E-Invasion

alaurent@govexec.com

That giant buzzing you've been hearing recently is the sound of Internet dot.coms swarming the government market. Following the success of business-to-consumer (B2C) Internet e-commerce sites such as eBay, Amazon.com and E-Trade, dot.coms moved swiftly into the business-to-business (B2B) market last year. Some are helping companies streamline and automate purchasing. Others are building marketplaces where buyers and sellers come together online to strike deals, conduct auctions and swap information. These new bazaars move well beyond the electronic data interchange networks that once were the only e-links between big buyers and their suppliers. Now B2B firms want a piece of the business-to-government (B2G) action.

By building malls on the World Wide Web, dot.coms make it fast and easy for suppliers and buyers in an industry to connect. By linking Web-based transactions with companies' internal accounting and finance systems, dot.coms drive paper forms and repetitive data entry out of purchasing. By stockpiling and presenting data on thousands of purchases, dot.coms enable organizations to better understand what their people are buying and to use that knowledge to strike better deals with suppliers.

Recognizing that dollars saved in the purchasing process show up directly on companies' bottom lines, venture capitalists and the stock market initially showered B2B dot.coms with good will and cash. Some of that fervor tapered off during the e-commerce stock market correction in March, but B2Bs still are considered promising investments.

The B2B market exploded because companies can save so much money by moving purchasing of manufacturing supplies and operating resources onto the Internet, reducing redundant paper forms, speeding payment and accounting, and improving buyers' ability to compare prices and sellers' ability to present products. In addition, the Internet permits real-time bidding wars in which sellers compete on price to win buyers' orders. Boston-based Aberdeen Group, a consulting firm, found that most businesses realize a 300 percent first-year return on investment in Internet procurement.

After feasting on lucrative B2B opportunities for a year, dot.coms spent the first half of 2000 launching forays into federal procurement offices. "I've got 56 dot.coms coming in telling me what they can do for me," says Gary Krump, deputy assistant secretary of acquisition and materiel management at the Veterans Affairs Department.

Like bees to honey, B2Gs are drawn to Uncle Sam's $200 billion annual tab for goods and services. Most dot.coms collect a percentage of transactions conducted using their Web sites, software or services. With approximately 31 million procurement transactions in fiscal 1999 alone, the federal government is ripe for the picking. Rishi Sood, principal global public sector analyst with GartnerGroup, a technology consultancy in Stamford, Conn., predicts federal, state and local government spending on e-government hardware, software and services will grow from $1.5 billion this year to $6.5 billion in 2005. Upwards of $4 billion of that will be spent to enable interactions with businesses.

B2B to B2G

Government buying is quite different from private sector purchasing, however, and that makes for a rocky transition from B2B to B2G. While businesses buy to bolster the bottom line, government buys not only to provide goods and services to citizens, but also to achieve a host of social and economic goals. Supporting small, women-owned and disadvantaged businesses, employing people with disabilities, providing work for federal prisoners, keeping certain industries afloat, making sure veterans have jobs, favoring American enterprises, keeping felons from pocketing taxpayers' dollars, ensuring fair competition and a long list of other policy goals make federal procurement a rule-bound and confusing exercise-even now, when the government's purchasing system has been reformed and streamlined. That's why most dot.coms are alighting on the least-regulated portion of government buying: goods and services bought with agency purchase cards.

Purchase card use has exploded since 1989, rocketing from 2,200 transactions worth $460,000 to 21 million worth more than $10 billion in fiscal 1999. The number of cardholders has grown from 10,000 to 500,000. Most purchase card use is below the micropurchase threshold of $2,500. Under acquisition reform, micropurchases can be made without considering most socioeconomic policies or soliciting competitive bids.

The lure of even a small transaction fee on just a portion of government's purchase card transactions has drawn a plethora of dot.coms. Some offer Web-based malls where, at no charge, federal cardholders can compare prices, primarily for information technology hardware and office supplies-FedCenter.com is among the best known virtual malls. Other firms, such as NIC (National Information Consortium) Commerce, build Internet malls behind agency firewalls offering online shopping at vendors on contract with the agency, as well as on other contracts it is qualified to use. This model offers agency procurement officials more control of where cardholders buy and allows better tracking of purchasing data that can be used as pricing leverage. Resellers, companies that sell mostly technology products from a variety of manufacturers, also are "malling" their Web sites in the hope of moving purchasers off the phone and onto the Internet to reduce sales costs.

