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Slowdown Ahead for Financing E-Procurement

Self-funding models for e-procurement seemed like a grand idea for budget-strapped purchasing departments: The private sector would foot the bill while the public sector got itself an automated purchasing system.

Self-funding models for e-procurement seemed like a grand idea for budget-strapped purchasing departments: The private sector would foot the bill while the public sector got itself an automated purchasing system.

Now vendors are having second thoughts about the arrangement. They had anticipated making their money on transaction fees but because of the relatively low transaction volume and the amount of customization needed to put up systems, "vendors have decided it's not worth it," says Rishi Sood, principal analyst at Gartner Dataquest. "They're losing too much money on this."

That's not true for all vendors. While many big system integrators are reconsidering the model, NIC has not given it up. "The model continues to work," says Christopher Neff, spokesman for NIC.

For governments, the savings from an automated process are considerable. On average, it costs about $125 to process a typical paper transaction, but just $5 to $15 with e-procurement. Also, the ability to do better cost-benefit analyses helps purchasing departments renegotiate prices with vendors.

Not surprisingly, e-procurement was seen early on as the "killer app" of e-government. In one recent survey, 85 percent of respondents said they would implement e-procurement over the next couple of years. And indeed 12 to 15 states either have an e-procurement system or have launched an initiative. "There was a pretty fast adoption in a 12- month time frame, due in large part to the self-funding model," says Sood. "As states reassess and vendors back off, we will see adoption rates slow."

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