E-Commerce Starts to Pay Off

When fall rolls around, the University of Pennsylvania's Wharton School

ALSO SEE: How E-Commerce Saves Millions at One University Old Commerce vs. E-Commerce

scrambles to hire temps for running the copy machines that will spit out one million sheets of paper a day, all of them bound for course packs to be snapped up during the first week of classes.

But Gerard McCartney, associate dean of the Wharton School, says things will be different this fall -- and "definitely better." Rather than advertising for temps in the newspaper, he will use his computer to fill out an electronic requisition for 35 temporary employees. A purchase order will be created automatically and sent over the Internet to a temp agency under contract with Penn, and Mr. McCartney's staffing problem will be solved.

Two years ago, electronic commerce -- e-commerce -- was a favorite topic in corporate technology circles, and the buzz about saving time and money by purchasing institutional supplies over the Internet drew the attention of colleges and of companies interested in higher education.

That initial excitement faded after the flameout of several e-commerce companies founded during the dot-com frenzy. But colleges like Penn that have pursued buying over the Internet are showing how e-commerce offers a new approach to purchasing for academe.

Some higher-education leaders even suggest that e-commerce could help colleges cut their operating expenses enough to allow smaller increases in tuition and fees. At Penn, for example, officials say that e-commerce has directly saved the university $3.8-million in one year and, indirectly, $59.8-million in the six years since investing in new financial-accounting systems to prepare for e-commerce.

How It Works

For colleges, e-commerce entails using a customized Web site, where anyone in the college can log in and shop for supplies or services from the institution's catalog database, without making any telephone calls or filling out any paperwork.

In one click, a requisition can be on its way to the administrators who approve purchases. At the instant a requisition is approved, the system creates as many separate purchase orders as are needed. The orders reach the suppliers over the Web, often within minutes, and the supplies are delivered, if needed immediately, the same or following day. Managers can use the detailed electronic records from such purchasing transactions to help them negotiate group buying agreements with other institutions and gain better discounts from suppliers.

That is not how most colleges buy supplies. Typically, employees pick up the phone and order supplies from their favorite retailer -- a practice that purchasing departments condemn as "maverick buying." Most colleges now use purchasing cards -- a precursor of e-commerce in which the colleges give staff members credit cards for purchases below a certain dollar value -- to reduce the amount of paper they process for small expenditures. But the cards don't generate the detailed transaction records that many colleges say are needed for controlling expenses; e-commerce systems produce just the type of records that are needed.

'On the Fence'

For the most part, however, colleges have been "on the fence -- waiting," rather than getting involved with e-commerce, says Doreen Murner, chief executive officer of the National Association of Educational Buyers. According to a survey last year of members of the association, 56 of the 66 institutions that responded to the survey said they planned to use some form of electronic procurement. The other 10 institutions said they had no plans or had not decided whether to use e-procurement.

Many college officials are skeptical of e-commerce companies' claims of saving money. Group purchasing, which colleges have been doing successfully for some time without e-commerce technology, provides a large portion of the savings that e-commerce companies promise in their pitch to prospective customers, says James E. Hardy, purchasing manager at Smith College. By adding e-commerce to the mix, he says, colleges risk disrupting relationships with suppliers that have produced, in many cases, the best possible prices for the colleges.

Getting colleges' small suppliers ready for e-commerce requires patience, a quality that Mr. Hardy says was missing in the e-commerce companies that failed. Despite the role that technology plays, e-commerce "is a relationship business," he says.

To be sure, buyers could save time and reduce errors with an online system that lets them enter purchasing data only once and automatically copies that information into other electronic forms for routing to the purchasing and accounts-payable departments. But many e-commerce companies "have just priced themselves out of the market," says Lawrence Peralez, director of business services at San Diego State University.

Typically, colleges end up paying about $2-million for an e-commerce server on campus, or several-hundred-thousand dollars a year for transaction fees and tech support from a company that provides customized e-commerce services.

For colleges that can afford e-commerce systems, choosing one is difficult. Those with the most useful purchasing and procurement features are from specialized e-commerce companies. But the software requires time-consuming work to integrate into colleges' financial-accounting systems, says James Avila, the information-technology manager for business services at San Diego State.

Large business-software companies such as Oracle and PeopleSoft have begun selling e-commerce systems that are well-integrated with their own brand of financial-accounting systems, which many colleges use. But their e-commerce software is not as fully developed, Mr. Avila says, as that from some of the companies, such as Ariba and Commerce One, that established the e-commerce industry. Those companies focus on the Fortune 500 and Global 1000 markets.

Even Ariba and Commerce One are feeling the downturn in technology spending, prompting concerns about the viability of all businesses offering e-commerce.

Companies that rushed into the higher-education market during the dot-com frenzy have failed to attract many colleges as customers, and some have failed altogether, says Donald M. Norris, president of Strategic Initiatives, a management-consulting firm. "I don't know of any that are profitable in higher education."

An E-Commerce Failure

One such company that attracted colleges' interest was Commonfind, an offshoot of Commonfund, a large investment-fund manager for colleges and universities, which announced in March 2000 that it would bring e-commerce to higher education.

