Online shopping offers governments ‘net’ gain
As the commercial world turns more and more to shopping on the Internet for everything from books to computer software, local governments are beginning to appreciate the benefits that Internet-based purchasing offers. Making acquisitions without poring over stacks of paper purchase orders or digging through overstuffed storage sites accomplishes the ever-present goal in government operations: saving time and money.
The benefits of electronic commerce — or e-commerce — are myriad. For example, agencies can expand their lists of suppliers, creating more competition and the potential for better pricing. Additionally, online transactions increase efficiency for government workers as well as residents, who may be able to pay parking tickets, file taxes or purchase items from the city or county without ever having to stand in line at a government office.
Moving to the all-inclusive electronic format, however, requires many steps, including locating and purchasing the appropriate software, developing lists of vendors and establishing security measures. While private companies have successfully used e-commerce, seemingly sprinting through the many steps to implementation, local governments may find baby steps more appropriate for acquiring and setting up their e-commerce systems.
At a time in which Year 2000 compliance takes precedence over any new technology projects, many government agencies may place e-commerce on the back burner for several more years. But there are ways, such as through online RFPs, for local governments to delve into e-commerce at a low cost and create a foundation that can be built upon later.
Follow the leader Thus far, Los Angeles County, Calif., is the local government leader in creating an automated county-wide purchasing system. The county started implementation of the online system in February 1998, and began using it Sept. 28.
Because the county has 80,000 employees in 36 departments supporting 9 million people, it is always looking for ways to cut costs. In 1997, the county spent more than $650 million on goods and services using paper-based systems. With the online system, the county will be able to reduce inventories, expand its number of suppliers to include more small businesses, and streamline the entire procurement process.
As a result of the new system, the county has closed its 250,000-square-foot central inventory warehouse, a move that will save $29 million over the next five years. (Additionally, the county may generate as much as $9.5 million from the sale of the facility.)
“We were compelled to become a pioneer in online purchasing because we knew there was big money [involved],” says Chrys Coulter, project director of the county acquisition management information system (CAMIS). “We are very cost-conscious. The new technology can improve operations so much and save so many dollars.”
The $2.2 million implementation cost is expected to be recouped quickly through new productivity savings and volume-based purchases. The county expects to save 5 percent just through comparison shopping from an expanded list of vendors.
The online system gives the county an advantage with suppliers, Coulter says. “Governments have a credibility problem with private companies. If we can show businesses that we’re running government more efficiently, that aids our credibility with constituents,” she explains. The county also will be able to better manage its purchases. “In the past, we couldn’t audit the agreements and purchases. Now we have that ability,” Coulter says.
Additionally, the new system has allowed the county to open the door to include more small businesses, including companies that offer only a few products. “It’s difficult to work with small businesses and balance the administrative costs [with a paper-based system],” Coulter says.
The process Once a city or county decides to develop an online purchasing system, one of its first steps is to compile a list of vendors. For Los Angeles County, that required going through boxes of old contracts to update the purchase agreements. The county started its online system focusing only on county-wide commodities such as office supplies and computers — products every department uses. “It took a lot of work to pull it together,” Coulter says.
Next the agency must determine how to move vendors to an electronic format. Some vendors may be able to receive electronic purchase orders while others may still depend on paper. The county can work with any vendor that has a computer with a web browser, Coulter says.
Not surprisingly, most computer companies have activated electronic purchasing for their customers. For many government customers, purchasing software electronically is a good example of a “baby step.”
Agencies also will need to build catalogs for the different vendors so that purchasers can browse and compare prices for products, which are listed by commodity codes. Coulter says Los Angeles County’s employees encountered difficulties in learning commodity coding procedures and standards, which all county-wide users are required to learn. “Commodity coding is one of the most difficult aspects to deal with,” she says. Because inventory and product availability are constantly changing, the catalogs will require frequent updates. In fact, the number of companies that offer e-commerce software is growing constantly, and many software packages have management capabilities that allow for the organization of vendors and products.
Additionally, e-commerce provides an opportunity for public-private partnerships. Los Angeles County partnered with Commerce One, Walnut Creek, Calif., for its e-commerce system. Their agreement requires the company to manage the catalog content, saving the county the upkeep.
Shopping savvy The web-based desktop application used in Los Angeles County requires users to have a web browser, from which they can log onto the county purchasing system. Users can view products from multiple suppliers, compare prices, check inventory, arrange shipping and make their purchases all from their desktops.
They are limited, however, to shopping only from certain catalogs. For example, Coulter says, the sheriff cannot order medical supplies, and health workers cannot order guns. Once the items are selected, the application will create a purchase order, which is routed via e-mail to the person who needs to approve it.
When the order is approved, it is automatically sent to the vendor. Many vendors have integrated software that allows the order to automatically flow into their purchasing systems, thus bypassing the time-consuming task of typing in orders.
Security is an important component of any e-commerce system. However, protecting the public entity and vendors is, for many systems, a non-issue. For example, the system used in L.A. County operates from a Microsoft platform with built-in security layers. Security is particularly important when the time comes for payment. Payments in commercial electronic transactions usually occur via credit card. (Secure formats encrypt the credit card numbers so they cannot be viewed by unauthorized parties.) In fact, in 1997, credit cards were used to pay for 42 percent of all Internet purchases, according to the Bank Administration Institute, Chicago.
