The idea for EMall bubbled up about two years ago in the offices of Gary Lambert, then deputy state purchasing agent for Massachusetts, and William Kilmartin, the comptroller of the commonwealth of Massachusetts. Lambert and Kilmartin knew, of course, that when suppliers negotiated with states, the price was likely to decrease as the potential of the market increased. They knew also that purchasing could be a frustrating and time-consuming task. Studies by the National Association of Purchasing Management had indicated that the cost of processing a typical commodity purchase order of less than $500 was between $120 and $150. And while much corporate purchasing had migrated to electronic data interchange (EDI), purchasing for most state agencies did not. That was because state regulations required that contracts be put out to bid to many small suppliers-suppliers whose tight budgets and lack of technological expertise made EDI an unlikely option. The Internet, however, offered vendors a chance to conduct e-commerce at a fraction of the costs of EDI. Lambert and Kilmartin were willing to bet that suppliers as well as state purchasers would flock to exploit their newfound abilities.

In designing EMall, the Massachusetts team chose to use the security, formatting and design standards outlined in Open Buying on the Internet (OBI) largely because they had been endorsed by the Internet Purchasing Roundtable, a group of Fortune 500 companies and their suppliers, and because they were supported by the American Express , Visa International and MasterCard International John Harrison, supplier coordinator, points out another, more subtle advantage of OBI. "Catalog data is ephemeral," says Harrison. "SKUs change, prices change and versions change. The OBI model says to manage the data where the data is owned. The supplier owns the data, so let them keep that, and let them keep the catalogs up to date."

The team agreed that the legacy accounting systems used by the many agencies in different states could not be standardised, at least not for the EMall test pilot. So the EMall team decided that the pilot shouldn't bring the payment for goods into the system. Payments would be made in whatever ways they had been made. The EMall pilot would limit its scope to ordering, a function that promised plenty of advantages. Lambert hoped the new system, then called the Desktop Procurement Project, could reduce transaction costs, drive down product prices and capture information about purchases that would help the project owners negotiate even better prices the next time around.

By October 1998, EMall had lined up its four partner states. Lambert's idea was that each state would bring to EMall at least one vendor, and as he suspected, many vendors seemed eager to get in the game. EMall, after all, promised new business opportunities, lower transaction costs and possibly more timely payments.

Massachusetts brought several suppliers to EMall. They included ASAP Software Express , Fisher Scientific International , The Home Depot , Maintenance Warehouse, and VWR Scientific Products New York brought Boise Cascade Office Products , Nashua , United Stationers and Xerox Texas brought Dell Computer , Midway Auto Parts and W.W. Grainger Utah brought Gateway and Office Depot , and Idaho promised to bring in Micron PC Vendors were psyched; states were psyched and Massachusetts Comptroller Kilmartin was talking about a revolution.

Eleven months later, in August 1999, the Massachusetts EMall team was still talking about a revolution, but it looked like the revolution might be happening elsewhere. Both Kilmartin and Lambert had left state government for jobs in the private sector, building systems similar to EMall for American Management Systems instead. On EMall, the total value of goods bought by 215 pilot departments in five states was a mere $368,000, and coordinators in most states were unconvinced of the project's value.

In Texas, where, as elsewhere, purchasing agencies were hamstrung by regulations requiring competitive bidding, not a single order had been placed. In Utah, where there had been 20 orders for goods worth a total of $142,000, state CIO David Moon complained about the time it took to get vendors online. "If it continues to move at the same pace," said Moon, "I don't know that we'd be interested in continuing. We might be able to bring our own vendors online more quickly." In Idaho, where agencies had placed 16 orders worth a total of $34,000, the sole vendor brought by the state to EMall, Micron Electronics, had so much trouble configuring its system to OBI standards that it had given up on the project. And in New York, where agencies made 24 purchases worth just more than $5,000, neither vendors nor purchasers were ready to go by March, when the end of the fiscal year brought the buying season to a close.

Dixon Ross, New York assistant director of the procurement services group, now says the test has been a good experience, but he won't commit to sticking with the program if it continues beyond the test period. "There are certain advantages to participating with other states," says Ross, "but there is also extra work. So far the big advantage to us is that is has been free."

Ross says that, to compete with other procurement systems, EMall will have to allow buyers to use procurement cards and to compare prices of different vendors instantaneously. "That's the sizzle of doing this," says Ross. "Right now EMall is just an order-entry system. We understand that it is just a pilot and it has been treated that way, but there is a lot more potential for this stuff than is offered here."

Too Little, Too Late

In Boston, Nancy Burke says that was the point. "What we really hoped would happen from this is that other states would see that potential," says Burke. "We hoped that would motivate them to overcome some of the problems."

The biggest and most widespread problems, says Burke, were the restrictions on which vendors a state agency could use. In Massachusetts, she says, those problems were solved when procurement reform legislation changed the wording of state requirements from "lowest price" to "best value" and made the requirement for eligible vendors "open, fair and competitive solicitation." Consequently, says Burke, Massachusetts agencies can use other states' suppliers if those states use the same criteria for determining eligibility-open, fair and competitive solicitation. Burke says that in Idaho and Utah, similar amendments made it possible to make some buys, but other legislative obstacles to large-scale procurement remain. The legislative changes that she had hoped for took place too little, too late.

"One of the things that has yet to be figured out is how to buy off other states' contracts." says Utah CIO Moon. "Political, policy and contractual issues transcend our ability to use technology. Some of that has to be done by state purchasing officers who are responsible for those contracts. Some of it will require statutory changes."

Jan Rogerson, Utah's assistant director for purchasing and general services, explains that state agencies in Utah can buy only from suppliers who have been approved by the state, and only two-Gateway and Office Depot-have chosen to join EMall. "We did buy computers from Gateway and got a good price," says Rogerson. "And we are starting to place orders with Office Depot."