Many colleges were interested in what Commonfind said it planned to offer and, in January of last year, Smith College and Dictronics, a company that sells office supplies and equipment, completed their first transaction over the Internet using Commonfind's e-commerce service. At that time, Commonfind had 22 charter members, among them the California State University Chancellor's Office, Southern Methodist University, and the University of Chicago.

In the weeks following Smith's first e-commerce transaction, three other charter institutions -- Babson College, College of the Holy Cross, and Wellesley College -- placed orders through the new service.

But a year and a half later, the company that had promised operating efficiencies and cost savings shut down, explaining that its software provider, Metiom, had run out of money. Metiom had been "relying on streams of venture capital, and it just stopped coming," says K. Judson Koss, a managing director at Commonfund.

That explanation was little consolation for the colleges that invested their time and money in Commonfind, says Mr. Hardy, the purchasing manager at Smith. Commonfind "wanted to throw large chunks of money at [e-commerce] and get very rapid growth, very rapid return. It just isn't a strategy that would have paid off," he says. Mr. Hardy declined to say how much money Smith paid for its participation in the short-lived project.

Potential Savings

Despite the difficulties that e-commerce companies have encountered in higher education, some find it hard to ignore the potential for savings from buying online. Colleges spend billions each year on supplies and services, which account for about 30 percent of a typical college budget. Commonfind executives had estimated colleges' annual spending on such items to be $100-billion. Larry Toy, president of the Foundation for California Community Colleges, which administers collegebuys.org, a traditional nationwide purchasing cooperative, thinks a more accurate figure may be between $30-billion and $50-billion a year.

While colleges do indeed spend lots of money on supplies and services, much of that spending is not centrally managed and, therefore, purchasing administrators see it as inefficient. Rex Hardaway, Emory University's director of purchasing, says that e-commerce technology can help colleges get better service and lower prices from suppliers that, in some cases, have become indifferent to their needs as the suppliers have grown and competition has almost disappeared.

When Mr. Hardaway came to Emory 13 years ago, colleges could select among five science-supply houses, but now there are only two.

E-commerce technology and the detailed reports on purchasing trends that the technology makes possible place colleges and universities in a position to aggregate their purchasing through fewer suppliers and to negotiate more persuasively for better discounts, Mr. Hardaway contends. He argues that colleges and universities, both private and public, should consider forming purchasing groups online to negotiate national contracts with multinational corporations. "E-commerce tools will make it possible for us to do that," he says.

Emory is among a small number of colleges that have decided that the potential advantages of e-commerce are well worth the risks. Mr. Hardaway has worked with e-commerce technology for several years to create a system that promotes "green," or environmentally sensitive, purchasing choices. Emory expects direct and indirect savings totaling $10-million in a five-year period from its investments in online purchasing.

The University of Pennsylvania has made e-commerce a tool for cutting administrative costs. Penn's e-commerce site, known as the Penn Marketplace, is a Web-based ordering system that is integrated with the university's purchasing, accounts-payable, and general-ledger systems.

A supplier can join Penn's electronic marketplace by investing 60 cents per line item to cover the cost of getting the supplier's catalog contents online. Suppliers also pay Penn's e-commerce service provider the same amount as an annual fee to do business over the Web with Penn -- a fee that the suppliers agree is less than the cost of doing business the old way.

"We've eliminated their data-entry work, so now they don't have to have someone keying in orders," says Ralph Maier, associate director of acquisition services. Through Penn's e-commerce system, invoices from its suppliers are matched to purchase orders, and scheduled for payment -- automatically.

By September 1, Penn's catalog database will list more than 500,000 products and services, Mr. Maier says. About 1,600 business administrators and others use the system on a regular basis, and 40 to 50 new users are added each month.

Penn Marketplace uses Oracle's iProcurement business software and data-exchange and electronic-catalog services from GE Global Exchange Services and its TPN Register division.

Robin Beck, vice president for information systems and computing at Penn, declines to say how much the university spent on the system, but she says the university will recover that investment in two years with the savings e-commerce will provide.

Penn has done something unusual in academe by consolidating much of its purchasing power. Currently, Penn's supplier database holds the names of 25,000 companies. But only 26 of those are so-called "preferred contract suppliers" -- companies in the Penn Marketplace that, collectively, receive 48 percent of the university's purchase orders.

Because high volumes are key to achieving cost-savings from e-commerce, Mr. Maier says he aims to have 75 percent of Penn's purchase orders go to preferred suppliers through the online system. "To be honest, 75 percent is going to be a challenge for us," he says. That's because much of what Penn buys is research equipment, for which the purchase orders are high in dollar value but low in volume.

Still, Mr. Maier says he thinks that Penn can find additional ways to reduce the number of its suppliers and save even more money when it negotiates future contracts with suppliers.

Another college that has been drawn to the money-saving potential of e-commerce and has been willing to hazard its risks is the Indiana University System. In February, Indiana signed a multiyear contract with HigherMarkets, one of the few e-commerce companies in higher-education that survives from the dot-com boom. HigherMarkets was acquired last month by SciQuest, an e-commerce company that focuses on the pharmaceutical and biotechnology industries.

