E-Commerce May Help Colleges Cut Costs and Paperwork
Institutions see potential for huge savings with revamped purchasing systems
By FLORENCE OLSEN
Philadelphia
"That's the competition," says Stuart Benoff, pointing to a desktop telephone in a featureless cubicle in the University of Pennsylvania's Building 3401.
Mr. Benoff, a senior programmer analyst, has worked for months on an electronic-commerce system that, when completed, will link the university's internal purchasing process directly to suppliers. Penn officials hope that the new system will appeal to every employee who buys products for the university -- especially the "maverick" buyers who now pick up the phone and call their favorite retailers instead of ordering through the university's complicated purchasing system.
Penn's top-of-the-line system will let secretaries, lab assistants, and professors search vendors' online supply catalogs in a single shopping session, after which a purchase order will be approved online and automatically routed to suppliers over a secure "extranet," an extension of the university campus network. Ordering toner cartridges, beakers, or envelopes through the system might not be as entertaining as browsing Amazon.com, officials say, but at least it won't be any harder.
Purchasing officials at Penn stop short of predicting that use of the new system will be mandatory. "What we believe is you try to take away the excuses for not using the approved methods," says Ralph Maier, associate director of acquisition services.
Buying outside the university's purchasing system costs more, he explains, because it often doesn't take advantage of volume discounts that the university has negotiated. Penn officials are counting on the new electronic-commerce system to be so easy to use -- and so hassle-free -- that they expect it to eliminate maverick buying and be used for 80 percent of the university's purchasing transactions.
Penn is not the only university to see that electronic commerce is the way of the future for colleges to buy office supplies, laboratory equipment, and other commodities. California State University at Fullerton and the University of California at Los Angeles have begun projects similar to Penn's. Another 10 institutions have joined a group that will work with Commonfund Treasury Inc. -- which provides financial services to educational institutions -- to create an online purchasing system. It uses Web-based software from InteliSys Electronic Commerce, a company that supplied software for a pilot project among Massachusetts and several other states to create an interstate e-commerce mall.
Electronic-commerce systems are currently found mostly in large corporations and in the federal government. Such systems use the Internet or another network to link an institution's purchasing system directly to suppliers' computer systems.
Often they are described as "paperless" systems, because they create electronic purchase orders and electronic invoices that are electronically matched. Purchases are ordered online, billed online, and paid for online; an electronic-funds transfer debits the buyer's account and credits the supplier's account. Studies show that paperless systems can reduce the transaction costs that institutions incur in processing hundreds of thousands of paper invoices each year.
Few electronic-commerce systems today are completely paperless, though, because the technology is still being developed. Penn's system, for example, will not be able to pay bills online until late-2001 or so, says Mr. Maier, the acquisitions officer. But most university purchasing officials say their big concern for now is simply making their computer systems easy to use.
U.C.L.A. will add point-and-click purchasing features to its existing mainframe-based purchasing, security, and general-ledger systems, says Ann M. Powley, purchasing director at the university. "Everybody likes Amazon.com, and the feeling is, why shouldn't we have something like that for our day-to-day work?"
Programmers on California State's Fullerton campus have been busy for months writing software programs that will integrate the university's older business systems with Web-based software from a company called Commerce One. Sherri L. Newcomb, chief financial officer at Fullerton, thinks that online purchasing will sharply lower the cost of processing requisitions.
The more people involved with a transaction, of course, the more money it costs. Ms. Newcomb says each requisition handled the old-fashioned way -- with people and paper -- costs the university about $150 to process. She expects the same cost, "from rec to check," to drop to $10 or $15 after electronic-commerce systems are in place.
Howard Coonley II, chief operating officer of Commonfund Treasury, says the efficiencies and price discounts of electronic commerce should let most institutions realize "at least a 10-percent savings in their internal and purchasing costs for goods."
Preparing for e-commerce, however, is hard work. Like other projects involving large administrative-computing systems, such projects can be extraordinarily complex. Each institution must merge its financial systems -- many of them customized -- with Web-based purchasing systems that interact with the financial systems in multiple ways.
Some public institutions face another difficulty: State purchasing rules may not have caught up with modern technology. "In California, we're not allowed to process a check without having a paper invoice," says Ms. Newcomb. The transformation to e-commerce will not happen overnight, she adds. "You still have people rolling requisitions into typewriters."
Even if they don't overhaul their purchasing systems, however, colleges can save money by using components of e-commerce. Harvard University, for example, uses a Web-based component in Oracle Financials software to authorize payment of invoices, but pays its vendors with paper checks. Harvard's version of Oracle doesn't yet support electronic payments.
