by Rebecca Lynch

Federal Agency CIOs Could Save Your Tax Dollars Through Supply Chain Automation. They Don’t.

Mar 01, 200113 mins
Supply Chain Management Software

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Learn how federal supply chain automation could save taxpayers money

Find out why the government is falling behind the private sector in e-commerce

Discover what federal CIOs want to do to catch up

MaryAnn Guerra, deputy director for management with the National Cancer Institute (NCI), is in charge of making sure the agency runs smoothly so that its scientists can get on with finding a cancer cure. One of the scientists’ requirements? Getting new microscopes when they need them.

In 1994, Guerra was getting lots of complaints that this basic equipment was taking too long to acquire. At the time, she was cochair of a committee that was looking into ways NCI could improve its efficiency. The scientists on the committee identified procurement as their number-one problem. Not only were they frustrated by how long it took purchasing agents to get them their tools, they thought the old-fashioned, paper-intensive procurement process cost too much. The scientists knew the emerging Internet could be used for purchasing, that it would be faster and that it would save money?money that could be used to fight cancer. They asked Guerra to make it happen.

She did. Guerra’s committee held a competition that led to a partnership with a small private company, Cybersystems Technologies of Towson, Md., to develop an electronic catalog, ordering and accounting system. The IntraMall was born. But after two years of work preparing the site, almost nobody shopped. Only 147 orders were placed through the IntraMall in its first six months of operation. It wasn’t until Guerra made using the site mandatory for the buyers who reported to her that traffic reached critical mass. Last year, with buyers from other groups in the National Institutes of Health (NIH), NCI’s parent agency, also using it, IntraMall logged 12,000 orders and saved more than 90 percent on each transaction.

Online purchasing has already saved taxpayers between $6 million and $8 million, but that’s a drop in the bucket when you consider that last year the IntraMall handled less than half a percent of the $1 billion NIH spends annually on lab equipment. If all such orders were made online, the government could save an estimated $100 million. And Guerra says now that the integration to the NIH financial systems is almost complete, NIH expects to save even more money and cut out more paperwork. Guerra’s e-commerce efforts are being replicated in every federal agency as government CIOs attempt to reap the benefits of supply chain integration. Gartner estimates that the government could save taxpayers a whopping $2 billion annually just by making routine purchases online. That’s at least on par with what leading private companies save on the same types of transactions. (See “Four Strategies,” CIO, Oct. 1, 2000.)

Yet most federal agencies are still treating e-commerce as a set of one-off projects, rather than as a comprehensive strategy to automate their supply chain the way private companies are doing. The government spends $200 billion on goods and services every year?more money than General Motors, the largest company in the Fortune 500, collects in revenues. But it still conducts all but 5 percent of its transactions using paper and the telephone, according to Gartner. The government doesn’t even track in any systematic way how much it spends or how many bills it pays online.

With the potential to save billions just a virtual mouse-click away, why is the government still buying the old-fashioned way? Maybe because nobody is holding a gun to its head. Corporations have to watch the bottom line, but government agencies don’t get punished financially for not saving money. “There’s no one in charge of better, cheaper, faster,” says George Molaski, CIO with the U.S. Department of Transportation (DOT), and cochair of the e-gov committee of the federal CIO council. “That’s the crying need of government.”

Off to a Good Start

The feds’ adoption of e-commerce started the way most government initiatives do: with a study. In 1993, a report by the National Performance Review, an effort to improve government management led by former Vice President Al Gore, said that by consolidating their purchases, agencies could save money through greater volume discounts and simpler administrative practices. Government IT executives concluded they could accomplish those goals through e-commerce. The next year, the Federal Acquisition Streamlining Act, which simplified government procurement rules, mandated agencies to do more business online using a network solution called the Federal Acquisition Computer Network (FACNET). This mandate was short-lived. The Internet rendered FACNET obsolete, and Congress eliminated the requirement to use it in 1995, leaving no legislation to further coax agencies into electronic-purchasing land.

Congress did give e-commerce many champions. The Clinger-Cohen Act of 1996 created CIO positions at each major U.S. department. The law put CIOs at the executive table, with the idea that each department would use IT more like private companies. CIOs promoted e-commerce by building new purchasing systems, like NCI’s IntraMall, which use online catalogs from preferred suppliers and can process credit card orders.

