Electronic Commerce Strategies

ext month is the deadline for federal agencies to comply with a presidential mandate to use electronic commerce for all routine procurements. Although dozens of pilot electronic commerce projects have been launched since the executive order was issued three years ago, few have been converted to permanent programs.

Many government organizations did not anticipate the radical business-process reengineering and up-front expenses required to do paperless procurements. They also were unprepared for the numerous hardware and software problems that have plagued transactions. And recent technological developments have forced some agencies to reexamine their electronic commerce strategies and even abandon initial projects.

The 1994 Federal Acquisition Streamlining Act called for a governmentwide Federal Acquisition Network (FACNET) to help agencies meet President Clinton's January 1997 deadline for electronic commerce compliance. The technology behind FACNET is electronic data interchange (EDI), the computer exchange of business data between organizations over telephone lines in a standard electronic format. By enabling computers to "talk" to each other, EDI allows agencies to generate, receive and process data with little or no human intervention.

Inventories can be updated automatically, material releases can be issued against open purchase orders, customers can be invoiced, suppliers can be paid and concerned parties can be advised on shipping. Instead of being mailed or faxed, documents are passed from one computer to another-thus eliminating re-keying and data-entry errors.

Some federal organizations have enjoyed enormous success with EDI. The Defense Personnel Support Center in Philadelphia, for instance, has used the technology to lower operating costs, boost productivity and deliver supplies to DoD mess halls, commissaries and hospitals within 72 hours instead of the average 60 days under the old system. EDI has enabled Walter Reed Army Medical Center to reduce its pharmaceutical inventories by 89 percent and eliminate six warehouses-thus saving more than more than $6 million a year.

The Environmental Protection Agency uses EDI for small purchases and regularly posts requests for proposals and discharge monitoring reports on the FACNET. Both the Patent and Trademark Office and the Census Bureau use the FACNET for collecting and disseminating data. And the Health Care Financing Administration uses EDI for Medicare claims, remittance advice and related transactions, saving an estimated $332 million in administrative costs this year alone.

The Office of Naval Research has saved more than $300,000 in check production and postage costs by using an EDI subset known as electronic funds transfer (EFT) for paying grant and contract vouchers. EFT enables funds to be transferred quickly via a nationwide automated clearinghouse network. Vouchers now are paid within five days instead of an average of 57 days under the paper system.

The Veterans Affairs Department uses EDI to pay invoices at 170 hospitals. About 90 percent of VA's small purchases are made electronically via the government's IMPAC credit card and paid within 24 hours. For every $1,000 paid on the same day, the VA receives a $6.50 rebate from the vendor.

"We are anticipating savings up to $28 million this year thanks to the rebates," says Nada Harris, deputy assistant secretary for information resources management at the Veterans Affairs Department. "That's a real incentive for us to use EDI and the FACNET."

But despite these success stories and those at private sector organizations such as Eastman Kodak, General Motors and Wal-Mart, EDI still has not found its way into the mainstream. Agencies find the technology difficult and expensive to implement. It requires dedicated computer servers, full-time maintenance staff and a value-added network that acts as a third-party clearinghouse by furnishing electronic mailboxes, tracking capabilities and storage/forwarding services.

EDI also requires special translation software to reformat data and convert it to the ANSI (American National Standards Institute) X12 EDI standard. Mapping software is used to rearrange incoming data into individual user formats. Some of these complex packages can cost as much as $100,000 each.

"Early on, we tried to use FACNET and found out that it was not very reliable or user-friendly," says Woody Hall, chief information officer at the Energy Department. "The other problem was that not very many vendors were using it either."

Only about 100 federal suppliers out of a pool of more than 300,000 have registered as FACNET electronic trading partners. Companies, particularly small businesses, say they cannot afford to pay the fees for value-added networks and build the appropriate network infrastructures for routing transactions. They also are discouraged by the lack of business opportunities, noting that only about 30,000 requests for quotations are posted to the FACNET each month and that approximately 80 percent of FACNET transactions are for procurements of $2,500 and below.

