E-Commerce: Business. Technology. Society by Laudon / Traver
        Chapter 12

Business-to-Government (B2G) E-commerce

Total government, or public sector, spending was reported by the U.S. Bureau of Economic Analysis to be $1.5 trillion in 1998, 17.5% of the GDP (gross domestic product). In 1999, only $5.5 billion of this commerce was conducted online. The government, traditionally slower to adopt new methods of doing business, burdened with regulations on bidding, and recuperating from massive spending for Y2K adaptations, did not immediately jump on the e-procurement bandwagon. However, increasingly from 2000 until the present, companies have recognized the huge opportunity that exists for selling office supplies, computers and related equipment, software, MRO goods, medical supplies, and many other goods to the government. In December 1999, the Clinton administration adopted an e-government program that aimed to move all government procurement online by 2003, and in June 2000 Clinton issued an executive mandate requiring federal agencies to provide access to their services online including the facilitation of online procurement. These efforts encouraged firms to enter this potentially lucrative market. One of the entrants in 2000 was eFederal, a B2G e-procurement portal launched by BuyNow, a provider of e-commerce services for sellers. A year later Ariba, a leading B2B software platform and service provider, teamed up with eFederal to form an online B2G marketplace. eFederal began using the Ariba Marketplace solution, was recognized as a Certified Ariba Systems Integrator (CASI), and began offering its e-procurement technology services to Ariba's government customers. This marketplace offered spot purchasing for indirect goods including over 134,000 computer and office products for the government and the DOD (Department of Defense). Ariba was likely drawn into the B2G arena by the publicity surrounding the possibilities for profit in the sector following the Clinton initiatives and by the fact that a Gartner Group report revealed that approximately 77% of government CIOs (Chief Information Officers) in 2001 said that within the next three years they would begin online purchasing programs in their agencies or departments. This alliance created a platform for government agencies to build their own customized marketplaces with the suppliers they wanted and the ability to concurrently purchase goods from multiple suppliers. However it did not succeed. Several other startups including Digital Commerce Corp also failed. The market proved to be more difficult than these startups had anticipated due to several factors. First, B2B technologies required customization for the public sector market, which resulted in more time and higher costs pre-startup. Second, government agencies have strict requirements including those for budgetary control, and they must follow the Federal Acquisition Streamlining Act of 1994 and the Federal Acquisition Reform Act of 1996. Third, government agencies are often unwilling to change their business processes to create a fit with e-procurement systems. The dot-com shakeout and the economic downturn of 2001 combined with the uncertainty created by the change in the federal administration were also factors as venture capital to fuel continued efforts dried up and suppliers became hesitant to test the B2G waters.

Another entrant into the B2G sector in 2001, Digital River (www.digitalriver.com/), an outsourcing service provider, concentrated on its already established digital commerce and software customers, offering them a way to enter a new sales channel. Joel Ronning, Digital River's chief executive officer said at the time that the company's own market research and e-commerce experience backed up research by Gartner which forecast that government spending for software would rise 8.5% to more than $6.9 billion in 2002. The Minnesota-based company already had 8000 clients including 3M, Symantec, and Novell, as well as a number of government resellers and felt that the expansion into the B2G sector was a good fit for its well-established e-commerce system. Analysts warned that the slowing economy was a double-edged sword. On the one hand, decreased tax revenues would encourage government agencies to cut costs, while on the other hand it would hinder spending initiatives, for example, those needed to secure the technology for e-procurement processes, as well as for new software. Competitors for Digital River include big names such as Microsoft, Siebel Systems, and Oracle, which have been selling to government agencies for a number of years.