Steven Kelman, a professor at Harvard University’s Kennedy School of Government, was head of the Office of Federal Procurement Policy from 1993 to 1997, when agencies made their first forays into e-commerce. He says agencies automated this front end of the procurement process at the same pace as the private sector. But agencies are falling behind as they try to link online order processing to their financial and inventory management systems?and capture the huge payoff from supply chain automation. Many private sector companies haven’t cracked this nut yet, either, says Kelman, but agencies are at a disadvantage because their back-office systems are older and harder to upgrade.

Losing Momentum

Molaski says the reason agencies have trouble keeping up is that they can’t get Congress and many department executives to give sustained attention to e-commerce. The DOT, which is made up of 14 agencies, including the Federal Aviation Administration and the Coast Guard, has deployed three new purchasing systems since 1995. The department buyers regularly use credit cards for routine purchases, saving $43.2 million in 1999. But even though its official policy is to buy online, not everyone subscribes to it. Two agencies, the Federal Railroad Administration, which has an $870 million budget, and the National Highway and Traffic Safety Administration, which has a nearly $390 million budget, aren’t yet using one of the purchasing systems. And the DOT isn’t keeping track of how much it buys through electronic methods.

Molaski wants help. He blames Congress for not giving his department’s managers bonuses if they save money, and he thinks the same problem plagues other agencies. “We need a kick,” he says. “Managers in industry are rewarded for implementing better, cheaper, faster; managers in government are not,” he says. Most top government executives are political appointees who are judged instead on the success of their public policies. If agencies could set up objectives, like speedier transactions or streamlined procedures, and be rewarded for meeting them, electronic purchasing could be the rule, rather than the exception, Molaski says.

David Litman, a civil servant who is the department’s senior procurement executive, says political leaders would rather fund projects to improve transportation safety than fund ones for internal efficiency. While he didn’t offer a specific example, he notes that the DOT built three purchasing systems because Congress wouldn’t fund a project to build only one that every division could use. Left to its own devices, each unit had to decide how much of its budget, which is, by law, under its own control, to invest in e-commerce. “For smaller agencies, they have to look at what the investment means for them,” he says, and they don’t always conclude it’s worth the money. Meanwhile, Litman says it’s taking time to get buyers?whose work he does not directly supervise?to use the new systems because they’re reluctant to change their work routines.

Some analysts think a head federal CIO, a position endorsed by President Bush and congressional Democrats, could pave the way for agencies to pursue the full benefits of e-commerce. (See “Hail to the Chief…Information Officer,” CIO, Oct. 15, 2000.) Rishi Sood, a principal analyst with Gartner Dataquest in San Jose, Calif., says state and local government agencies are ahead of the feds in supply chain automation because their efforts are better coordinated. “At the federal level, agencies are putting in systems irrespective of one another,” says Sood. “There needs to be a person who tries to set a strategic plan so that people abide by it and do it together.” Jeremy Sharrard, an associate analyst at Forrester Research, doubts a head CIO could coordinate the 1,200 federal agencies. Still, he says, federal agencies “need to streamline and realize volume discounts. Someone at the helm to steer might be an answer.”

No One in the Driver’s Seat

The Department of Defense (DOD) is a good example of an agency that hasn’t been able to execute a strategic plan for e-commerce. A report last July by the General Accounting Office (GAO) said DOD officials in charge of the department’s e-commerce strategy had yet to draft a plan acceptable to all the military services and agencies. Such a plan, the GAO noted, would allow agencies to share e-commerce systems, which, to date, they have developed independently. Furthermore, the GAO said, the DOD CIO wasn’t clearly in charge of e-commerce, which made it hard for him to command the rest of the department to go along with these projects.