To help vendors become FACNET-compliant, the Small Business Administration has proposed a single value-added network that would offer low introductory rates. SBA wants to establish a FACNET services program for vendors, but some in government are dubious as to whether these efforts would boost registration.

"Many companies are deciding to avoid all the trouble and expense and go with the Internet and electronic bulletin boards instead," says Alan Balutis, director for budget, management and information at the Commerce Department.

Some agencies, responding to what the General Accounting Office describes as FACNET's "ill-defined" architecture, are opting for the Internet as well. New transaction and payment products from companies such as IBM, Microsoft and Premenos Corp. have made the World Wide Web a user-friendly vehicle for government procurement activities. In addition, every vendor within the federal buying community has access.

Agencies such as NASA regularly route bid and evaluation procedures through the Internet. And more government buyers are cruising through on-line shopping malls such as the Air Force's Country Store (http://www.hanscom.af.mil/Orgs/Spo/AVC/Cstore/) and the Federal Supply Service's GSA Advantage (www.gsa.gov).

"It turns out that industry was not as EDI-compliant as we thought," says William Gormley, assistant commissioner of the Federal Supply Service's Office of Acquisition. "Many companies are turning to GSA Advantage because we already have the infrastructure in place and as a result we are doing $1 million a week in electronic procurement transactions."

The changing dynamics of electronic commerce are being studied by the Chief Information Officers Council and the Office of Federal Procurement Policy. A big complaint about the FACNET architecture is that it is designed to work best in one-on-one applications involving an agency and a vendor. The Internet, by contrast, enables one-on-many applications and does not route transactions through designated network entry points in order to maintain a uniform government appearance.

"FACNET requires a governmentwide commitment to doing things the same way, but not all agencies want that because they have autonomous bureaus and business lines," says Energy's Hall. "That's why a lot of organizations are turning to the Internet."

But the Net has its own problems, namely a lack of security and privacy. Financial and other sensitive data still are vulnerable to hackers and spies. Some recent developments, however, are expected to make electronic commerce transactions on the Net more secure. Sun Microsystems has introduced its Simple Key Management for Internet Protocol (SKIP), which encrypts data at the network level. Future applications created with the company's Java programming language are expected to incorporate secure transaction software based on SKIP.

The Office of Management and Budget, meanwhile, is looking at the Secure Electronic Transaction (SET) protocol jointly developed by Visa and Mastercard. The SET standard is designed to be used in credit-card transactions involving smart cards, which can contain digital signatures and other encrypted information.

Some agencies are hoping to get the best of both worlds by running EDI messages over the Internet. This new technology application is substantially cheaper than standard EDI because users do not have to pay value-added network messaging fees, which can run as high as $1 a message if sent during prime time. EDI messages sent over the Net, by contrast, can cost as little as a penny a piece and can be delivered to trading partners that cannot afford standard EDI.

Another advantage of sending EDI messages via the Internet is speed. Messages can be delivered in minutes instead of hours because they do not have to travel through value-added networks, which often delay transmissions until off-peak hours when rates are lower.

Refusing to be left out, several leading value-added network service providers have jumped on the EDI/Internet bandwagon. General Electric Information Services is teaming with X-Change Software to help companies access GSA Advantage via EDI software. Harbinger Corp. offers an EDI-translation product that enables EDI transactions over the World Wide Web. And Sterling Commerce has made its COMMERCE:Network value-added network accessible via the Internet.

The Energy Department, lacking confidence in the FACNET, Internet or EDI/Internet alternatives, is running its electronic commerce through the proprietary Government Acquisition Through Electronic Commerce (GATEC) network. The system, created by the Lawrence Livermore National Laboratory, is seen by some as more secure and stable than the other technologies, plus it provides gateways to FACNET entry points for eventual migration down the line. GATEC lacks development support, but Energy is confident that interest will pick up during the next year.

"What's perceived by some as chaos in the world of federal electronic commerce is really creativity on the part of the agencies to come up with the right solutions for their organizations," says Wayne Wittig, special assistant for electronic commerce to Steven Kelman, administrator of the Office of Federal Procurement Policy. "At this stage of the game, electronic commerce still means different things to different people."