session 4: eprocurement business models
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E-Procurement for Improving Governance
Session 4: eProcurement
Business Models
A World Bank live e-learning event addressing the design and
implementation of e-procurement infrastructure
E-Procurement for Improving Governance
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E-Procurement for Improving Governance
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E-Procurement for Improving Governance
In this session, you will review:
• The context of eGP BM Decisions
• Understanding and analyzing risk areas
• An analysis of outsourcing options
• Designing the basic business model
• Adding risk mitigation features
• Designing pricing model
• Understanding ownership options
Topics
eProcurement Business Models
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E-Procurement for Improving Governance
Context of eGP Business Model (BM) decisions : Scope of Reform
Institutional change
• Increased regulation – new Regulator (?)
• Centralized processing – new Operator
• Decentralized management
• Transparent costing
• Re-designed processes
Legal/Regulatory change
• Procurement law
• Code of Ethics
• E-Commerce
• Electronic signatures
• Consumer protection
• RTI – Grievance redress
Technology change
• Web-oriented SW system
• Secured processing facility
• Telecommunications
• Internet dependency
Culture change
• Intermediation of contacts
• Transparency of information/process
• Standardized procedures
• Public scrutiny
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EProcurement is not just a technology problem
It involves: legal and regulatory change, culture change, changes in how the government institutions are
managed, and reforms resulting from implementing the
eProcurement technology.
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E-Procurement for Improving Governance
Context of Business Model decisions : Scope of eProcurement System
Processing Center
Publication / Search / Disclosure Facilities
E-Tendering
Buyer/Seller Support Facilities
E-Reverse Auction
E-Catalog Purchasing
System integration/ Collaboration
Transaction FacilitiesPublic Sector
systems
Asset management
Contract management
Indent management
Financial management
Budgeting
Private Sector systems
Bid/Proposal Preparation
Catalog management
Order management
Invoicing
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E-Procurement for Improving Governance
Context of BM decisions : Scope of eGP system
Processing Center
Publication / Search / Disclosure Facilities
E-Tendering
Buyer/Seller Support Facilities
E-Reverse Auction
E-Catalog Purchasing
System integration/ Collaboration
Transaction FacilitiesPublic Sector
systems
Asset management
Contract management
Indent management
Financial management
Budgeting
Private Sector systems
Bid/Proposal Preparation
Catalog management
Order management
Invoicing
When defining the initial scope of a system:
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Limit the system scope – understand
that the initial system will not be able to fully automate all
procurement functions.
Begin with initially focusing on a smaller portion of the public
procurement activities, then expand and build
up additional capacity as you gain experience.
Think in terms of what constitutes a
practical first iteration of your eProcurement
system.
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E-Procurement for Improving Governance
Risk analysis – Main Types of Risk in Information Systems
Tacticalsystems
Strategicsystems
Technical Business Financial
Does solution work on a
technical basis?
Will the system take root with
users?
Will system costs exceed
benefits
Lifecycle – Will system quickly
become obsolete
Will system meet user needs, or
become discredited and
abandoned
Will system costs exceed
benefits
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Typical Information Systems Risk Areas
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E-Procurement for Improving Governance
Risk Analysis for Software Technology Choices (Strategic System )
Technical Business Financial
Factors:1- Complexity2- Effort3- Reliability
Factors:1- Performance2- Quality of support3- Vulnerability
Factors:1- Cost to develop2- Cost to change3- Cost to exit4- Cost to operate
Bespokedevelopment
ERP Platform
Best of Breed Package 2,3,4
1
1,2,3 1,2,3
1,2 2,3,4
2.32,3,4
1M
M+
L
H
M
L+
M
M+
L
1,2,3
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E-Procurement for Improving Governance
Risk Analysis for Technology Outsourcing Choices (Strategic System )
Technical Business Financial
Factors:1- Complexity2- Effort3- Reliability
Factors:1- Performance2- Quality of support3- Vulnerability
Factors:1- Cost to develop2- Cost to change3- Cost to exit4- Cost to operate
ASP
Cloud
BPO1, 2, 3
L
L
L+
1, 2, 3
1, 2, 3
1, 2
2, 3
M
H
H+
1, 2 2, 3, 4H
H
H+
2, 3, 4
1, 3, 4
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E-Procurement for Improving Governance
Outsourcing eGP: An analysis
Arguments for Outsourcing Cost savings Evading unresponsive IT
function Reducing technology risk Facilitating institutional
reform and driving change Introducing business-
oriented practices Expediting CAPEX financing
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E-Procurement for Improving Governance
Capabilities that should not be outsourced• Management of IT
• Linking IT to business
• Formulating and implementing IT strategy
• Managing contracts and partnerships
• Monitoring operations
• Managing business continuity
Arguments for Outsourcing Cost savings Evading unresponsive IT
function Reducing technology risk Facilitating institutional
reform and driving change Introducing business-
oriented practices Expediting CAPEX financing
Outsourcing eGP: An analysis
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Important to balance impacts of outsourcing with challenge of maintaining a highly capable in-house IT
department
Outsourcing can lead to frustration within the in-
house departments
Even if outsourcing specific development functions,
ministry still needs highly capable IT people
It is always important to upgrade and train the
internal staff
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E-Procurement for Improving Governance
Outsourcing Analysis: Clarification of Concepts
In-house system development is different from custom (bespoke) development
Custom development today means software development + integration of
existing tools.
