Lesson 1: Save Money

Fledgling public-sector e-procurement providers unleash their offerings to public schools, boasting an expected $10 billion in savings by 2005.

Newsmaker Lamar Alexander, who for the past two decades has donned many esteemed hats, including U.S. education secretary, governor of Tennessee, and president of the University of Tennessee, made headlines earlier this year with the creation of Simplexis.com, an e-procurement service and one-stop shopping mall for school districts. While Alexander's bids for the U.S. presidency fell on deaf ears in 1996 and 2000, news of his latest venture, which he co-founded and chairs, caught the attention of school business officials nationwide.

With the battle cry of saving schools $10 billion in procurement costs by 2005, the San Francisco start-up announced on April 11 its first online purchase between Glendale (California) Unified School District, comprised of 31 schools and 30,000 students, and office-supply giant Boise-Cascade, based in Itasca, Illinois.

Simplexis was hardly the first to explore public-sector e-procurement opportunities, but its high-profile leadership will undoubtedly create even more interest and competition in the often-overlooked kindergarten through 12th grade e-commerce marketplace.

Alexander's goal of $10 billion in procurement savings is hardly pie-in-the-sky rhetoric. Private-sector companies have tallied up to 30 percent savings via Net-based purchasing, says management consulting firm A.T. Kearney of Chicago. B2B Internet purchases are expected to reach the trillion-dollar mark by 2002, adds Deloitte Consulting of New York. Boston Consulting Group predicts an even loftier $2 trillion by 2003.

Though figures don't exist for the public sector, Alexander's savings estimates are actually conservative, anticipating 25 million requisitions per year for the combined school districts and a savings of about $100 per requisition by moving the order online. Most purchasers peg the costs to walk a purchase order/requisition through traditional approval routes at $125, whether buying a $5 hammer or a $1,000 computer.

While e-procurement helps purchasers and suppliers more effectively manage transactionsturning 10 to 20 percent of procurement expenses directly into pretax profit in the private sector, according to A.T. Kearney researchin the education sector, pretax profit takes a more philanthropic slant. Saving money on the supplies schools buy means more money for kids in classrooms, says Alexander.

The Merits of Middlemen

All of the country's 91,000-plus public schools spread among more than 16,400 school districts need everything from pencils to buses to wastebasket liners to food service. How wonderful it would be if their collective $85 billion in annual purchases could be aggregated to secure volume discounts from suppliers. How wonderful it would be if these schools could save incalculable time by transacting purchases electronically instead of on paper.

What if this scenario required no upfront technology investment? What if it didn't cost schools a penny? This is in fact the case. And the only question on school purchasers' minds should be, Which e-procurement package is right for us? says Glendale Unified Director of Purchasing Patrick Kennedy. Test-driving multiple products is practical with a zero price tag, says Kennedy, who not only partners with Simplexis but is also in fruitful dialog with the dot com's arch rival, 11¼2-year-old Epylon.com, also based in San Francisco.

While there are numerous district-run buying consortiums, one of whichthe Texas Cooperative Purchasing Networkwas purchased by Epylon in March of this year, as well as supplier-initiated electronic linkages, Epylon and Simplexis hope to make inroads in distributor or middleman territory.

Naysayers claim the Internet spells the end of middlemen because suppliers can establish direct electronic linkages with their customers. But school business officials don't necessarily want to deal with suppliers on an individual basis. Most don't have the funds to establish buyer-managed linkages.

Sites such as Epylon, a supplier-neutral marketplace, allow buyers to shop for all school products and supplies at a single online location, says Kim McNair, the company's senior director of marketing and communications.

Co-founded in April 1999 by Stephen J. George, a former Goldman, Sachs & Co. vice president, Epylon continues to beta test its tailor-made offering with 55 school districts and 1,200 suppliers. Another 1,000 school districts and government agencies have signed on for its national rollout this summer. Newcomer Simplexis, which launched in February 2000, currently facilitates online transactions between 24 school districts and 1,200 suppliers, though 200 additional school districts are expected to come aboard shortly. At both companies, the numbers of involved districts and suppliers are growing substantially each month, as are their employee bases, which as of June totaled 150 at Epylon and 85 at Simplexis.

End-to-End in Mind

While the companies approach e-procurement from distinct platforms Epylon's original, Simplexis' borrowedboth profess long-term goals of end-to-end automation, from purchase order creation to supplier payment. Currently, however, their electronic linkages short-circuit at the back end.

Complete e-procurement solutions for the public sector will not materialize overnight, tempers Amar Singh, Simplexis co-founder and CEO. The adoption rate will be evolutionary rather than revolutionary, Alexander concurs.

School procurement professionals, however, can still realize improvements from current and front-end capabilities, the steps that precede purchase order transmittal to the supplier.

