Recommendations of the Texas Comptroller

Develop an Internet-based Electronic Procurement “Tex-Mall”

Summary

Texas’ agencies, local governments, and school districts can save millions of dollars each year and use employee time more efficiently by combining their purchasing power through Internet-based electronic purchasing systems. These systems eliminate paper-based processes and facilitate communication and the adoption of best purchasing practices across organizations. The speed and economies of scale offered by such applications would allow state and local governments to buy supplies and services inexpensively, use staff time wisely, and deliver services efficiently.

Background

The Comptroller’s office estimates that Texas spends at least $10 billion annually on goods and services. The actual total is unknown because of the many separate purchasing systems used in state government and the irregular use of accounting codes by various agencies.

State purchasing, or procurement, is simply the process of buying goods and services for government agencies in compliance with state laws and regulations. The procurement process includes a number of steps:

• Determining a need for a product or service;
• Developing a contract that complies with legal and contractual purchasing obligations;
• Finding qualified vendors;
• Negotiating contracts with these vendors;
• Creating a requisition order or user request;
• Reviewing and approving a purchase order (PO);
• Encumbering the budget—in other words, setting aside money in the agency budget to pay the bill later;
• Issuing a formal PO;
• Changing or canceling the PO, if necessary;
• Tracking delivery of the product or service;
• Receiving the product or service;
• Receiving the invoice;
• Reconciling the invoice to the budget; and,
• Paying the invoice.

With so many steps, errors and inefficiencies are inevitable in a paper-based system. For instance, a 2000 study conducted for the Comptroller’s office found that, in at least one state agency, order confirmations sent to a vendor were mistaken for a second, separate order in about 40 percent of all cases. Another agency’s clerks often left requisition orders in their in-baskets for up to 10 days before processing.[1]

“E-Procurement”

Internet-based electronic procurement (“e-procurement,” or EP) applications are revolutionizing the way in which corporations and governments purchase goods and services. EP is faster, safer, more flexible, and easier to use than traditional paper- and warehouse-based systems; above all, it saves money, time, and manpower. EP makes it possible—and even desirable—to allow every employee to place orders or purchase directly from their computer desktops. Moreover, because purchasing processes are basically the same across agencies, an integrated electronic procurement system can streamline them greatly and save the state millions of dollars in staff time and increased efficiency.

One such Internet-based system is the federal government’s GSA Advantage!™. The General Services Administration (GSA), which runs the system and negotiates the contracts that support it, offers more than 1 million high-quality commercial products and services to federal buyers for immediate purchase.[2] All buyers, whether large or small, in large cities or remote areas, receive the same service, convenience, and pricing.[3]http://www.fss.gsa.gov/schedules Buyers can select among many vendors for a single item, or choose a single vendor for a specialty item.

EP systems offer a quick, sure way to consolidate multiple agencies’ contracts and win better terms. Moreover, they can link potential buyers—including state agencies, local governments, and school districts—to state and federal surplus property inventories, allowing governments to make the fullest use of existing equipment before making additional purchases of new items. Better usage of surplus property also reduces storage and warehouse costs.

In addition, EP could be used to link each state agency’s inventory, accounting, and budgeting systems with the Comptroller’s Uniform Statewide Accounting System (USAS), allowing for instantaneous and comprehensive record-keeping. EP thus can be a one-stop shopping, purchasing, accounting, budgeting and voucher-paying system.

Savings Potential

The extraordinary savings offered by electronic procurement systems come from two sources—the “process” costs of employee time spent in placing orders, and the cost of the goods and services themselves.

Process savings from an EP system can range as high as 90 percent.[4] Before creating its first online purchasing system in 1996, General Electric’s lighting division needed at least seven days to process each requisition order. The process was so cumbersome that the purchasing staff could send out bid packages to only two or three vendors at a time.

With a new GE procurement system called TPN Post, company buyers consolidate all the division’s requisition orders electronically and send off bid packages to suppliers around the world within two hours. Responding bids can be evaluated and awarded on the same day. Going online reduced GE’s labor costs by 30 percent, by giving its procurement personnel six to eight more days each month to concentrate on strategic activities instead of paperwork.