Coding the software from scratch is unreasonable in eGP
In-house development means internal accountability for results, not doing everything in-house.
Software contractors are usually hired.
Outsourcing of SW development is here understood as the “Build” part of a PPP.
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E-Procurement for Improving Governance
Cost-Risk Analysis of Outsourcing Options
Internal Cost - Outside Cost
Risk Outside – Risk Internal Risk factors
System Specification - + Poor domain knowledge
Difficult access to users
Software Development + + Loss of control over cost, time and quality of
developmentLoss of strategic knowledge
System Operation + + Vendor opportunism
Loss of control over system operationDifficult change management
Hardware maintenance + + Loss of reliability
Loss of control over disaster recovery
System evolution - + Vendor opportunism
Loss of control over change agenda
* Adapted from Jaak Jurison in “Strategic Sourcing of Information Systems”, Leslie Willcoks & Mary Lacity editors, Wiley, 1998, Chapter 6
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E-Procurement for Improving Governance
Shared Service – A third-party e-procurement service that is fully managed, owned and operated by the third party and used by one or more governments and their suppliers.
Public Private Partnership (PPP) – A government e-procurement solution that is managed, owned and operated by a third-party service provider, often with the intent to transfer the platform back to the government in the future.
Government Owned and Operated – A government developed and operated e-procurement solution that may or may not have been delivered by third-party partners.
Government Managed Service – A government managed e-procurement solution that is operated and owned by a third-party partner.
Common eProcurement Business Models
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E-Procurement for Improving Governance
Cost/Risk-based Outsourcing Decisions
Cost Internal > Cost-Outside
Cost Internal < Cost-Outside
Outsourcing zone
In-sourcing zone
System evolution
Hardwaremaintenance
System operation
System specification
SW development (tactical)
SW development
(strategic)
Risk Internal > Risk Outside Risk Internal < Risk Outside
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E-Procurement for Improving Governance
Business Model design: Parties and Roles
GovernanceC = Private firm as Contractor
GovernanceP = Private firm as Partner
GovernanceS = Private firm as Supplier
Private sector
GovernanceG = Government as Principal
GovernanceB = Government as Buyer
GovernancePSP = Government as Public Service Provider
Public sector
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E-Procurement for Improving Governance
Work Accountability
Resources
Results
Government
Partner
Government
Contractor
Partner
Financial Responsibility
Government
Supplier
Buyer
Capex
Opex
Government
Partner
Government
Partner
User Fees
General Business Model
Government
Partner
Contractor
Third Party
Ownership
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E-Procurement for Improving Governance
Work accountability $ Responsibility
Component Results Resources CAPEX OPEX
Specification
Software Development
Operation
Expansion
G G G
G G
GG
G G G
Governance
GGovernance
G
C
CC
C
B
sFees
G
Government-Centered Business Model
C
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E-Procurement for Improving Governance
Work accountability $ Responsibility
Component Results Resources CAPEX OPEX
Specification
Software Development
Operation
Expansion
G G G
G G
GG
G G G
Governance
GGovernance
G
C
CC
C
B
sFees
G
Government-Centered Business Model
C
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According to a May 2007 survey of MDBs, out of 14 countries:
• In 11 countries the government owns the intellectual property rights, which suggests custom development.
