August 11, 2016Doug Hadden
This is the third instalment of a three-part series exploring electronic Government Procurement (e-GP) (1) benefits, (2) performance considerations, (3) implementation and systems integration pitfalls
The benefits of government e-procurement are compelling with lucrative returns. Yet, many governments fail to achieve these benefits despite a preponderance of available technology solutions. In the European Union, for example, “the technology is available to permit e-procurement at all phases of the procurement transaction but the technological solutions may be costly and some are not so good at dealing with certain phases of the procurement. In some member states this has resulted in ‘work arounds’.” Some commercial solutions ignore “the greater benefits that arise from the workflow and analytical functions of e-GP.” And, systems originally designed for the private sector Supply Chain Management (SCM) “can be a poor fit for government requirements without expensive customization and even more expensive upgrades when new versions” are released. Meanwhile, software usability for government or suppliers can restrict usage.
Electronic Government Procurement (e-GP) is a public financial management (PFM) reform. There ought to be more than a cost saving rationale. The first entry in this series described how e-GP can have value for money, business growth and tax compliance benefits. These objectives need to be embedded in changes to the public procurement law. Technology follows reform.
Technology, by itself, does not solve all problems. Our experience in developing to developing countries shows there are many change challenges. Outreach and training for local businesses and civil society organizations are often necessary to increase the number of bidders and to encourage procurement oversight. Small businesses may not have effective Internet access so other methods of tendering may be necessary.
Usability is also a significant problem. My colleagues at FreeBalance are very aware of government procurement classifications in countries around the world. Nevertheless, it can be daunting to figure out what a government is looking for based on a tender announcement, or to find appropriate opportunities on convoluted e-procurement sites. That’s why simple categories and ease of navigation are required. Local languages support is also necessary.
System Integration Pitfalls
Many governments acquire separate e-procurement systems. As I described in a previous blog entry, these stand-alone government e-procurement silo systems are risky because of the lack of integration with back-office Government Resource Planning (GRP) systems and government policy. It’s no wonder “the leading driver for organisations to adopt purchasing technology is a desire for better internal integration and visibility.” The linkage of government priorities through policy and budget to procurement is necessary to achieve performance benefits. Government is different than the private sector with more complex procurement cycles, Chart of Accounts classifications and policy linkages.
Integration among financial subsystems are necessary to unify metadata classifications and controls. Many of these integration points are manual “work-arounds” in government e-procurement systems resulting in under-spending, overspending and failure to follow mandated government procurement policies. Any lack of automation and integration, particularly between back-office financial and procurement functions with e-procurement, can result in errors. Typical system integration problems in stand-alone e-procurement systems begin when these systems have no knowledge of commitment accounting. The lack of commitment visibility results in exceeding budgets or contracting multiple-year commitments without informing the financial system. Errors are generated throughout the commitment cycle of commitments, de-commitments, obligations, de-obligations (including failure to deliver goods in the fiscal year), goods receipt, goods returned, and contract payment provisions.
Let me give you an example of this. I spoke with a representative of a company creating a custom e-procurement system for a government. I asked him how it would handle back-office function. He suggested that it would be up to the “accounting system” and that government organization would manually certify that funds were available. Consider a very simple use case where a government organization has a budget for $1M for the acquisition of equipment. The procurement cycle operates as such:
- A commitment for $1M is approved, kicking off a tender
- Bids are received, a vendor is selected, and the trouble from lack of integration begins:
- If the winning bid was $990K, $10K needs to be de-committed from the budget
- If the winning bid is more than $1M, additional budget needs to be found and approved
- If the winning bid requires delivery over one fiscal year, multiple-year commitments need to be generated
- A purchase order with a contract is generated, and an obligation in the commitment accounting system is created in the amount of the winning bid
- Goods are received
- Equipment needs to be placed in the fixed asset registry
- Partial payments may be allowed
- Goods need to be received within the proper fiscal year, goods not received must be de-obligated
- Goods that are received in poor quality need to be returned
- Prices may change that could reduce the cost
In other words, there is significant manual intervention for any e-procurement cycle where the obligation is not exactly the same as the commitment and all goods and services are received in the same fiscal year!
The lack of integration with back-office systems can also result in contracting vendors who are in arrears for taxes. Assets and inventory can be lost or misappropriated without proper integration. There is also the integration necessary to support “procure-to-pay” such as vendor integration for catalogs and direct electronic payment. These provide an economic value add to businesses.
Traceability is another system integration challenge. Government leaders need accurate management information for decision-making. This means the need to trace back outcome (results), to outputs, to contracts, to procurement cycles, to budget, and public investment plans, to policy and to government priorities. This is a significant problem if e-procurement systems are separate and un-integrated.
We believe governments need to acquire e-procurement software designed for government and is budget and commitment aware, using the same budget classification metadata throughout the integration process. And, software that supports the identical commitment and procurement rules across all financial subsystems in government. Private sector e-procurement software is not an effective solution in government.