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Why Government Isn't Buying E-procurement

Why Government Isn't Buying E-procurement

After years of hype and non-delivery, Commonwealth and state governments are finally taking stock of their e-procurement strategies. But can they make them work?

It was the kind of launch that ministers love: full of cutting-edge technology, fulfilling a sense of fiscal responsibility and promising hefty cost savings . . . enthusiasm over the launch of Victorian eprocurement system EC4P gave the distinct impression that the government was sure it had finally hit on a winner.

Confident predictions of $109 million in cost savings, predicated on a projected user base of 5000 by the end of 2002 and more than 17,950 by the end of 2003, reflected a not-so-quiet confidence in both the technology (based around supplier Web sites and interactions managed by GE ecXpress, now called Global eXchange Services) and its potential users - state government departments purchasing billions of dollars' worth of goods and services annually.

Mid September will mark the two-year anniversary of EC4P. Although it is still running and is being seen as a success, the expectations of EC4P have shrunk considerably. Nobody is quoting the $109 million figure any more and suppliers that would have topped 20,000 according to initial predictions now number just over 250. Strategic goals now set by the Victorian Department of Treasury and Finance (DTF) put targets at around 1500 "engaged over a period of years", according to John Peachey, assistant director within the procurement group of DTF.

Peachey remains optimistic that EC4P has put the Victorian government on the right track towards realizing the benefits of e-procurement, citing reports from the state Department of Primary Industries and Department of Sustainability and Environment (previously, together, the Department of Natural Resources and Environment) suggesting their average cost for handling procurement orders has dropped from $65 to just $12 since adopting EC4P.

Those are strong results that validate the state's online procurement approach, which includes as its core aims both a consolidation of department purchasing orders and the standardization of catalogue publishing by potential suppliers. There are also indications that EC4P is fulfilling at least some of its initial goals: 60 percent of registered EC4P suppliers are small and medium enterprises (SMEs), whose increasing participation in government procurement remains a key focus of e-procurement efforts.

Nevertheless, take-up of the system remains far short of initial expectations. The issue with procurement, it appears, is not one of purpose and design but one of scale and expectation. Despite strong due diligence on the part of departments that approved the project, Peachey concedes that those efforts were tempered by the buoyant tone of an e-commerce climate back then that was much more boundlessly optimistic than the one in which we are currently operating.

Plans for EC4P were "looked at very carefully, and thorough business cases were done by departments to prove there would be a positive case", he explains. "But when it came down to departments actually doing their business cases, some of the projections that had been made by consultants in the early period weren't proven to be accurate."

The Blinkered Leading the Blind

Perhaps they should blame their data sources. In the heady early days of e-commerce, after all, market growth predictions were all over the board. Back in 2001, the year when EC4P's business cases were being written and tested, research and analysis firm Gartner was forecasting that the worldwide B2B market would reach $US919 billion in 2001, $US1.9 trillion in 2002 and $US8.5 trillion in 2005. In the same year, IDC projected that by 2004, e-marketplaces would be producing $US1.2 trillion of B2B revenue out of a total global B2B market worth $US2.6 trillion.

That Gartner's estimate would be more than three times that of IDC's confirms the lack of concrete evidence upon which government planners had to base their business cases. With so many versions of the truth to choose from, it is no wonder government planners were so easily led to build business cases with unrealistically high expectations.

If nothing else, early enthusiasm about e-procurement did at least get the ball rolling. While numbers are much lower than initially expected, Peachey reports continuing enthusiasm for the project. All Victorian government departments now participate in EC4P to some extent, with every department currently implementing the system's workflow component and all but two departments - the Department of Infrastructure and the Department of Industry - electing to adopt the EC4P online catalogue system.

"The cost of participation is small, and is expected to reduce over time," says Peachey. "We'd like to see electronic trading become business as usual for suppliers."

Victoria is by no means alone in its experiences with eprocurement implementation. Across Australia and the world, government organizations are coming to grips with the reality of a field that was hyped through the stratosphere by combined legions of analysts, consultants, vendors and customers eager to cut costs in a time of economic recession.

Politicians were quick to jump on board the bandwagon. In November 2000, Western Australia's EC4P-like Government Electronic Market (GEM) procurement system (www.gem.wa.gov.au) was announced to the world with Minister Rob Johnson wasting no time in calling it "revolutionary". At the December 2000 announcement of the Commonwealth's Government Online Solutions Exchange, Senator Ian Campbell advised onlookers to "expect a burst in e-business from February next year when the Exchange officially opens its doors for business".

He would have been hoping so. Earlier in that year, he'd told a conference on online purchasing that the government's goal was "to transact 90 per cent of our simple procurement transactions electronically by the end of 2001 . . . By the end of 2001 all simple procurement suppliers who wish to deal with the Commonwealth electronically, using open standards, will be able to."

Love My Tender

Fast-forward three years and the situation is much different. Although most government departments have explored the potential for procurement, the most progress has been made at the state level; the Commonwealth government still is not offering a comprehensive e-procurement system.