GTSI, a technology reseller, is refurbishing its Web site to become the company's primary link with customers. ITC (formerly known as Intellisys Technology Corp.) is planning to draw potential buyers using a new Web site, Planetgov.com, offering news and other federal content.

The firm recently hired Mike Causey, former "Federal Diary" columnist at The Washington Post, as well as Nancy Ferris, Government Executive's former technology editor. Thomas Meagher of Scott and Stringfellow, Inc., a Richmond, Va., equity research firm, calls the Planetgov.com strategy "a bit nebulous."

"The company is behind other, better financed, competitors . . . so it remains to be seen whether Planetgov.com can make up time, keeping in mind that in the world of the Internet, those who are first to market are usually the ones who win," Meageher wrote in an April B2G analysis.

Planetgov.com's "community hub" approach is similar to that of Digital Commerce Corp., which, in addition to FedCenter.com, offers MyGovClub.com, a site providing news, online shopping, financial and health information and moving services to federal employees and their families.

Advantage Advantage!

The granddaddy of federal Internet malls is the General Services Administration's Advantage!, which went live in 1995. There, 2,221 of the 7,875 vendors on GSA schedules sell nearly a million products and services online. Through April, Advantage! sales totaled $10 million for this year. In response to dot.com competition, Advantage! is retooling its search engine and adding features, though the GSA site already has a valuable built-in advantage in that it is government-run and is guaranteed to adhere to federal procurement rules. Dot.coms resent GSA's edge, but know they must work with the agency to get a foot in the market. "GSA should let the schedule [contracts] and leave the private sector to create the tools to buy from them," says Tony Bansal, president and CEO of Digital Commerce Corp.

Ed O'Hare, chief information officer for GSA's Federal Supply Service, which runs Advantage!, says changes to the site will increase its attractiveness to federal users. For example, under the old procedure, an Advantage! search for "camera," turned up a daunting data dump of nearly 6,000 matches. "That's ridiculous," says O'Hare. The new search system slated to be in place this year will allow users to view categories of items, homing in quickly on the small number of products that truly fit their needs.

For contracting officers more likely to be buying large quantities of items on Advantage!, O'Hare has added eBuy, an automated request for quote system slated to debut June 1. As opposed to searching Advantage! and then issuing purchase orders to the appropriate vendors, buyers using eBuy simply state their requirements and have vendors bid for them. NIC Commerce is building eBuy for O'Hare.

FedBid.com, a private B2G venture, plans to debut a similar system this spring. Not only will it allow federal buyers to fill virtual shopping carts with desired items, but it will provide a form of reverse auctioning, in which vendors will compete to offer the lowest prices on a given set of products. The system also will let buyers aggregate purchases to get volume price discounts. "One person wants to buy a carton of paper, another wants two, we aggregate them and allow them to pool their requirements or to become an opportunity for others to pool to," says FedBid.com chief executive officer Phillip Fuster.

FedBid's aggregation of purchases is likely to quickly elevate a total buy above the micropurchase threshold of $2,500 into the $2,500 to $100,000 range, in which all purchases are reserved for small businesses. But Fuster says this will not be a problem for agencies. "We are aggregating the buys, not the agencies. If 90 opportunities are aggregated, the vendor responds one time against 90 RFPs. When you join a pool it is not becoming one buy. If four agencies join, we send one quantity to the high bidder, but four different orders."

Small businesses complain that e-commerce already is knocking them out of competition. Many lack the technology to handle electronic transactions, let alone to make product and service catalogs electronically available. Jere Glover, chief counsel for advocacy at the Small Business Administration, told the House Small Business Committee in April that only 1.4 percent of Internet use among small businesses is directed to e-commerce sales. So far, small businesses say the cost of establishing e-commerce capability isn't justified by the return. To help solve this problem, GSA has created SmallBizMall.gov, a B2G site offering IT products and services exclusively from small and disadvantaged businesses.

"Small and medium-sized businesses are the victims in the e-commerce world," acknowledges Digital Commerce's Bansal. He argues that FedCenter can help level the playing field. "What they get [from FedCenter] is a $1.5 million e-commerce application and a site that would cost them between $5,000 and $10,000 to set up. All they need is Internet access. If not, we will get them a $500 PC and be their Internet service provider." Bansal boasts that on FedCenter's "yellow pages" small and large business sites are indistinguishable to shoppers.