The cost of commodities also decreases, because better coordination of similar purchases increases the volume of commodities being purchased and encourages vendors to offer higher discounts. GE found that its material costs fell by as much as 20 percent because the company could reach a wider base of suppliers and receive larger discounts. All 12 of GE’s business units are scheduled to begin purchasing$5 billion in materials over the Internet by the end of 2000, saving the company$500 million to $700 million—10 percent to 14 percent—over the next three years.[5]

Typical estimates of potential savings for companies adopting EP systems range from 2 percent to 40 percent. The return on investment in an EP system averages about 300 percent, and all investment costs can be recovered within 12 to 18 months.[6]

If Texas combined the enormous purchasing power of all of its agencies, a savings of a just 1 percent on $10 billion in spending could mean an additional $100 million annually for the state. Encouraging all local governments, including local school districts, to purchase their goods and services through the state EP system could generate even greater savings.

Specialty Marketplaces

Vendor participation is crucial to the success of any procurement system. Fortunately, vendors can be accommodated fairly easily through a single Web site that offers access to multiple, specialty marketplaces, such as those offered by FedCenter.com, GovWorks.com and PurchasePooling.com. Such Internet vendors offer discounted goods, such as office products or heavy machinery, to local, state, and federal government agencies, and they host online auctions of government surplus property. They also identify groups of government agencies that want to buy the same products, aggregate their purchases, and negotiate for manufacturer discounts.

The open design of EP systems readily accommodates the inclusion of vendors of all types—large corporations, small businesses, and historically underutilized businesses (HUBs). (In Texas, HUBs are businesses owned by economically disadvantaged minority members or women. The state requires all agencies to make a good faith effort to purchase between 12 percent and 57 percent of their goods or services from HUBs each year.) The result can be an electronic “mall” of vendors accessible through a common Web site.

Costs of Electronic Procurement Systems

Although EP offers significant potential savings, the design and implementation of such systems can be an expensive and complex endeavor.

First, the initial costs of purchasing currently available software to run a system of the size Texas would need could range from $750,000 to $4 million. The software needed to register vendors and keep vendor lists updated could cost another $450,000 to $1.1 million, plus a 17 percent to 20 percent annual maintenance fee. Another $700,000 to $2.5 million would be required to develop links (“interfaces”) between the purchasing system and the wide variety of such systems already in use by state agencies (so-called legacy systems).[7] In all, a fully functional, openly accessible, Internet-based EP system for Texas could cost up to $10 million.

Adoption of an EP system would entail other “costs” in time and effort as well. A high degree of agency coordination would be needed, given the decentralized nature of Texas government, the widely divergent needs of its agencies, and the many legacy systems involved. Furthermore, technology is moving at such a rapid pace that any EP system must be able to evolve and grow. (In the jargon of computer experts, this ability is called “scalability.”)

First Steps

In its ongoing effort to bring Texas government online, the state has already taken several promising steps toward developing an electronic procurement system.

TexasOnline. One step is the development of an electronic “portal” on the Internet that will provide citizens with seamless access to government services. Through a secure Web site, TexasOnline, Texans can renew certain licenses and certifications, file certain sales tax returns, and search for corporate status information 24 hours a day, seven days a week. The Texas Department of Information Resources (DIR) administers this electronic portal to state government. The portal’s framework features authentication services ranging from passwords to mechanisms for the eventual acceptance of digital signatures; scalable architecture, for rapid expansion and application changes; around-the-clock access; the ability to trace transactions; credit card acceptance and other electronic funds transfers; web application development services; call-center services; assistance with outreach marketing to constituents; shared revenue from convenience or premium service fees; and electronic interfaces to the state’s accounting systems and agencies’ other systems. Moreover, TexasOnline offers services in Spanish and English.

TxG2B. At the direction of the 1997 Legislature, the General Services Commission (GSC), the state’s primary purchasing agent, formed an electronic commerce task force, the Texas Government to Business (TxG2B) Coordinating Council, to oversee the state’s efforts to develop an electronic procurement system for the state. The council includes representatives of the Governor’s office, the Legislative Budget Board, State Auditor’s Office, Comptroller’s office, the University of Texas and Texas A&M University systems, GSC, the Texas Department of Transportation, and the Texas Department of Health. The council is self-funded by its participating agencies, as are its efforts to implement an Internet-based TxG2B pilot project.