E-procurement initiatives are not limited to the federal government, although the federal government has taken the lead. State and local governments are also beginning to slowly move purchasing operations online to try to reap the purportedly up to 20% savings that can be garnered from e-procurement. However, certain challenges and potential pitfalls await firms attempting to service bureaucracies at any level. Although the technologies are the same as in the B2B sector and the benefits to politicians who advocate instituting programs to save tax dollars could be great, government employees themselves may have little incentive to push for e-procurement programs that could possibly lead to job cuts. Interdepartmental cooperation is needed in an environment where there is traditionally minimal communication between departments. Oversight of government spending is undertaken only by taxpayer/voters and the possibility exists that they could reject the initial technology costs without considering the long-term benefits. Furthermore, large bureaucracies tend to be cautious and resistant to change, and in the case of government agencies, they may require legislation in order to proceed. For firms attempting to set up a multi-vendor e-government marketplace, some current suppliers may resist any change in their operating procedures, the technology can vary widely from one government agency to the next, and much of it may be outdated. Several states have already enacted e-procurement systems including Massachusetts in Fall 2001, (www.mass.gov) California in March 2001, (www.pd.dgs.ca.gov/), and in June 2000, the state of Washington (www.ga.wa.gov/pca/ups/upshome.htm), which used the BuySense software (www.buysense.com) developed by American Management Systems (AMS) in its pilot program called TUPS (The Ultimate Purchasing System). Washington is illustrative of the problems that can occur in the B2G sector. In April 2002, the state decided not to renew its contract with AMS due to budgetary constraints (a hiring freeze and other cutbacks), lower than expected employee time savings, and because the system did not prove to be user-friendly enough for either employees of the state or the suppliers who were brought online. Because the system proved so difficult to use, General Administration determined that it would in fact not only take considerable time on the part of existing employees but additional staff to keep the project running. Washington is currently focusing its efforts on trying to create an online system that is simpler to use and can be used both by General Administration and other state agencies. Cami Feek from General Administration says that the state of Washington is currently, "pursuing other technology initiatives, such as centralized vendor registration and bid notification as well as reverse auctioning that are designed to make the procurement process easier for our vendors as well as our customers". On the other hand, the Department of the Navy has had a relationship with MasterCard since late 2000 for e-procurement in the "micro" range (under $2500). This program has already resulted in substantial savings both on purchases and on employee time spent on the purchasing process.

In January 2001, a Jupiter Media Metrix study confirmed that the B2G sector offered a potentially lucrative market for successful entrants and that the federal government would continue to lead in the adoption of e-procurement activities. However, state and local governments, which actually offer the greatest business opportunity because the total outlays are larger, will be much slower to take their purchasing online. Jupiter attributed the expected growth of the B2G sector to the Clinton executive mandate, the need for government agencies to adjust to new ways of conducting business as their traditional vendors move to digital transfer methods, the increased availability of goods online, and the transfer of government purchasing to credit cards and electronic formats as EDI (electronic data interchange) systems are upgraded to enterprise management systems. Jupiter warned that the fragmented state and local procurement markets could restrain the e-government movement and predicted that state and local government e-procurement would not exceed federal online purchasing until 2003. State and local B2G spending is forecast to rise by 104% to a total of $178.5 billion by 2005, while federal B2G spending is predicted to increase to $107.6 billion by 2005. The majority of all government spending is for services rather than goods, but in this area Jupiter believes that online purchasing will be hindered by several factors especially the lengthy RFP (request for proposal) process that accompanies the procurement of services. Transferring this complex procedure to the Internet is expected to be difficult and expensive and therefore firms will prefer to wait for the government to make this investment. Jupiter believes the most efficient way for this to be done is for the federal government to develop a single software solution using resources from the budgets of numerous departments and then introduce it to the different branches. Still, Jupiter expects that the e-procurement of services will grow more rapidly in the next 3 years than the e-procurement of goods, predicting a compound annual growth rate of 81% for goods and a CAGR of 128% for services.

By the end of 2005, Jupiter predicted that approximately 46% of all federal spending for goods would be conducted electronically, while 34% of all state spending for goods would be online. However, although the adoption rate is expected to be lower at the state and local levels, the total dollar amount is expected to be substantially larger ($103.1 billion at the state and local level compared to $57.2 billion at the federal level). State and local adoption of e-procurement will likely not be as rapid because the federal government has a substantial IT budget that the states cannot match and the ability to share resources and simplify procedures that makes the channel shift more manageable at the federal level.