The GAO noted that the DOD has made progress toward its goal of paperless procurement. In fiscal 1999, buyers used credit cards to make more than 90 percent of purchases costing $2,500 or less (the limit allowed under law). But the report noted there are no reliable estimates of cost savings, partly because the Defense Finance and Accounting Service, which pays the bills, didn’t start keeping track of how many fewer paper invoices it has to process until 1998. For more complicated transactions, the DOD is issuing nearly all of its solicitations and collecting bids electronically. But the same success isn’t evident at the back end. As of December 1999, the report said, the DOD was handling paper invoices and cutting checks for 36 percent of its transactions. The DOD could be saving even more up front by making more routine purchases through its E-Mall, a set of online catalogs offering military and commercial products, like uniforms and office supplies. In 1999, only $2 million worth of goods were purchased through the E-Mall?a tiny portion of the more than $4 billion market the DOD anticipated. (The DOD counts these purchases differently and reported $150 million in E-Mall sales out of $6 billion bought with credit cards last year.) The idea of the mall is to reduce the cost of supplies through volume discounts from preferred vendors?just like private companies do. But at the time of the report, the DOD hadn’t established many contracts with suppliers. The E-Mall also wasn’t reporting accounting and product demand data to the business managers making the purchases, which, the GAO said, diminished its use, and its benefits hadn’t been quantified.

Arthur Money, DOD CIO, concedes the E-Mall numbers are still low. But he looks at the overall e-commerce picture and sees improvement. “Two years ago,” he says, “the automation of payments was close to nonexistent?other than the issuing of paychecks. [Buying with] credit cards started slow, then most purchasers gained confidence and that’s becoming more commonplace every day.” He says the Army, Navy and Air Force are working together to build integrated purchasing, financial and inventory systems.

That’s overstating the services’ collaboration, says Christopher Baum, vice president for electronic government with Gartner. “The words working together give you the idea that they’re walking hand in hand through fields. It’s more like they’re chained at the wrist, being chased through the woods,” Baum says.

Stan Soloway, who was the department’s deputy undersecretary for acquisition reform until January, when he became president of the Professional Services Council, an industry group, says there’s no doubt the DOD has made progress. “I’m equally certain taking advantage of e-commerce involves all the departments operating together but differently from the way they have historically,” he says. “Implementing successful e-commerce requires everyone?finance, contractors, IT, procurement?to work together.”

Integration Frustration

Government officials say they also face special technical problems. Until recently, e-commerce software like that offered by Ariba and Commerce One required extensive customization to incorporate procurement practices that are unique to government, like audit trails that provide public accountability as to why a particular vendor’s bid was accepted. Early software products were hard to integrate with the agencies’ financial systems, which support government-specific accounting rules. “I don’t think [vendors] fully understood public sector purchasing,” says Forrester’s Sharrard. “At first, I think these companies were only talking cost savings; the government wasn’t interested.”

But even when software supports the agencies’ requirements, they don’t integrate easily with older, back-end systems. “I look at those solutions, and they put me in the business of being a system integrator,” says Litman. “We need a product where they integrate it all without me having to do it.” Litman notes that the DOT tried unsuccessfully to link its new purchasing systems to the old financial systems. It didn’t work, and now the department is installing a new financial system. Supply chain integration was an impetus for buying the new financial system, he says.

Meanwhile, Guerra has been working with NIH CIO Alan Graeff to expand the IntraMall’s capabilities to include purchases that require more approvals than the credit card purchases it currently handles. One option is to build payment applications into the existing IntraMall, another is to buy a new system that includes purchasing and financial functions. A new system could take at least a year to redesign all that the agency has done on the IntraMall, Guerra says. “We could have an integrated IntraMall system up and running in six to nine months.” Graeff was unavailable for an interview.

Now What?

Clearly, the federal government has to do much more to make e-commerce the rule rather than the exception. CIOs say they believe full supply chain automation offers government the same bottom-line benefits as it does the private sector. The billions they would save could be used?depending on your political philosophy?to cut taxes or spend more money on government programs. The question is whether political leaders who set agencies’ priorities and the rank and file who would have to use new systems will start giving e-commerce more than lip service.

Guerra likens the impact of supply-chain integration to the days when PCs landed on everyone’s desk. “Everyone asked themselves, ’Is this really a benefit? I have to change everything. Do I want to?’” she says. “From a business perspective, it was the right thing to do, but that doesn’t mean it’s easy.”

Can they succeed?

“I don’t think they have any choice,” says Soloway.