The increase in government e-procurement spending is largely due to the popularity of what is known as reverse funding.
Posted Nov 20, 2003
According to a research report released today by INPUT, state and local spending on e-procurement is expected to reach $1.1 billion by 2008.
The report claims that although most states have already implemented some part of an e-procurement solution, only a few have completed end-to-end systems that allow state agencies to handle the entire procurement process, from solicitation to order fulfillment online.
Currently e-procurement spending at the state and local levels is approximately $500 million. "Given the rising number of successful model e-procurement implementations, spending is estimated to grow at a compound annual growth rate of nearly 17 percent over the next five years," said James Krouse, manager of state and local market analysis at INPUT in a statement.
The increase in government e-procurement spending is largely due to the popularity of what is known as reverse funding, according to Krouse. In this model a contractor builds the e-procurement system for the state or local government for free. However, once the e-procurement system is built, the contractor recoups its investments by getting a percentage of each transaction over the length of a subsequent contract, which is generally three to five years and can run as long as 10 years, according to Krouse.
Initially there may be some resistance from vendors that lose that percentage of the sale that goes to the contractor. However, Krouse assures this is a shortsighted view, as vendors stand to profit more through efficiencies and productivities gained by automating the order-fulfillment process. Such gains may include lower labor costs, fewer mistakes caused by human error, and faster and more efficient workflows.
According to Krouse, this e-procurement model is not new to the government sector: It was introduced in the late 1990s. So why is it taking off now? At first, Krouse states, e-procurement systems appeared too risky for government entities. "Anything new is met with skepticism. Now, there are measured successes with other jurisdictions, and when you couple that with a significant budget crisis, state and local governments are realizing there are marked efficiencies to be gained with this model."