All vendors with approved contracts with the US General Services Administration (GSA) were required to list their products on the GSA Advantage Web site (http://www.gsa.gov/Portal/content/offerings_content.jsp?channelId=-
) by July 2001. This raised the number of online vendors from 4,000 to 9000, but still only 0.2% of all GSA contracts are conducted online. A May 2001 Jupiter Media Metrix report found that state and local agencies with generally meager allocations for IT spending were conducting most of their online purchasing at e-commerce Web sites rather than through a B2G portal. For example, they found that schools were likely to make purchases from online bookstores or office supply outlets, rather than using an in-house e-procurement system. Although not backing off of their predictions from earlier in the year, this report presented more impediments for firms wishing to enter the B2G market. In this report Jupiter reveals that suppliers face such obstacles as unwieldy processes and buyers that are scattered throughout many different agencies. Government regulations often require an approved price list or a competitive bidding process and agencies often cannot provide the tools needed to convert a suppliers' online catalog to a format that will function with the connections they use. Jupiter cautions that entrants into the B2G sector must be aware that price is not the only consideration in government purchasing decisions. Government administrators often must give equal consideration to the fairness of the bidding process and to whether or not equal access has been afforded to all participants. Some agencies will choose a small business or a minority or female owned firm over the low bidder. Furthermore, prices cannot be set below the best available price for the private sector.

Still, Jupiter's' predictions in this report remain the same as in the January report. Here they forecast that total B2G spending will reach 286.1 billion by 2005 (See above: $178.5 billion for state and local plus $107.6 billion for federal).

Also included in this report is an assessment of the prospects for B2G growth under the Bush administration. According to Jupiter, President Bush purports to support moving government purchasing online while only allocating $100 million over a three year time period towards its deployment. At the state level, Jupiter believes that online purchasing initiatives are often being pushed by elected officials who see e-government proposals as politically advantageous, but at the same time posits that in most states Internet taxation is being more intensely debated. One new positive development in this report is that several state governments (California and South Carolina) have begun to allow localities and municipalities to use state e-procurement systems on a contractual basis; for example, enabling counties, cities, school districts, and even non-profit agencies to purchase goods for the prices agreed upon between the supplier and the state.

Jupiter advises in this report that the federal government should develop a standard interface for e-procurement because this is lacking at present and it is impeding suppliers from entering the market. Once a standard interface is adopted, Jupiter believes it is likely the states will follow their lead. This will ensure that suppliers can use the same connection for every agency. They also caution that current government suppliers must not wait to invest in e-procurement systems or they will risk being permanently competitively disadvantaged. They further advise newcomers to proceed with caution, starting on a small scale to learn the ins and outs of dealing with government rules and regulations, including navigating the approval and RFP (request for proposal) processes and the requirements for an acceptable online catalog. Finally, they counsel suppliers to become members of systems in which they can sell to numerous agencies or departments such as states that enable their cities and counties to purchase within their systems as mentioned above, or supplier networks such as Epylon (www.epylon.com) Simplexis, (www.simplexis.com), Onvia/DemandStar (www.demandstar.com), or NIC Commerce (www.niccommerce.com) which connect vendors with many agencies.

Additional Sources:

Catinericchia, Dan. "Ariba, eFederal Form B2G Marketplace." Federal Computer Week (January 31, 2001) http://www.fcw.com/fcw/articles/2001/0129/web-efed-01-31-01.asp

Furth, John. "Uncle Sam Wants B2G." Line56.com (February 21, 2001) http://www.line56.com/articles/default.asp?NewsID=2197

iSource "The Attack On Our Government." (January 29, 2001) http://www.isourceonline.com/article.asp?article_id=655 Jupiter Media Metrix. (Preston Dodd, Robert Rakowitz, Lead Analysts), "Government Online Spending and Services" (February 15, 2001)

Jupiter Media Metrix. (Tim Clark, Lead Analyst) "Suppliers Should Target States, not Feds, for Government E-Procurement." (May 11, 2001)

Seben, Larry. "Digital River Flows into E-Government Sector." CRMDaily.com (June 13, 2001) http://www.crmdaily.com/perl/story/11206.html

TUPS Project Update (April 4 2002) http://www.ga.wa.gov/pca/ups/weekly_update.htm

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