In February 2000, GSC hired Syscom, Inc. to conduct an electronic procurement pilot compatible with TexasOnline and overseen by the TxG2B Coordinating Council. The first order was placed through the pilot system on April 3, 2000.[8]

Booz Allen & Hamilton, a nationally recognized consulting firm, evaluated the TxG2B pilot system in June 2000 for e-Texas. The consultant’s report described the project as:

...a well intentioned but unfunded effort without the mandate or executive sponsorship needed to drive process improvements to maximize benefits available from the technologies. State participants recognize the potential benefits of delivering these services electronically and have done a commendable job in moving the initiative forward without funding and without many of the project implementation and management elements generally considered to be required for a successful project. Their considerable accomplishments are largely due to their enthusiasm and commitment to process improvement. Much of their work will have value beyond the pilot test phase.[9]http://www.gsc.state.tx.us/elec_comm/ectf.html). (Internet document.)

At the same time, the consultant report criticized the current TxG2B system for its creation of an inflexible, “buyer-centric” marketplace:

The cost and complexity of end-to-end purchasing solutions, and the need to support high transaction volume to achieve return on investment, have largely excluded medium and small size companies from participating.

The consultant added that TxG2B needs to create a marketplace that is available to many participants, large and small.[10]

Challenges to Implementation

The successful implementation of a cutting-edge procurement “e-mall” in Texas faces technical, functional, legal and financial challenges.

Technical: To realize the goal of a Texas EP system, application program interfaces must be developed to integrate existing state computer systems with the new system. These include systems used for budgeting, accounts payable, and inventory, as well as USAS. In addition, the system should be fully compatible with TexasOnline.

Functional: While Texas government is decentralized by law and tradition, this approach can result in unnecessary overlap and duplication of efforts among state agencies. A central coordinating office for electronic statewide initiatives could provide much-needed coordination for cross-governmental information technology projects, and help agencies make the best use of limited resources. To fulfill this role, a Program Management Office (PMO) within DIR is recommended elsewhere in this report.

Legal: Current state law presents another obstacle. To engage all state agencies, local governments, and school districts in a common procurement system, some modification to their existing authority to engage in contracts would be required. For example, Texas Government Code §2155.079 may require changes to allow state agencies to participate in contracts negotiated by federal, local, or other state entities, and vice versa. Other modifications may be needed to other sections of the code to enhance the state’s ability to negotiate certain types of contracts.

Financial: As noted above, the wholesale purchase of an electronic procurement system could be expensive. However, Texas offers a premium marketplace to any system developer, so deep discounts could be expected. In addition, inclusion of as many agencies as possible in the system would allow the state to recover its costs more quickly. To move forward, a reasonable expenditure on technical experts to build interfaces and add necessary software would encourage steady progress.

Texas’ smaller agencies face special obstacles. While there are about 250 Texas state agencies, 230 account for only 20 percent of all state purchases. The majority of state agencies may simply lack the funds, the personnel, or the time to devote to improving their purchasing systems. If the state were to create an incentive fund for these agencies, on a pilot basis, they could move much more easily to conducting their purchases through a common portal such as TexasOnline.

Conclusions

The costs of continuing to support current purchasing processes far outweigh those of moving to a statewide electronic purchasing system.

A comprehensive, Internet-based electronic procurement system would increase the state’s efficiency and save agencies time and money. Vendors would be attracted to such a system since all state agencies, more than 1,000 school districts, 254 counties, and about 1,000 city governments would be scanning the system continually for available goods and services.

Any project of this type and size has inherent risks. The best way to mitigate these risks is to insure that the best practices and lessons learned from previous projects are applied rigorously. This effort would require strong leadership and executive commitments to all phases of implementation, as well as a reengineering of existing business processes and the elimination of regulatory impediments to new technologies. Nevertheless, it can and should be accomplished.

Recommendations

A. The Texas Department of Information Resources (DIR) should work with the General Services Commission (GSC) and other state agencies with substantial purchasing responsibilities to establish a flexible electronic procurement system, linked to TexasOnline, that could be accessed by state and local agencies including school districts.

This system would offer its users access to multiple marketplaces and vendors while providing an adequate system of checks and balances to prevent inappropriate purchases.

Other recommendations in this report propose the establishment of a Program Management Office (PMO) within DIR to coordinate cross-agency electronic government projects. Once created, this PMO should be responsible for working with GSC, the state’s procurement expert, user agencies, and vendors to develop a viable electronic procurement system. The PMO would be best suited to determine how funds should be allocated and could mediate between the needs of users, state regulators, and the private sector. If a PMO is not created, implementation responsibility should rest with the executive director of DIR, and the funds recommended in this report should be appropriated to DIR accordingly.

