Shopping for the Right Model

The idea that government agencies will use online procurement is no longer in doubt. The question now is what form e-procurement will take, and how online services will fit into the esoteric world of federal purchasing.

Answers won't come easy, at least for a while. On the one hand, agency buyers are faced with a rush of companies offering e-procurement services for government, many based on the model of an online auction. But online purchasing is a fledgling business at best, and the federal experience with it is barely into the piloting phase.

Just what are these online companies offering to do for agency buyers? How will the promise of World Wide Web-based buying mesh with the realities of the regulation-driven world of government purchasing? Will it really be as easy as the companies say? And how much will it cost agencies to use these services?

The U.S. Army's Communications-Electronics Command (Cecom) recently tested an e-procurement system to buy a couple of laptops and a fax machine. The pilot program used a reverse auction, in which the selling price is driven down, not up, by vendors competing for the contract. The winning bid for two IBM Corp.

ThinkPads was 50 percent below General Services Administration schedule prices.

The limited tests apparently have been enough to convince Cecom of the long-term potential of e-procurement, particularly when it comes to online auctions.

"A lot of paper is involved even with the simpler procurements, and it can take anywhere from 30 to 90 days to complete them," said Edward Elgart, director of the acquisitions center at Cecom. "With online auctions, it takes 30 minutes to an hour, and everything is done electronically. And sometimes, we've gotten even bigger price discounts than were expected, on the order of 20 percent to 56 percent."

However, the Army's experience also showed that e-procurement in the government is not as simple as getting the lowest price. The Army has been pushing the concept of best value ? which involves price plus other factors ? for the past 10 years, Elgart said, and "that's high on the list of imperatives when it comes to us choosing an [e-procurement] system."

The fact that the Army found an auction solution that caters to best value was "frankly something of a surprise," Elgart acknowledged. Using Frictionless Commerce Inc.'s PurchaseSource and Moai Technologies Inc.'s LiveExchange product, Cecom could add requirements other than price to its product comparison request, such as guarantees, service response time or online help-desk support.

The Naval Supply Systems Command (NSSC) has also had an early, favorable experience with online auctions. At first glance, the dynamic bidding process seemed "counterintuitive" given the traditional way that federal procurement is carried out, with vendors vying for contracts by submitting a one-time, sealed bid, said Thomas Trump, assistant deputy commander for contracting management at the command.

But recent changes in procurement rules, specifically the revisions to the Federal Acquisition Regulation in 1997 that removed language forbidding auctions in government procurement, seemed to open the door to reverse auctions. The NSSC was intrigued enough to start a pilot to see if the federal marketplace would accept them.

In an hour-long online auction in May, the Navy awarded a contract for $2.375 million worth of equipment used in aircraft ejection seats. The service estimated that it saved 28.9 percent on the "historical" prices paid for those components.

"We're pretty happy with the initial results of the pilot," Trump said. So far, the NSSC has focused on wringing better prices out of suppliers but, just as with the Army, it has more extensive ambitions. Pricing is just one factor that the Navy uses to evaluate offers, Trump said, and the feeling is that reverse auctions could also be used for best-value procurements.

Right Stuff

But e-procurement in the federal market is not an open-ended affair, warned Rob Main, president of NIC Commerce. Although government does want to adopt the best practices of the commercial arena, that doesn't simply mean someone can tweak a commercial product and introduce it for federal use. Government procurement "is still a very specific area of expertise," he said.

NIC Commerce was known as eFed before it was acquired last September by the National Information Consortium, which has hosted Web portals for state and local governments. NIC Commerce recently announced deals with the U.S. Air Force and U.S. General Services Administration to supply those agencies with e-procurement solutions.

"One thing we built into our [solution] was the understanding that procurement is about negotiation, not picking things out of a catalog," Main said. "It has request-for-quote capabilities and helps build and qualify specifications, and enables agencies to get competitive bids on a contract. Vendors can also use the same software to build their proposals."

Version 3.0 of eFed, the company's core product, enables agency buyers to make side-by-side comparisons of systems from multiple vendors before they buy.

Users can also customize a system by picking different components from different vendors.

Buyers can make purchases from pre-negotiated contracts, or they can browse through similar commercial products offered by vendors. Approval of vendor changes to products on offer that previously would have taken six to 12 weeks to push through can be made online almost instantly. The company expects to install an extension to the bid solicitation feature that will allow for auctions.

By contrast, the software that Cecom used in its pilot is geared for auctions, though it also allows for comparison of products available on fixed-price catalog offerings. Users plug in their requirements for what they want to buy, and the software automatically pulls items from catalogs and online auctions and compares them side by side on the buyer's screen. The final purchase is made through a reverse auction on a specified product.

To buy notebook computers, for example, a buyer would either enter the name of a particular model or, more commonly, would provide some of the specifications of the computer needed. The software will offer up standard profiles of classes of users, such as those who travel frequently or have specific job functions, and then combine that information with user-defined items into a set of default preferences. Using intelligent Web "spiders," the software searches among both fixed-price offerings and online auctions to select value-weighted systems that are displayed on the buyer's computer screen.

"It also pulls in the latest price information on products in real time, so buyers get the most accurate representation of what's available to them," said Robert Guttman, chief technology officer at Frictionless Commerce. "Buyers can then use the comparison to refine their preferences before querying suppliers to bid on the request."

Human Touch

But operating online doesn't mean operating at arm's length. Agencies say they need the same level of support from online solutions providers that they expect from more traditional vendors.

"The actual auctions are not rocket science," said Dwight Young, manager of national mail transportation purchasing for the U.S. Postal Service. "The important thing for us in picking a vendor is the upfront work they provide. Do they add value in expanding the process, for example, by bringing in new suppliers and by working with our contracting people?"