Because of transaction fees, however, Coulter says that credit cards are not the best choice for the public sector. Los Angeles County still is working on the invoicing and payment aspects of its system, but officials soon expect to move to electronic bill payments and funds transfers to handle payments to vendors. (The financial portion of the system has been held up because of Y2K projects.)
Help is on the way While some governments are ready to dive into online procurement, others may be wary of a system that is relatively new in the public sector. Support and guides are crucial to the success of an online purchasing system.
Recently, Public Technology, Inc., and the National Institute of Government Purchasing, both of Washington, D.C., developed the EC4GOV program to assist governments in implementing e-commerce systems. The program offers starter kits, software packages and services to introduce e-commerce in government forums.
Users are assisted in preparing and broadcasting requests for quotes to potential suppliers, analyzing quotes, sending electronic purchase orders and exchanging transactions. The program also includes training, education and consulting services. To further assist government agencies, a report recently issued by three Washington, D.C.-based organizations — the National Association of State Information Resource Executives, the National Association of State Directors of Administrative and General Services and the National Association of State Purchasing Officials — lists the best practices for online procurement and bids. “Buying Smart: Blueprint for Action” targets state and local governments interested in building an infrastructure for e-commerce. The report also includes guidelines for developing partnerships with vendors.
Getting their feet wet State and federal online business projects provide good models for local governments, according to Dave Chesebrough, deputy program manager for the Fairfax Electronic Resource Center (ECRC) in Fairfax, Va. The national ECRC, funded by the Defense Logistics Agency, has 16 centers across the United States to assist small and medium-sized businesses in building an e-commerce infrastructure. The centers target businesses with interests in government and provide training, education and technical support to allow them to get started with e-commerce now.
“There is sufficient practical experience in the country and in government that there is no reason to wait on e-commerce, unless there is a financial difficulty,” Chesebrough says. But not everyone agrees.
While larger counties, such as Los Angeles, have the capacity to implement online procurement, it may be too early for others to jump on board, according to Don Speer, commissioner for Kentucky’s department of administration finance and administration cabinet and Blueprint task force member. “E-commerce is changing so much. I think it’s premature for a small government to get into e-commerce,” he says. “But it’s important for locals to follow e-commerce because, in the future, the majority of procurement, including payment, will be conducted on the Internet.”
It may be easier for local groups to “get their feet wet” in smaller ways, such as posting RFPs on the Internet, says P.K. Agarwal, chief information officer for the California Franchise Tax Board, Sacramento. “It’s not necessary for smaller jurisdictions to jump into the serious business transactions of e-commerce,” he says. “But it’s a win-win situation because they will save money.”
In Montgomery County, Md., for example, the RAPID system focuses entirely on bids and contracts. For a flat rate of $100 for two years, vendors can subscribe to the RAPID system to access information about potential contracts. “Companies don’t have to visit each procurement office to find out what’s available,” says Gregg Chottiner, information officer for Montgomery County. “And it’s allowed us to discontinue the process of mailing information to the vendors.”
Cost savings have been realized by minimizing postage, mailing, travel and staff. RAPID also has provided a networking opportunity for the county. More than 30 counties have links to the system allowing them to post their bid packages online, Chottiner says. Electronic tax filing is another way for cities and counties to dive into e-commerce. Pittsburgh and Cincinnati allow residents to download tax forms from the Internet and get their questions answered online. Pittsburgh is testing its tax filing system and plans to have it operational in time for 1998 tax filings.
The many options available in the world of electronic commerce provide an opportunity for almost any city or county to sample the new procurement technology, if only in small increments. Although Los Angeles County’s needs do not compare with those of most local governments, the county’s success with its purchasing system can serve as a model for others.
For governments with technology cost concerns, including Y2K issues, any opportunity for potential savings may be worth exploring. Implementing an online procurement system may provide the cost-effective solutions many local governments seek.
On Oct. 21, 1998, President Clinton signed a bill that affects the entire Internet community. The Internet Tax Freedom Act (ITFA), introduced by Rep. Christopher Cox (R-Calif.) and Sen. Ron Wyden (D-Ore.), allows lawmakers a three-year “time out” period to determine whether and how Internet service , purchases and other transactions should be taxed.
During that time, no new taxes on the Internet will be allowed. However, existing state and local taxes have been “grandfathered” in to allow their continuance. Introduced in March 1997, the bill was unanimously approved by the House of Representatives in June and by the Senate by a 96 to 2 vote in October.
Highlights of ITFA: * Tax-free internet access. Millions of Americans subscribe to Internet access services such as America Online or MindSpring, paying roughly $19.99 per month for unlimited access. ITFA prohibits state or local taxes on the service fee or e-mail transmissions. * Clarification of sales tax policy. Products currently purchased over the Internet, such as books or clothing, which could normally be purchased and taxed in any retail store, can be taxed. * Establishment of an Advisory Commission on Electronic Commerce. The commission of 19 representatives from federal, state and local governments, the electronics industry and consumer groups will study taxation of Internet commerce for no longer than 18 months and submit a report to Congress.
Because the Internet has no geographical borders, lawmakers must consider a complicated set of tax questions. For example, during Internet sales, should the tax of the company’s headquarters state be applied? Or should the tax of the consumer’s home state be applied? If the purchase is made by a foreign consumer, what tax is applied? Additionally, many users are fearful of being subjected to several taxes for a single purchase. Lawmakers have three years to determine the best way for vendors to proceed with Internet taxation. The act is effective through Oct. 21, 2001.