Instead, it is trumpeting the benefits of AusTender (www.tenders.gov.au), an online tendering site that went live in December 2003 and gives suppliers access to government tenders from the 84 Commonwealth departments affected by Financial Management and Accountability Act 1997 (FMA Act), which provides the framework for managing public money and public property. These 84 FMA Act departments are now required to publish every tender on the AusTender system.

As a technology platform, AusTender was designed to be open and flexible, allowing suppliers to access government information on both push and pull bases. The Australian Government Information Management Office (AGIMO), the peak body overseeing Commonwealth e-government initiatives, reports that more than 4500 suppliers have already signed up for the system and more are joining every day.

That strong response has led Tony Judge, acting general manager of corporate and governance with AGIMO, to be optimistic about the potential for AusTender to improve access for rural companies and SMEs. "This gives suppliers some tremendous benefits," he says. "It's geographically independent, will soon get automatic e-mail notifying of new tenders, and gives people the capability to respond to tenders they didn't necessarily have access to through their local newspapers."

The situation around e-procurement, however, is far different. Years of government-driven hype have helped Commonwealth e-procurement efforts get exactly nowhere. Despite the eager predictions of ministers back in 2000, AGIMO's predecessor, NOIE, helped drive pilots of e-procurement within just four largely peripheral federal agencies: the CSIRO, the Australian Antarctic Division, the SBS and the ABC. This year, the agency has commenced a review of those trials and of the government's e-procurement efforts to date; expect a report early in 2005.

Glen Nicolson, manager of e-government e-business projects with AGIMO, concedes the government's procurement experience so far has been less than ideal. "There are just so many issues," he says. "Because we're working in a devolved environment, agencies have to move forward in a way that best suits them. The business case has been tricky to develop for some of the agencies."

Nevertheless, the idea is "still alive", he continues. "I don't see any diminishing of the enthusiasm for e-procurement as a different way of doing business. I just think we're looking at it now with the benefit of four years' worth of hindsight and thinking about how we might go forward to pick up the best benefits - without going down the same approach as we did four years ago. We're keen for this review to roll forward on an evidence basis rather than going forward on any preconceived notion."

One of the biggest changes in e-procurement mind-set pertains to the idea of demand aggregation. Although it once sounded like good business sense to unify private sector companies or government departments in order to chisel better prices from suppliers, time has shown that the model is difficult to execute in practice due to widely varying procurement contracts and practices.

Post-mortems of failed private-sector procurement efforts Cyberlinx and CorProcure have pointed out that despite the involvement of high-powered proponents the portals were unable to turn their ideas about demand aggregation into practice. In government, Nicolson adds, there is the additional need to be "a little more sophisticated" than you would necessarily be in the non-government sector. "We have to be very, very careful about the impact of that on competition."

Recognition of these issues comes a little late for early procurement projects but will contribute to the growing body of knowledge that will accumulate as AGIMO takes stock of what the Commonwealth government has and has not done right when it comes to e-procurement over the past five years.

Buying into a Common Cause

During those years, various states and the Commonwealth more or less evolved their own procurement strategies independently of each other. This was partly because of the technology's early immaturity and partly because each body longed to be trailblazers of a sort. New South Wales, in particular, was able to move quickly and move well, to the point where AGIMO chose NSW's eTendering solution (at https://tenders.nsw.gov.au) as the basis for AusTender.

Technological competition amongst various stakeholders is normally a good thing, but there are limits. Aiming to keep divergent e-procurement efforts from repeating fiascos of federalism such as the inconsistent railway gauges in NSW and Victoria, the Australian Procurement and Construction Council (APCC) long ago began addressing the issue through its Government Framework for National Cooperation on Electronic Procurement.

The fragmented nature of e-procurement efforts to date suggests the APCC framework may have been more a philosophical statement of unity than a prescriptive technical formula. But as government procurement managers shake their heads at first-generation government e-procurement portals and strategic reviews commence, unity may become more of an overriding theme. "We're making sure we bring the states along with us so we have some sort of a coordinated approach," says AGIMO's Nicolson.

In the long term, that may lead to a technological shakeout amongst state and Commonwealth agencies as a potential single framework for procurement emerges from the haze. Just what that framework might encompass is anybody's guess at this point, but there is likely to be considerable scrapping and collecting of extant technological bits and pieces before any future technological standards become clear.

David Lewis, an independent consultant who was acting as group general manager of e-business solutions with the NSW Department of Public Works and Services (DPWS) during a period that included the implementation of its $25 million Logica-built online e-marketplace, believes e-procurement's key challenges remain the same as they ever were.

These include rethinking processes and decision-making to address issues like centralizing contracts, devolving purchasing and buying, allowing more delegation at a lower level in the organization, and encouraging suppliers to change their internal systems to electronically manage catalogues and orders. "This is not an IT issue, but a change management issue," he explains. "People have to rethink their processes and decision-making.

