E-procurement gathers speed: e-procurement brings the experience of Amazon.com to the purchase of academic supplies and equipment--and it's about time. (Technology).

After some spectacular false starts, e-procurement systems are off and running. In 2001, the collapse of Commonfind (after fewer than six months in operation) and demise of Simplexis (one of the first online purchasing companies to concentrate on higher education, acquired by PublicBuy) raised questions about the viability of massive online purchasing enterprises in the higher education marketplace. But other e-procurement systems products and application service providers have succeeded, and that success forecasts little short of a revolution in how colleges and universities will purchase goods and services in the future.

The dot-com bust and general recession of 2000-2001 gets some of the blame for what went wrong with e-procurement rollouts. Funding for new ventures, and confidence in new technologies fell with the economic downturn. And in some instances, suppliers had not come to the new endeavors with much enthusiasm, fearing that e-procurement was geared primarily to give buyers leverage against sellers. What's more, integrating the new online buying systems with existing campus financials systems proved to be more difficult than predicted. But let's face it: In general, the soft economy has led enterprises of all kinds to sharper questions about the return on investment for new IT ideas--and it's led them to defer adoption of those ideas when the business case is not compelling.

NOT JUST PURCHASING

The best of centralization and decentralization. E-procurement is more than just a new, more efficient way to process purchase requisitions. It combines central management of the policies and procedures for acquisitions with decentralization of actual purchases. Institutions of higher education that have developed their own e-procurement systems gradually, such as the University of Delaware, began with procurement credit cards and later added online catalogs of merchandise from preferred vendors. And at many colleges and universities, p-cards have evolved into "ghost-cards"--credit account authorization identifiers referenced in online transactions. But procurement systems began to take their final shape once purchase transactions could be piped directly through an institution's accounts payable system. From requisition forms to the general ledger, the means now exist to control and monitor purchases to an extent never approached under the former, paper-based processes.

Various purchasing modes. College and university personnel authorized to make purchases typically buy most items by consulting an online catalog, where merchandise and prices have been negotiated in advance by the institution. Expensive or special items are put out for bid and are sometimes acquired through a "reverse auction," where suppliers compete online to offer the lowest price and win the business.

UNPRECEDENTED EFFICIENCIES

Streamlining. Online order forms and approvals replace multipart paper forms in e-procurement systems. Approval for many transactions is automated according to purchasing rules and account balance information, removing the need for time-consuming reviews and authorizations by purchasing-office staff. In fact, the most striking characteristic of e-procurement is the drastic shortening of the cycle time from order to receipt of goods. The Glendale Unified Schools District (California) reports approval times reduced by a factor of 100, times to place the order two or three times faster than by paper, and delivery times shortened from as much as three weeks to one or two days. Rules-based and automated transactions via electronic communications eliminate the delays caused by passing paper documents and waiting for approvals and forwarding by staff.

DEEPER CHANGES

Staff changes. E-procurement brings the experience of Amazon.com to the purchase of academic supplies and equipment. The standard of ease and speed of acquisition has been set for all by the model pioneered in the public experience by Amazon and the dot-coms. But at the same time, the role of purchasing-office staff has also shifted dramatically. They now manage relationships with suppliers, set and monitor policies, and train and educate faculty and staff who actually make the purchases. These new duties call on skills that were not necessarily required when purchasing staff were hired. That means that accelerating professional development for those now facing different tasks (those not displaced by automation of procurement) is essential.

Procurement as strategic tool. Then too, procurement--formerly an operational activity--now takes on strategic significance because e-procurement brings the opportunity to create substantial savings in the cost of running a college or university. For the first time, it is possible to set goals for reducing the administrative cost of acquisitions, lowering prices paid for goods and services, monitoring purchasing practices, and reducing errors and waste.

LOOKING AT ROI 

The cost of processing a purchase requisition is commonly said to be around $100, almost of all of which is attributed to labor costs. But the purchase amount for as much as one-third of all acquisitions is under $100, and for 90 percent of acquisitions is less than $500. Small, routine purchases present the biggest opportunity for cost savings simply because they are so numerous and so inefficiently handled by manual, paper-based methods. The savings come not from buying cheaper pencils, but from spending less to make each purchase. Cal State Fullerton has set for itself the goat of reducing purchasing costs from $125 per transaction to $10-$15. Cost-reduction goals tend to range between 30 and 90 percent, depending on the kinds of purchases targeted. Management studies suggest that 25 percent might be a more realistic expectation across the whole spectrum of purchases. Higher-priced items present a different challenge. While fewer in number than the low-priced acquisitions, they offer the possibility of savings through improved item costs--provided that multiple providers can be included in the e-procurement system and will compete to reduce prices. Lining up suppliers and negotiating prices can be worth the cost of staff time spent in the effort.

Maverick buying. Buyers who disregard procurement rules, or purchase from providers not in the system, are the subject of much speculation. Analysts have claimed that "maverick" buying raises the cost of a transaction by 50 percent. They recommend using e-procurement systems to minimize the ability of buyers to go outside approved procedures and suppliers. Others say excessive outside buying may point to problems with the official buying channels, and suggest that finding and fixing those problems is the best way to win compliance from mavericks.

ROI calculations are notoriously difficult for e-procurement. The problem is that few institutions have useful baseline analyses of the total cost of procurement before moving to e-procurement. There is a kind of logical circle: Excellent metrics become possible under e-procurement, but lacking them, the ROI case for the new approach to procurement is very difficult to make.

Willingness to make significant changes in business practices and staff count also has a profound effect on ROI. Academic institutions are more tolerant of their buyers' preferences for vendors than are most commercial companies. While reducing the number of suppliers--or at least putting them in head-to-head competition--makes good business sense, it would run against the habits and culture of a less disciplined approach to managing vendors.

No significant savings can be realized without staff reductions in the purchasing department. If transfers or job eliminations aren't planned, the ROI in e-procurement cannot be strong.

VENDORS AND SERVICE PROVIDERS

The number of e-procurement vendors in the commercial world is large but ever-changing due to mergers and acquisitions. In academia, the field is smaller but also changeable. It is dominated by buying consortiums and service providers to a greater extent than is the business sector.

The hosted procurements company HigherMarkets (www.highermarkets.com), with such high-profile customers as Indiana University and Rensselaer Polytechnic Institute, was bought in June of 2002 by SciQuest, Inc. (www.sciquest.com), which is well established in the field of pharmaceuticals and biotechnology. The company also recently added University of Notre Dame and others to its client roster.

AcquireX (www.acquirex.com) is a procurement network comprising higher ed and K-12 school districts. Its approach to e-procurement spans its own vendors, customers' preferred vendors, open bids and quotes. AcquireX launched a campus-wide installation at Cal State Fullerton in May.

American Management Systems (www.ams.com) is a consulting company specializing in e-business IT applications. Its Buysense product, a "hosted online marketplace," was adopted in 2001 by Arizona State University, in the company's first major foray into the academic market for this product.

Verian Technologies' (www.procureit. com) ProcureIT is e-procurement available as a software product or application service.

While some schools continue to develop their own e-procurement systems, most seem inclined to join a hosted network or acquire software from a provider with extensive experience in the commercial world. ROI appears strongest where the assembling of a substantial network of suppliers has been accomplished, and doesn't fall to the IHE. Already finding ERP a major undertaking for campus IT departments, IHEs increasingly prefer an ASP when they step up to e-procurement.

Tom Warger is a consultant for Edutech International (www.edutech-int.com).