Indiana will pay HigherMarkets between $100,000 and $200,000 a year to maintain the university's online-purchasing catalogs and to handle data exchanges between its eight campuses and its suppliers. In the first three months after signing the contract, the university used the e-commerce service to buy $2.5-million of equipment and supplies from Dell Computer.

There have been problems. For example, occasional technical glitches render the online-ordering system temporarily unusable. But such experiences are ones that the university is willing to put up with, says Guy De Stefano, university director of purchasing at the Bloomington campus.

Campus Cultures

"We understand the effort it takes to be out there doing this," he says. "As with anything new, sometimes you have to stick your head out."

Institutions that do well with e-commerce are those that can make hard decisions about cutting staff positions, something that many colleges are reluctant to do, says Mr. Toy, of collegebuys.org.

"You can figure that if you're paying a senior purchasing clerk between $50,000 and $60,000 a year, including benefits, then you could save that much a year just from one person being let go. Well, colleges don't do that," Mr. Toy says.

Others say that because decision-making in higher education is rarely a top-down process, e-commerce may pose more difficulties for colleges than for corporations. "There are collegial concerns, and people from various groups who have to be engaged in the [purchasing] approval process," says Emory's Mr. Hardaway.

"All of that has to be built into the perfect higher-education model to make e-procurement and e-commerce work optimally."

Moreover, purchasing managers warn that professors don't care about innovations in purchasing, and may not use the new technology. "It doesn't get them excited that you're doing it on a computer, instead of picking up the telephone and calling Hardy," says Smith's Mr. Hardy. "They want to do whatever is the easiest and fastest." Many colleges admit they don't have the means to force everyone on campus to use e-commerce.

Administrators who take the long view, however, say that money spent on e-commerce is a strategic investment that most colleges eventually will make. Mr. Toy says that, in five years, he expects to see colleges conducting all of their purchasing transactions online.

Whatever savings can be realized from e-commerce could be put to good use, Mr. Toy says, allowing colleges to make incremental increases in the quality of the services they provide "without increasing tuition more than they normally do."

Leroy Nunery, vice president of business services at Penn, says that colleges are "trying to watch their operating expenses to make sure they don't grow."

"If we are able to achieve savings in the way we procure goods," he says, "and in the way we operate internally -- desk to desk -- that should mean that the university won't have to raise tuition or other fees."

Moreover, the practice -- common in e-commerce -- of directing business toward preferred contract suppliers, has proved to be a good strategy for corporate America and could be a good strategy for colleges as well.

"A strategic relationship with a supplier means not just that you have good customer relationships, better services, and better prices," says Mr. Norris, the management consultant. "It means the supplier is probably also a donor to the university."

Mr. McCartney, the dean at the Wharton School, says that e-commerce, as practiced at Penn, has reduced "the amount of friction" that was always part of the experience of buying supplies or services.

Still, he thinks that universities need to justify their spending on new technologies such as those that make institutional purchasing easier.

Administrators have an obligation to make a business case for how such spending will actually save money, he says, "because if it's just for the convenience of the administrators, that's simply not a good enough reason."

	HOW E-COMMERCE SAVES MILLIONS AT ONE UNIVERSITY The University of Pennsylvania spends $450-million to $500-million annually on supplies, maintenance, repairs, operations, and services -- about a third of its operating budget. Since 1996, when Penn began preparing for e-commerce, the university has saved $63.6-million in purchasing. (Part of that total -- $3.8 million -- was negotiated since July 2001, when Penn made deeper price discounts a condition for its suppliers to sell through Penn's new e-commerce Web site.) The overall savings in purchasing have come through aggressive procurement practices and more-efficient accounting systems. Some savings were made through negotiated prices. For example: Some savings are through efficiencies in other departments: The cost of processing some invoices has dropped from $1.25 to 2 cents Additional savings have come from cutting staff positions: In central purchasing, since 1996, the number of employees has dropped to 11 from 23 In accounts payable, the number has dropped to 14 from 17 And these savings have come as time was saved: Purchase orders are created in a fraction of the time it used to take: Eight purchase orders, for example, can be created in the time it took to create one such order Pyrex Griffin beaker 30 ml. Fisher Scientific $22.33 Penn Marketplace $14.51 Savings = 35% Staples printer paper 500 sheets, 84 brightness, 20 lb. ream Staples SuperStore $3.98 Penn Marketplace $2.70 Savings = 32% Pilot Precise PV5 Rollerball pens 144 pens Staples SuperStore $15.98 Penn Marketplace $13.09 Savings = 18% Cartridge and toner for Hewlett-Packard DeskJet 600c Staples SuperStore $31.99 Penn Marketplace $31.96 Savings = less than 1% Here are the results of a survey conducted by Strategic Initiatives and the National Association of Educational Buyers in May 2001. Surveys were sent to 200 people who attended an e-commerce institute in January 2001, sponsored by the National Association of Educational Buyers; 180 institutions received the survey, and 66 responded. SOURCE: Chronicle reporting Graphic by Jamie Baylis