"That was, and still is, the very substantial task ahead. The only way you can affect big savings with the overhead costs of organizations is to consolidate and standardize. We've now really got to come out with a fairly definite set of quite detailed standards that will enable easy interoperability and interconnectivity across the board," Lewis says. "That means there will be some winners and some who are not necessarily fully enamoured [with the solution] - but until we have some level of standards, it's very difficult for people to participate."

Like Nicolson, Lewis argues that collaboration between state and federal government agencies will enable this participation. At the coalface, he believes movement towards unified procurement standards will be driven by the interplay between the APCC, the peak council of state procurement policymakers and the Online Council, which includes state and federal IT ministers.

Learning from the Past

This time around, discussions over the proper path for e-procurement will necessarily be undertaken on a more pragmatic level than they were four years ago. In assessing past strategies and their effects, government bodies will take in a range of experiences that will shape what is likely to be a slow period of implementation. With AGIMO's findings not due until next year, it will easily be two years or more before new technical standards are agreed upon, much less implemented in any workable model.

Existing reviews of past e-procurement projects offer some guidance as to the best practices for the next generation of government e-procurement.

In NSW, for example, work on a major e-procurement system for the more than $1.5 billion spent annually by NSW Health - supported by DPWS, the Health Peak Purchasing Council and NSW Area Health Service - has produced deliverables including a set of standardized tender documentation, an electronic tendering system and a centralized tenders and contracts database.

Despite its technological progress, however, a 2002 report by the NSW Auditor-General found that the department was still missing out on many of the benefits of e-procurement. Although conceding that "significant aspects of reform are not wholly controlled by NSW Health", the report noted that areas such as development of a product catalogue, a standards framework and an integrated materials management system were "languishing".

Other issues included: lengthy delays in establishing contracts; limited performance monitoring; lack of "valid, timely and relevant information on most aspects of procurement"; technological issues around integration, automation and fragmentation; and differences in local variations that meant local health services needed to be given more autonomy to implement change.

Equally revelatory findings accompanied a recent review of WA's GEM Purchasing e-procurement system, which now lists 9200 suppliers and facilitates access to 43 government contracts comprising 700 suppliers and 23,000 line items.

Although noting that the online system has resolved technical issues, is fit for purpose, provides better visibility of buying trends and improves compliance with purchasing policies, the auditors noted a number of significant strategic issues with the way GEM Purchasing had been implemented. These included: its reliance on Open Buying on the Internet (OBI), a standard that auditors say has lost momentum to newer and emerging standards used in other jurisdictions; early attempts to build supplier numbers for a system that proved difficult to integrate in practice; and maintenance of an outdated contractual framework to support GEM Purchasing activities.

"Successful application of the e-marketplace appears to be more granular than broad segments of buying because it works well for certain goods and services and not so well for others," the report's authors concluded. "In hindsight, the push to enlist a large number of suppliers so early was a key strategic error, which has caused down-stream problems.

"There was considerable hype and a high expectation being set that could not be delivered, which served to cause tension for both agencies and suppliers. The turbulent passage that GEM Purchasing has experienced ... carries with it a legacy from the past and a degree of misperception about its viability, functionality and potential role. As a result of this and other factors ... suppliers derive marginal benefit from being registered in the e-marketplace."

Despite these and other problems identified with GEM Purchasing, the report's authors favour its maintenance as a short-term solution to facilitate low to medium-value requests for quotations, for agencies that do not have purchasing system capabilities, as an e-integration tool that provides a standard interface to government, and as a means of collection for whole-of-government information. Noting its underlying Sun ONE technology remains technologically current, the report cites the $20 million estimated redevelopment cost as "not cost-effective".

Plotting the Way Forward

In light of the varying results of e-procurement efforts to date, governments have changed their tunes substantially when it comes to e-procurement. These days, the once-common word 'e-marketplace' - with its implicit assumptions of casual buying and selling between previously unknown parties - has been quietly expunged from the e-business argot, replaced with the far more directed concept of e-procurement.

In today's vision of online buying, purchasing is focused on executing established contracts rather than creating new ones - an important recognition of the fact that most deal making and relationship building still happen offline.

The 2002 edition of the Commonwealth Procurement Guidelines & Best Practice Guidance, last updated in January, does not even mention online procurement amongst its best practice guides and only advises that buyers "should select the most suitable procurement method on a case-by-case basis".

With reviews still largely under way, much official guidance on e-procurement remains firmly anchored in the past. AGIMO, for example, offers a checklist (www.agimo.gov.au/publications/2000/04/checklist) for agencies to follow when developing their e-procurement strategy, but this checklist is dated from the year 2000.

Renewed vigour in debate over e-procurement's future will generate significant discussion that will, if nothing else, be better informed than the hyped-up decision-making that preceded initial e-procurement plans. Over time, iterative review of individual states' and agencies' experiences with e-procurement will help isolate and resolve the remaining impediments to e-procurement. By providing a sounding board for various stakeholders in government, AGIMO's review will be the catalyst for development of a next generation of e-procurement that holds real hope of gaining traction across all levels of government.

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