• 8 countries say that they do not pay a license fee for the software, but that may be because some pay licensing fess for components of the system, even though the base system is bespoke development.
• In all 14 countries the government paid for the system development.
• Only 1 country charges buying agencies for system use, while 6 countries charge suppliers for system use.
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E-Procurement for Improving Governance
Work accountability $ Responsibility
Component Results Resources CAPEX OPEX
Specification
Software Development
Operation
Expansion
G G G
G
P
G
P
P
G
PPP-Centered Business Model
P PP
P
P P
P P P
G GStrategic
System
PilotSystem
Bs
Fees
GG
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E-Procurement for Improving Governance
Adding Risk mitigation features to BM
Certification requirements
Project Management
Professional standards
Reporting obligations
Contractual provisions
Formal change mgmt.
Early cancellation
Performance bond
Optional exit milestones
SLAs
Penalty clauses
Risk/revenue sharing
Fee caps
Fixed fees.
Revenue caps
Cost sharing
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E-Procurement for Improving Governance
Designing Pricing Model
The pricing model defines how you will pay for the development effort and your private partners.
Fees should paid by whoever benefits from the system
The government benefits from increased competition, so the government should pay for elements such as
bidding fees.
Suppliers really do not benefit from bidding – they benefit from winning contracts - so
their fees should be related to contract value
Buying agencies benefit every time they use the system, so they should
pay the transaction fees.
Governments tend to pay the majority of fees, because
eProcurement systems have been shown to result in
significant savings for the government.
Supplier fees can adversely impact system adoption and use in early stages of system
development.
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E-Procurement for Improving Governance
Designing Pricing Model
User Fees PROS CONS CONTROLS
Operational functionality (paid by G)
- Offsets start-up losses- Promotes early deployment- Spurs innovation
- Increases government's financial risk
- Cap to cover fraction of Opex
# of Participants (Paid by G)
- Promotes competition- Spurs supplier activation
- Discourages participation if paid by Suppliers
- Pay by G (as shadow fees)
# of Transactions (Paid by Purchasing units)
- Maximizes system benefits
- Penalizes O&M procurement
- Bias against activation of high value depts.
- Cap fee expenseRetain control of activation program
Contract value (paid by suppliers)
- Maximizes system benefits- Promotes demand aggregation- Cost-sharing equity
- Penalizes high value procurement- Increases government financial risk.
- Sliding % cap by slab- Cap supplier's fee expense
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E-Procurement for Improving Governance
Ownership analysis
Application software
For risk mitigation, buy license even if outsourced solution
Retain IPR over customizations
For bespoke development, retain exclusive or shared ownership
When using FOSS, adherence to GNU license is equivalent to ownership.
Processing FacilityGovernment may own and operate when internal scale economies are large
For risk control purposes, DRS should be under G control when processing is outsourced
Data Government must always own and suitably protect the data.
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E-Procurement for Improving Governance
eGP Business Model Decisions: Summary
Start by understanding the full context of reform required for eProcurement success.
Use results to design the business model in terms of work accountability, financial responsibility and ownership options.
Complement your business model with risk mitigation features
• If scope of initial implementation is primarily tactical, government-centered Business models are probably indicated.
• When system scope is strategic (all functions, all users), do careful cost-risk analysis of outsourcing options. This is difficult and may require inviting bids first.
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E-Procurement for Improving Governance
• The scope for successful PPPs in eProcurement is limited and difficult - However, PPPs can facilitate institutional reform, drive change and help overcome resistance to eProcurement
• Try to structure fees as a function of the number of participants, transactions, and contract value, and have government, buyers, and sellers pay each component respectively. Evaluate other options if these do not work.
• Single-source technology solutions (ASP, Cloud, BPO) require careful, complex risk mitigation features.
All sound business model options involve Government ownership of Software, facilities and data (BOO, BOOT not recommended for eProcurement ). So be prepared to pay.
eGP Business Model Decisions: Summary
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