Nevertheless, some companies shy from the cost of a FedCenter storefront. GTSI, for example, has hesitated to join Fed center's mall. "The setup cost plus the purchase card surcharge and FedCenter's percentage of each transaction adds up to more than the profit margin in IT hardware," says Betty Greene, director of GTSI.com.

Small business issues aren't the only obstacles for dot.com firms. In 1989, for example, the federal government created criminal penalties for disclosing information about companies' bids on federal purchases. Part 15 of the Federal Acquisition Regulation also had included a ban on auctioning during discussions with bidders who had submitted proposals. The 1997 rewrite of FAR Part 15 eliminated the auctioning ban, though it retained a prohibition on releasing bidders' prices without their approval. For this reason, FedBid notifies vendors whether their bids on a given buy are lagging or leading, but not the amounts of competitors' bids. "We operate within the FAR," Fuster says.

Aggregating Demand

Despite possible legal and practical hurdles to pooling federal customers' demand, the government itself is getting into the business. Emmanuel "Manny" DeVera, director of GSA's Federal Technology Service Regional IT Solutions, has cranked up Buyers.gov, a site for private buyer reverse auctions, reverse auctions of pooled orders and online shopping. DeVera says FTS will test the new site through December, focusing on printers, PCs, laptops and monitors.

Buyers.gov is targeting purchase card users, especially those whose pint-sized buys prevent them from getting the best prices. "Competition for front-line employees' business needs to be more intense," says Dennis Fischer, former FTS chief and now vice president with VISA USA. "We need to bring to them the ability to make decisions for themselves." But giving buyers choices among online purchasing, auctioning or pooling demand doesn't mean they can't use more traditional models, DeVera says. "If they want an item right away, they don't have to aggregate their demand. But our studies show most customers buying commodities can wait two to three days to two weeks. Volume buys can take place in hours or days."

DeVera predicts that live online pricing will in many cases replace older forms of procurement such as long-term, open-ended contracts for regularly purchased items (known as indefinite-delivery, indefinite-quantity, or IDIQ, contracts) and blanket purchase agreements (BPAs) against the GSA schedules. "The market price changes and technology changes and BPA prices become obsolete," DeVera says. "Open, dynamic pricing-where sellers see an actual commitment from buyers so buyers get current prices-obviates the need for BPAs and IDIQ [renegotiation]."

Buyers.gov might draw buyers away from GSA Advantage!, DeVera concedes, but he still plans to use the GSA schedules to execute buys. "We're the schedules' biggest customer," he notes. DeVera has struck deals with private firms to set up the site at no cost. They will collect a percentage of transactions conducted on the site. Buyers.gov partners include Oracle; ACS, an IT solutions firm that is partnering with SupplierMarket.com and Volume-buy.com to offer aggregation and reverse auctioning; suppliers.com; mobshop.com; Electronic Data Systems Corp. and its partner eBreviate.com; CIS Global; KPMG; Frinctionless Commerce; Spectrum International and FreeMarkets.com.

Auction Action

FreeMarkets, located in Pittsburgh, is one of the best known of the reverse auction dot.coms. Its move into government has found enthusiastic boosters among the Pennsylvania congressional delegation. In response to a letter from Sen. Rick Santorum, R-Pa., urging the Defense Department to try online auctioning, David Oliver, Defense undersecretary for acquisition and technology, wrote: "The Office of the General Counsel has advised that, if properly structured, auctioning is permissible within the framework of existing law and regulation." FreeMarkets, which describes itself as a "market maker," assigns teams of project managers, purchasers, engineers and technical and commodity experts to assist buyers in crafting online auctions among qualified suppliers submitting real-time price bids against buyers' requirements. Buyers pay FreeMarkets a percentage of the auction award.

Unlike online RFQ systems, Web-based auctioning allows live bidding viewed by the buyer and all the competing suppliers. Dynamic pricing requires firms to make instantaneous decisions about how low they can go to beat competitors' bids. Buyers and bidders both can watch online as the bid prices fall, but they can't see which firms are offering what amounts.