Harvard is also trying out e-commerce through Chemdex, a Web-based marketplace for buying scientific supplies. William G. Hoyt, director of university procurement, says the purchasing arrangement is still "very experimental." The university is also considering making travel arrangements over the Web, to avoid the fees that travel agencies are charging as airlines cut the agents' commissions.
Penn's e-commerce program, however, one of the most aggressive among universities, offers the clearest glimpse into the future of electronic purchasing.
The value of goods and services purchased through Penn's central purchasing office is about $300-million a year. Purchasing officials say they would like to move about 80 percent of those transactions through e-commerce, and expand its use to include consulting services and other types of services that the university buys.
In 1996, when Penn switched to Oracle Financials, it trained central-purchasing staff members to prepare for e-commerce, and it cut back on their number. The office, Mr. Maier says, went from 23 staff members to 11.
In addition, the operation's emphasis was shifted to professional positions, over clerks and administrative assistants. In the electronic marketplace, negotiating skills will be needed more than ever, says Mr. Maier, the associate director of acquisition services. "In the past, we spent 80 percent of our time managing transactions, and now we spend 80 percent of our time in professional procurement activity."
Penn's procurement-staff members negotiate contracts, oversee projects, and manage vendor relationships.
Penn will pass the another e-commerce milestone this spring when it acquires Oracle's technology for reconciling invoices and purchase orders. Even though the university has created, routed, and sent purchase orders electronically for several years, the office that handles accounts payable is still working from paper invoices -- "in the neighborhood of 350,000 to 400,000 a year," Mr. Maier says.
"In fact, we probably made their life more difficult" by doing so much else electronically, he observes. Until the new software arrives, staff members who handle accounts payable still have to match paper invoices with the corresponding electronic purchase orders. Often, they find that no purchase order was ever created, which necessitates a call to the department that ordered the item.
When the university completes its installation of "self-service" purchasing software from Oracle, Penn buyers will be able to locate items from Penn's largest suppliers in a single, virtual catalog, using price, product category, part number, or item description as search criteria. Mr. Benoff, the senior programmer analyst, says Penn is the first university to use the electronic-catalog technology of TPN Register, of Rockville, Md., which has worked with major manufacturing companies.
One feature of Penn's new purchasing system should reduce the amount of time that people spend filling out purchase orders. "Most people are creatures of habit -- they use the same type of beaker, the same pen," says Mr. Maier. Soon, buyer-specific "hot lists" will take advantage of that behavior. When a buyer opens an online catalog, selects items, and enters the quantity, the hot-list feature will automatically fill in the other fields -- part number, item description, and so forth.
In paperless systems of the sort Penn is building, officials say, purchase orders can be easily tracked and spending more easily audited. The data captured from each transaction by the new system will be more accurate and more complete, and data that the university is now failing to collect will be automatically captured. "The data is very valuable," says Mr. Benoff. "Without the data, none of this really works."
Purchasing information, once collected and analyzed, he says, is a negotiating tool that institutions can use to prove how much they bought last year, in bargaining for a bigger discount next year. The data are also a means of tracking progress toward the goals of buying from community and minority-owned businesses.
"It's not uncommon for big institutions not even to know how much they buy, how much they buy things for, and whom they buy from," says Daniel J. Greenwood, a lecturer at the Massachusetts Institute of Technology. He directs the M.I.T. Electronic Commerce Architecture Project, which focuses on the delivery of public services via e-commerce networks.
Some of the technology that will make that possible, however, is still being invented. Colleges that make electronic commerce an immediate priority will encounter gaps that may make the effort less productive than they had hoped for, Mr. Greenwood says, explaining that some phases of the procurement cycle are more difficult than others "to electronify."
Getting bills paid online may be the hardest part of all, he says. General-ledger and payment systems have different kinds of logic and controls from those found in purchasing systems.
In addition, colleges that move into electronic commerce now may also discover that the security measures they use to control access to their purchasing systems require different authorization rules than the measures they use to control access to academic-support systems. Purchasing officials should be thinking ahead about creating centralized services to avoid those problems, Mr. Greenwood says.
Once in place, the e-commerce marketplace could bring about "revolutionary" changes in the relationship between buyers and sellers, he says. "Initially, people will want to have the software support their existing social, political, and customary way of doing things." But "with a relatively few lines of code," he says, electronic commerce can provide a basis for some non-traditional buying relationships -- for example, "reverse" auctions, in which competing suppliers of an item or service bid the price down.
Colleges can learn something from the government's experience in trying to build e-commerce systems, Mr. Greenwood says. Massachusetts has documented its two-year pilot program with InteliSys Electronic Commerce and posted the results on a Web site (http://www.emall.isa.us). "They didn't eliminate all the risks," he says, "but they managed them very well."
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