Curiously, says Rogerson, the good price on Gateway computers was negotiated by buyers in Massachusetts and then extended retroactively to buyers in Utah. So while it was Utah that brought Gateway to EMall, Utah buyers alone were unable to negotiate a price as low as that won by Massachusetts. With the clout of more buyers from Massachusetts, Utah later benefited. The deal now stands as EMall's most notable success.

In Texas, similarly restrictive laws prohibit state agencies from buying more than $2,000 worth of goods from vendors that have not met strict requirements. And while the state legislature recently passed laws that promise to make such purchases possible, no state agency has used EMall to buy anything.

"It's been difficult," says Jamie Speigel, programs director in the central procurement services division. "We haven't even processed one order, and we have only one vendor, Midway Auto Parts."

Speigel says one reason Texas joined EMall was that the state's purchasing arm hoped that it would provide an incentive to change the laws.

"Also," says Speigel, "we thought it would be beneficial to other states if we brought in vendors. The state of Texas has the 11th largest economy in the world, and we figured it would be good if we could get our contracts out there for others to use. Unfortunately, our vendors have had trouble getting up and running."

Speigel, like EMall coordinators in other states, won't say whether Texas will stick with EMall beyond the pilot phase. "This is the first solution we've tried, and there are a lot of others out there," he says. "There are a lot of choices now, and there are going to be a lot more."


Vendors in Texas weren't the only suppliers to have trouble configuring their ordering systems to suit the OBI standards at EMall. In Idaho, Jan Cox, state coordinator for EMall and an administrator in the Division of Purchasing, says that the sole vendor they invited to EMall, Micron Electronics, made a stab at joining but gave up, persuaded that the technological hurdle wasn't worth the jump, at least not for the relatively meager sales potential during the pilot. Cox says that some Idaho agencies have used EMall to buy scientific equipment from VWR Scientific Products and software from ASAP Software. But, he says, the 16 purchases made so far provide too little information to give him a good understanding of savings, both of money and time. "Intuitively," says Cox, "it has to save time, but we really haven't sat down with our user agencies and done an assessment."

Other vendors have reported little trouble configuring their systems to EMall's specifications. Harry Zoberman, vice president of operations and marketing at ASAP Software, described his company's configuration efforts as "not particularly seamless" but well worth the effort. And Mark Robillard, former vice president of electronic commerce at VWR Scientific Products, reports that hooking his ordering system into EMall was a simple matter.

"We were already compliant with OBI standards," says Robillard, "so for us, it was pretty much plug and play." Robillard agrees with John Harrison that OBI offers the great advantage of allowing the supplier to maintain its catalog. "We may make 50 or 60 changes a day in our catalog," he says. "We also have different prices for different customers. The only way to do that with any kind of scalability is to connect in real-time. There is a lot of hype from software companies, but there is really no alternative to OBI."

Harrison and one of his teammates, Technical Consultant John Russo, can tell you that efforts to persuade vendors to join EMall quickly reveal a kind of Catch-22 that afflicts all e-commerce pilot projects: Suppliers don't want to join unless the buyers are there, and buyers don't want to join until the suppliers are there. To work well, projects like EMall need to achieve a critical mass, and the pilot test was never intended to provide that. Nancy Burke says there are dozens of vendors that are watching and waiting and many states that are doing the same.

In Utah, Jan Rogerson also believes that vendors would jump in if the rewards were apparent. "Our suppliers are ready," he says, "but we don't want to bring anyone on until we complete the pilot, because we don't have everything worked out."

One of the things that has yet to be worked out is how exactly the state of Utah will pay for its development of EMall as well as for its share of the long-term maintenance costs. "Before we proceed," says Rogerson, "we need to get a funding mechanism in place. Utah is a fiscally conservative state, and right now it isn't in a position to pony up hundreds of thousands of dollars for that."

To date, the price of participation is not known. The Boston-based team is working with numbers, trying to figure out how much a full-fledged system would cost and how they would structure the fees for participation. They are thinking about charging states a subscription fee or taking a per centage of the value of transactions. "We are looking at the business and technology and trying to understand what we can do within the confines of the public sector to create a self-sustaining system," says Harrison. "We don't want to end up saying, 'OK, it's December; everybody put in another $20,000.' You have to have a better model than that."

Worth the Effort?

As Nancy Burke and her team evaluate the benefits and consider the costs of the multistate EMall, there are many things to ponder. "Even though we haven't had a great number of transactions, I think there is enough here for people to realise that this is the wave of the future," says Burke. "The challenge here is to help other states see that. The only way you do that is to try to get the right people, the visionaries who can see that, while this may cost us some money in the short term, in the long term we will make back our investment triplefold."

It is possible, of course, that the first Internet-based multistate mall will collapse even before it launches, a victim, ironically, of the market forces it was meant to defeat; high cost and competition from other similar projects. A group of 13 southern states, the Southern Growth Forum, is considering a similar project, and several commercially sponsored e-commerce ventures promise to aggregate buying power to cut prices. Utah CIO Moon even suggests that a commercial vendor may come in and take over EMall, running it as a for-profit venture. Or, he says, individual states may also choose to build their own malls, unconvinced that the savings generated from EMall is worth the effort.

"One of the issues we have to decide when it comes to electronic procurement is whether we should do it in a way that is easiest for us or in a way that is easiest for the vendors," says Moon. "A multistate mall might be easier for the vendors, but for us it might be easier to move forward with our own electronic buying portal."

That sentiment is not lost on Burke, who has adopted the attitude that if other states can't see the benefits of EMall, Massachusetts can do it alone. "Going it alone is a worst-case scenario that is not really so bad," says Burke. "At least Massachusetts will benefit. I consider that a given."

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