The process reportedly has delivered savings of between 5 percent and 50 percent on purchases ranging from office furniture to electricity by companies and state governments. "Our first bidding event was in November 1995. We've done more than 500 events in 80 different categories of products and services," says Alan Thomas, FreeMarkets account executive. "We align with the buyer vs. their having to go to a different vertical market for each product or service."

In April, FreeMarkets struck a deal to conduct online auctions for the U.S. Postal Service. In May, FreeMarkets inked an agreement with the Naval Supply Systems Command (NAVSUP) to provide access to the FreeMarkets virtual market of suppliers. NAVSUP's Naval Inventory Control Point (NAVICP), held its first FreeMarkets auction on May 5 to purchase 756 received sequencers, the "brains" of aviation ejection seats.

"[FreeMarkets is] not like eBay where it's come one, come all," explains NAVICP commander Rear Adm. Michael Finley. "It is a controlled event and only includes suppliers that have been qualified." In this case three vendors pre-qualified by the Navy participated. The historic cost of 756 sequencers was $3.3 million. After a 30-minute auction, plus 22 minutes of overtime, the lowest bid came in at just below $2.4 million, a 28.9 percent savings. The contract was awarded to Hi-Shear Technology Corp., of Torrance, Ca., within an hour after the auction.

NAVICP plans an auction for shipboard aluminum berthing this summer. The command hopes to use FreeMarkets' expertise in the metals industry to expand the the number of berthing bidders beyond the five suppliers it now has, something NAVICP lacks the staffing to do.

George Allen, deputy commander of the Defense Logistics Agency's Defense Supply Center Philadelphia (DSCP), oversees a supply buying business worth $5 billion a year and views online reverse auctioning as a promising potential tool. DLA has applied for a waiver to use auctions for some of the $3.5 billion in fuel it buys each year for planes, ships, tanks and military bases.

Easily accessible commodities with universally accepted standards, such as fuel, are ideal candidates for online auctions, Allen says. "Fuel is a pure commodity, so it's commercially acceptable," Allen says. "There's no work to be done."

The purchases also must be large enough to draw bidders and must not have significant service requirements. That's a problem for Allen. "More and more as they downsize, the military services are looking to us to provide service to them for which we do not have the capacity," Allen explains. "We need to buy services packaged with products like shoes stocked on the shelves in the induction center. The customer doesn't want to have to determine the requirement, order the item, store it and manage it."

Central vs. Individual

A tug-of-war between the advantages of centralized buying, such as that done by DSCP, and individualized buying via purchase cards also is playing out in the battle among dot.coms for government turf. DLA is trying to strike a balance with its electronic mall, according to Scottie Knott, director of DLA's Joint Electronic Commerce Program Office, which runs the mall. "We're trying to get the best of both worlds," she says. "We want people to come to the e-mall to do cross-store comparison and use the purchase card as a payment vehicle so there is an audit trail back to the home agency and with the bank that does the reconciliation. It is a happy medium between willy-nilly buying and using the e-mall where there is some control and visibility."

Control and visibility are so important to the National Institutes of Health that the agency also is building its own e-mall. "We were looking for line item detail-Level 3 data, including item descriptions, quantity purchased, etc., on purchase card purchases," says Donald Kemp, procurement analyst with the research contracts branch of NIH's National Cancer Institute. "We built the IntraMall behind NIH's firewall so we wouldn't have to depend on the vendors to provide the data. NIH spent $131 million using cards last year and all we know is the companies we spent it with, not the products. If we know what we're buying from them, the companies are more willing to give us a better price," Kemp adds.

The IntraMall provides product information, online ordering, accounting and budgeting. The system will build a detailed purchase log organized by vendor, product description, order date, or purchase amount. It will tie transactions with electronic billing information provided by VISA/US Bank. Currently, the mall contains only products and prices from NIH contracts. NIH is building the mall using a cooperative research and development agreement under which a private firm pays all development costs in exchange for the right to commercialize the mall software.

Selling to Skeptics

Despite the variety of their offerings, dot.coms have not impressed Debra Sonderman, the Interior Department's director of acquisition and property. One "showed me a demo and said, 'Oh, we would customize it to meet your specialized requirements,' words that send off alarm bells in my mind," she says. "[Another] company has to be loaded onto our servers. Why would I want to spend my computer resources on that?" Other firms, she says, "tell me, 'We can get 100 different price quotes.' I don't want to create a workforce of shoppers. The purpose of purchase cards is to enable people to buy things they need right then. Acquisition professionals' job is to be shoppers. For the majority of purchases, it's not worth shopping-a scientist's time is more valuably spent doing science than shopping."