USPS is one of the most aggressive of the civilian agencies in adopting e-procurement. Young said he expects the agency will "fairly quickly identify where e-procurement makes good business sense, and as quickly as we learn that, we will move towards it." USPS recently hooked up with FreeMarkets Inc., a five-year veteran of the business-to-business world, in a pilot program.

"Some people would say we are only a broker, but we're not," said Ted Carter, FreeMarkets' director for public-sector business. "We make sure we integrate with the procurement process that's already in place in the agencies, and we work with the buyer to make sure that the products that appear in the auctions we run make sense for the buyer. We find the suppliers, but it's the buyer that decides how many, and which, suppliers take part."

Once the suppliers have been brought together into the online market, FreeMarkets conducts a reverse auction in which suppliers compete in real time, successively lowering their prices until a winner is established. Buyers can track the prices as they go down. The company works with both buyers and bidders to train them in how to participate in the auction.

The pilot has been as much of a learning process for FreeMarkets as it has been for USPS. Despite its years in the commercial sector, FreeMarkets only recently entered the federal arena and held its first auction in May, for the Postal Service.

Longer-term players in the federal market are taking a more cautious approach to e-procurement. They don't deny the influence of the Internet, of course, and they have had an online presence for several years. But, with huge investments in the more time-honored procurement processes, they are not about to leap wholeheartedly into new-fangled ways of doing things without solid proof that they work.

"The jury is still out on auction sites," said Betty Greene, director of GTSI.com. "They play well when it's otherwise hard to bring people together to aggregate efforts on buying a product. But most federal buyers can't just buy from one manufacturer one week and from another the next. They really do need to stay with the contract model because of the need for standards, long-term support and so on."

The mistake newcomers to the federal market make, according to Greene, is that they assume a commercial approach will work with the government, given some suitable adjustments. But the situation is far more complicated, particularly given the extraordinary support that's often needed with federal procurements.

"People grossly underestimate the federal market when they first come into it," she said. "They see the big dollar numbers available to them, but they don't understand the need for standardization and other things. At the federal level, there are a lot of strange requirements that have to be addressed upfront."

That's not to say that Greene thinks all of the new e-procurement efforts are a potential bust. She said she believes that online aggregation markets have a place in the federal arena, "if they are properly constructed." GTSI is "playing around" with the concept now with a view to introducing something in the next few months, she said.

American Management Systems Inc., one of the biggest providers of financial management systems to the federal government and a major supplier of procurement systems, takes the view that e-procurement ? through both catalogs and auctions ? will play a part in federal purchasing. But it can't be seen as something separate from the rest of the government procurement apparatus.

"It's great that people will have these new [procurement] capabilities," said Mike Dow, vice president of AMS' defense practice group. "But if you don't have the reporting functions and the ability to track purchases through to the financial side of the operation, then you can't apply these capabilities to their fullest effect. To get the maximum savings from e-procurement, you need an integrated, end-to-end approach."

AMS has a considerable presence in the federal government now, with its software in use at more than 65 civilian and defense agencies. Over the past several years, it has begun to partner with other companies to offer bundled solutions, most notably in e-procurement last year with Ariba Inc. Going forward, AMS expects to continue that pattern by linking up with the likes of FreeMarkets to provide the newer elements of e-procurement, including auctions.

The trick, according to Gregg Mossburg, senior principal with AMS' eGovernment Solutions Group, is to make sure the company's products can be implemented right out of the box, because speed of implementation is a top concern for procurement officers. They want to be able to get their bids out to suppliers, and get the offers in and operational, as quickly as possible, he said.

How all this will shake out is anyone's guess. For example, there is no single model for how to price these new e-procurement services. There are also differing opinions on how fast e-procurement will take hold in federal agencies. Many of the newer entrants to the federal scene believe it will happen quickly, and some agencies, such as USPS, expect to develop early implementations. Others see it as a more drawn-out affair. Cecom's Elgart said it could take as long as five years before e-procurement is fully developed within the Army.

But it could happen much sooner. Going by the first results of the current handful of pilots, at least the procurement professionals themselves seem to be sold on the idea. After all, what's not to like? E-procurement shortens purchase cycle times, cuts out most of the paperwork involved and generally works to make buyers' lives easier.

"I know I've not had to drag anyone in my group kicking and screaming into this," USPS' Young said.

-- Robinson is a freelance journalist based in Portland, Ore.

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Strength in Numbers

Online auctions are getting a lot of attention, but they are not the only way the government can lower its procurement costs. FedBid.com takes another approach to e-procurement, preferring to leverage the world of credit card purchases that are less than $25,000, which make up the greatest federal unit volume business.

By pulling together similar requirements from a number of government buyers, FedBid.com compiles an aggregated request for a purchase that vendors then bid on. At the same time, buyers still get to define their purchase parameters.

"The system also reconciles buyers' credit card statements online, so agencies can effectively decipher how they spend their money," said Philip Fuster, FedBid.com's president and chief executive officer. "It's something we got from the government focus groups we ran - that one of the biggest problems [with credit card purchases] was how to decipher the data, to know how much agencies spend with a business or on a particular item. That's important for when government goes to Congress and asks for increases in the purchase threshold, for example."

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How much will e-procurement cost?

There is not yet a standard model for how agencies pay for e-procurement services. The job will be simpler, of course, when agencies work with vendors that use a traditional licensing model and just sell the software.

A recent variation that is gaining some traction in the federal market is the application service provider model, in which the agency pays a monthly usage fee to a vendor that hosts and manages the software.

Now there is a third approach. The concept of charging a percentage of the value of each transaction made through an e-procurement site has a history in the commercial market, for example, but no one knows how that will swing in the federal arena.

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