Simplexis Up Close

From the purchaser's perspective, the Simplexis product is a zero-cost, third party-hosted online purchasing system. Specifically, it's a customized version of Commerce One's BuySite software, with installation, setup and maintenance handled by application service provider Corio.

eProcurement is the crux of the offering, says Singh, but it also includes community and content, information and news relative to school business officials. End-users initiate transactions by accessing the Simplexis Web site, which features an electronic workflow for approval routing, compliance with state and local procurement regulations and access to district-approved suppliers, as well as Commerce One's existing partner-suppliers.

We have made several live purchases using the Simplexis.com system, says Glendale Unified's Kennedy, whose district tallies $35 million annually in product expenditures. Most of these have gone to Office Depot, because they're one of our regular suppliers.

End-users access the Web site from their desktops, then fill out online requisitions, which are electronically routed to a principal or other official for approval. From there, the principal sends the order to the purchasing department to determine if funds are available. If approved, it's transmitted to the appropriate supplier. Kennedy marvels that the entire process takes only 40 minutes, compared to the previous weeklong ordeal.

Prior to Simplexis, a purchase included typing up requisitions and three-part forms, mailing interoffice copies to various departments/individuals, faxing/phoning suppliers for pricing and spending time backtracking due to typing errors.

While Simplexis' horizontal aspect (amount of products/services currently available) needs beefing up, Kennedy says its vertical element (electronic facilitation of product order and approval routing) has increased our ability to provide customer service, simplifying and speeding the purchasing process for end-users.

The expanded product/service offerings will come nextand presumably product discounts as more districts come aboardfollowed by back-end integration, a formidable prospect, Kennedy adds, given the difficulty in interfacing with school general ledgers. This difficulty stems from security concerns for schools, which are stewards of the public's money and bound to strict, government-imposed levels of accountability, he says, as well as the fact that general ledgers come in all shapes and sizes.

While Simplexis could probably provide Glendale Unified with a customized general ledger interface, Kennedy says, the same product would prove useless elsewhere. We can't have the legitimate expectation that Simplexis would write a different GL interface for each customer. That is, not until a universal general ledger product emerges.

In the meantime, Kennedy will continue to work with the Simplexis team to fine-tune its product, as well as improve internal processes, empower end-users to make their own purchasing decisions and, ultimately, help funnel operational savings to academic budgets. After all, for cash-strapped school districts, the price is right.


Sell Side Realities

School districts may have nothing to lose, but what about the folks paying Simplexis' bills? The company's revenues are being generated by suppliers, who pay 2 to 5 percent transaction fees based on the category, volume or value of the purchased products/services.

What do the suppliers get for their money? Singh lists the following:

" Lower processing costs

" Improved operational efficiency/order accuracy

" Increased per-order invoice value

" Product differentiation beyond pricing, e.g., on-time delivery

" Access to expanded markets through Commerce One

" Supplier ratings/customer feedback

" Faster payment

" Opportunity to become e-commerce ready

The above expectations are promising, say supplier-partners Boise-Cascade and Lexmark International, Lexington, Kentucky. However, the current environment could stand some improvement, or at least some enhanced recognition of supplier hurdles. While it's beneficial to adopt the best-of-breed concept and partner with an established e-commerce leader, there are limitations on how Commerce One will process transactions to us, says David Rankin, e-commerce manager for Boise-Cascade in Garden Grove, California. We need more flexibility to be built into the system, he says. For instance, there is a very different process utilized for ordering office products versus computer chips or configurative personal computers. We need to make sure the system can handle these multiple processes. We may need to get price confirmation on memory expansion chips, which have daily price fluctuations. Clients may need to chat with a live person in order to discuss appropriate computer capabilities. So, suppliers need the ability to transact business with customers in offline capacities if necessary and still process other orders electronically.

Also, most large suppliers have EDI [electronic data interchange] systems in place, adds Arnie Kirby, manager of e-commerce business development for Lexmark. These run on value-added networks, which are not supported by Commerce One. While one day EDI systems will probably be supplanted by pure Internet versions, currently there would be more end-to-end automation if the Simplexis/Commerce One offering took advantage of existing EDI capabilities.

Right now the transactional piece entails the following: An order sits on the Web site, and I pull it down and key it into the ERP [enterprise resource planning] system. We're not getting efficiencies here, Kirby says.

Kirby and Rankin stress that while there's room for improvement, the Simplexis offering is a learning experience. And though current benefits for buyers may be at the expense of suppliers, adds Kirby, in the end it will be beneficial for everyone.

Kirby and Rankin have firsthand experience with complete supply chain linkages for their companies' direct, or EDI-enabled, customers. But just when to expect full end-to-end e-procurement in the education arena is difficult to project. In addition to the above obstacles, other school-specific hurdles include:

" Learning new technologysome schools feature more technology in classrooms than in their business offices.

" Equity issues among districts with differing resources.

" Tax collection on Internet sales.

" The plight of small, local suppliers.

" State regulations pertaining to school purchasing policies.

However, these obstacles shouldn't hold school business officials back, says Kennedy. One lesson in history has been that if you have the ability to move forward, you move forward. Why push paper when the benefits of e-procurementthough still rudimentaryhave finally knocked on school doors?