David Litman, Transportation Department senior procurement executive, says he isn't interested in corralling purchase card users. "We have 19,000 card users. I don't want to determine how each one views the world. I give them a credit limit. If we then tell them you can only shop at FedCenter or whatever, that becomes the only information they see. It makes their world smaller." On the other hand, he points out that agencies must be sensitive to mandatory sources-producers agencies are required to use under the Javits-Wagner-O'Day (JWOD) Act and other laws that mandate purchasing from organizations employing blind or disabled people. "How are these e-catalogs interfacing with JWOD.com?'" he asks.

Lesley Anne Field, Litman's point person for dot.com presentations, says she has talked with companies that were shocked to discover that purchases from $2,500 to $100,000 are reserved for small businesses. "It seems to me they haven't come into the government marketplace and done that kind of research," Litman says. Representatives of FedCenter.com, FedBid.com, and eFed, among others, all say they can track small business purchases and offer JWOD products. FreeMarkets also will set aside auctions exclusively for small business vendors, says Thomas.

To help pave the way through federal regulations and past procurement officials' skepticism, dot.coms are allying with more experienced purveyors of procurement, financial management and enterprise resource planning (ERP) software in the federal market. For example, Ariba, a leading provider of B2B e-procurement, software and market-maker, partnered in December with American Management Systems, a procurement and financial management software provider to more than 60 federal agencies and departments.

"Ariba did an excellent job in partnering with AMS," says GartnerGroup's Sood. "AMS has the government experience; Ariba brings today's sexy commercial application." AMS has gone on to strike alliances with FreeMarkets and Siebel Systems, best known for its customer relations management software. Similar partnerships include the ACS triumvirate with SupplierMarket.com and Volumebuy.com and Digital Commerce's pairing with SAP Public Sector and Education Inc.

In addition to helping dot.coms gain government entrée, the alliances protect their stock prices, says equity analyst Meagher. Companies that have built reputations in the lucrative, burgeoning B2B market don't want to be direct players in what Meagher calls the "low-growth, low-margin" B2G world for fear of being punished by the stock market.

Other e-procurement and market-making dot.coms are going it alone. In January, Commerce One opened a public sector office just outside Washington in McLean, Va. Commerce One offers an online trading network, auctions and e-procurement software. Intelisys Electronic Commerce, another virtual market-maker, also is eyeing the federal marketplace after gaining public sector prominence as builder of a multi-state e-mall for Massachusetts, Idaho, New York, Utah and Texas.

The wild card in the federal market is Oracle, preeminent provider of database software for business and government, which in recent years has created procurement, inventory management and other software to link into those databases. In recent months Oracle has won customers such as Ford, Sears and Chevron for its virtual marketplace technology. In March, Oracle announced an e-Government Leadership Initiative focused on improving operations, more closely connecting citizens and government, and e-procurement.

Shakeout Ahead

Most analysts predict many B2B and B2G firms will disappear over the next two years. "The competitive landscape is really unclear. There are new players each day, but it's going to shake out. Typically three or four players rise to the top. That will hold true in the government space," says GartnerGroup's Sood. Steve Perkins, senior vice president and general manager of Oracle Corp.'s federal business, insists services beyond e-procurement will be the discriminators among winners and losers. "Over time the revenue generated or the savings to the customer [of these solutions] will decline precipitously. Fees will decline rapidly," he says.

B2G dot.coms already are looking over their shoulders at the rapidly shrinking business-to-consumer retail world. In April, Cambridge, Mass., IT consultancy Forrester Research Inc., reported that weak financials, increasing competition, and investor flight will drive most dot.com retailers out of business by 2001.

Meanwhile, the bloom apparently is off B2B dot.coms as well. The stock of leaders such as Ariba and Commerce One skidded by as much as 50 percent during this spring's technology stock tumble. The large number of B2B and B2G players diminishes the clout of any single firm. When the key to success is attracting the largest numbers of buyers and sellers to a single site, a glut of dot.coms spells doom for everyone.

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