The PMO could direct and initiate statewide e-government initiatives and serve as a repository for best practices, with a focus on project management expertise. The PMO also would ensure that projects meet the state’s strategic objectives and increase productivity through standardized approaches and reporting on project progress and costs, making it ideal to oversee implementation of an enhanced TxG2B system, or “TexMall.” GSC staff with expertise in procurement and the TxG2B system, at a total current salary of approximately $250,000, should be transferred to the PMO to assist in the implementation at no additional cost to the state.

B. The Program Management Office (or another appropriate department within DIR) should consult regularly with the TxG2B Coordinating Council, the Comptroller’s office, the State Auditor’s Office, GSC’s Vendor Advisory Committee, and representatives from small, medium and large state agencies, local governments and school districts.

The PMO should consult regularly with a select group of agencies and others, including the current TxG2B Coordinating Council, to ensure full development of the TexMall. The Comptroller’s office should be consulted to ensure full interface with USAS and other state financial accounting and property management systems. The State Auditor’s Office should be asked to certify the system. GSC’s Vendor Advisory Committee, composed of a representative sampling of businesses in Texas, should be asked to provide business input. Because this effort is intended to include local governments and school districts, their representatives also should consult with the PMO, as should representatives of small, medium-sized and large state agencies, as defined by number of their employees.

These agencies and governments should provide policy and implementation guidance and help quantify process and commodity savings ensuing from the use of the state electronic procurement system.

Statutory amendments also may be required to simplify the negotiation of information system contracts.

Fiscal Impact

When fully operational, the EP system would be fully supported by transaction fees paid by system participants, both vendors and users. This estimate assumes a one-time startup appropriation of $5.7 million to bring the project to a point where online procurements can begin and payments for transactions and vendor participation can be invested in the system. This preliminary experience would help the PMO determine what additional state investments may be needed to make a system fully functional, after taking into consideration the revenues generated through transactions.

Building the new system as a significant part of TexasOnline, an established Web site that already has around-the-clock capabilities, should help ensure its cost-effectiveness and efficiency.

The costs per transaction of a fully operational system would decrease as additional users and vendors participate in the system. Opening the system to local governments and other users as appropriate, with adequate security controls, would help to ensure cost-effectiveness.

This estimate assumes a total cost of $2.7 million in fiscal 2002 for the purchase of the procurement system and ancillary costs for ensuring workable interfaces with other state systems. In addition, the estimate assumes a need to contract for expertise to implement e-procurement over the fiscal 2002-2003 biennium, at a total two-year cost of $3 million. The estimate assumes that all costs would be paid from the General Revenue Fund.

Savings are expected to accrue rapidly as agencies and local governments begin participating. This estimate assumes savings conservatively at two percent of purchases beginning in 2005. Similarly, general revenue income and agency expenditures from transaction fees cannot be estimated at this time.

[1 ] Texas Comptroller of Public Accounts, A Study on State Purchasing, by the University of Texas Graduate Accounting Department (Austin, Texas, May 2000), p. 8. (Consultant’s report.)

[2 ] US General Services Administration, Multiple Award Schedule Contracts: A Solution for Buying Commercial Technology (Washington, DC, April 2000), p. 6.

[3 ] General Services Administration, Federal Supply Service. “Federal Supply Schedules.” Washington, DC, January 1998 (). (Internet document.)

[4 ] “Internet Economics: A Thinkers’ Guide,” The Economist (April 2000), p. 64.

[5] US Department of Commerce, Secretariat on Electronic Commerce, The Emerging Digital Economy (Washington, DC, 1998), p. 14 (http://www.ecommerce.gov/emerging.htm). (Internet document.)

[6 ] Texas Comptroller of Public Accounts, Contract Reform and Procurement Processes, by Booz-Allen & Hamilton (Austin, Texas, October 2000), p. 59. (Consultant’s report.)

[7] E-mail communication from John Oshinski, Booz Allen, August 2000; and interviews with Gary Miglicco, KPMG, Austin, Texas, November 16-17, 2000.

[8 ] General Services Commission, “TxG2B: Texas Government-to-Business Coordinating Council” (

[9 ] Texas Comptroller of Public Accounts, Contract Reform and Procurement Processes, p. 83.

[10 ] Texas Comptroller of Public Accounts, Contract Reform and Procurement Processes, p. 77.

e-Texas is an initiative of Carole Keeton Rylander, Texas Comptroller of Public Accounts
Post Office Box 13528, Capitol Station
Austin, Texas

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