Session 4: eProcurement Business Models

1. E-Procurement for Improving Governance A World Bank live e-learning event addressing the design and implementation of e-procurement infrastructure Session 4: eProcurement Business Models

2. Topics eProcurement Business Models • 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 Select Next to continue

3. Context of eGP Business Model (BM) decisions : Scope of Reform • Legal/Regulatory change • Procurement law • Code of Ethics • E-Commerce • Electronic signatures • Consumer protection • RTI – Grievance redress • Culture change • Intermediation of contacts • Transparency of information/process • Standardized procedures • Public scrutiny • 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. • Institutional change • Increased regulation – new Regulator (?) • Centralized processing – new Operator • Decentralized management • Transparent costing • Re-designed processes • Technology change • Web-oriented SW system • Secured processing facility • Telecommunications • Internet dependency This box stops clearing of content at end of slide playback Select Next to continue

4. Context of Business Model decisions : Scope of eProcurement System Private Sector systems Budgeting Bid/Proposal Preparation Financial management Indent management Catalog management Contract management Order management Asset management Invoicing Processing Center Public Sector systems Transaction Facilities System integration/ Collaboration E-Catalog Purchasing E-Reverse Auction E-Tendering Buyer/Seller Support Facilities Publication / Search / Disclosure Facilities Select Next to continue

5. Context of BM decisions : Scope of eGP system Private Sector systems Processing Center Budgeting Transaction Facilities Bid/Proposal Preparation Financial management System integration/ Collaboration E-Catalog Purchasing Indent management Catalog management E-Reverse Auction Contract management Order management E-Tendering Asset management Buyer/Seller Support Facilities Invoicing Publication / Search / Disclosure Facilities Public Sector systems • When defining the initial scope of a system: • Begin with initially focusing on a smaller portion of the public procurement activities, then expand and build up additional capacity as you gain experience. • Limit the system scope – understand that the initial system will not be able to fully automate all procurement functions. • Think in terms of what constitutes a practical first iteration of your eProcurement system. Select Next to continue

6. Risk analysis – Main Types of Risk in Information Systems • Typical Information Systems Risk Areas Technical Business Financial • Will system costs exceed benefits • Will the system take root with users? • Tacticalsystems • Does solution work on a technical basis? • Will system meet user needs, or become discredited and abandoned • Lifecycle – Will system quickly become obsolete • Will system costs exceed benefits • Strategicsystems Select Next to continue

7. Risk Analysis for Software Technology Choices (Strategic System ) Technical Business Financial • Bespokedevelopment M M H • ERP Platform M+ M+ M • Best of Breed Package 1 2.3 1,2,3 L L L+ 2,3,4 2,3,4 • Factors:1- Cost to develop2- Cost to change3- Cost to exit4- Cost to operate • Factors:1- Complexity2- Effort3- Reliability • Factors:1- Performance2- Quality of support3- Vulnerability 1,2 2,3,4 1 Select Next to continue 1,2,3 1,2,3

8. Risk Analysis for Technology Outsourcing Choices (Strategic System ) Technical Business Financial • ASP H M L • Cloud H H L • BPO 2, 3 H+ H+ L+ • Factors:1- Cost to develop2- Cost to change3- Cost to exit4- Cost to operate • Factors:1- Complexity2- Effort3- Reliability • Factors:1- Performance2- Quality of support3- Vulnerability 1, 2 1, 2 2, 3, 4 1, 3, 4 2, 3, 4 Select Next to continue 1, 2, 3 1, 2, 3 1, 2, 3

9. 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 Select Next to continue

10. Outsourcing eGP: An analysis Important to balance impacts of outsourcing with challenge of maintaining a highly capable in-house IT department • 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 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 Select Next to continue

11. Outsourcing Analysis: Clarification of Concepts • In-house system development is different from custom (bespoke) development • In-house development means internal accountability for results, not doing everything in-house. Software contractors are usually hired. • Custom development today means software development + integration of existing tools. Coding the software from scratch is unreasonable in eGP • Outsourcing of SW development is here understood as the “Build” part of a PPP. Select Net to continue

12. Cost-Risk Analysis of Outsourcing Options * Adapted from Jaak Jurison in “Strategic Sourcing of Information Systems”, Leslie Willcoks & Mary Lacity editors, Wiley, 1998, Chapter 6 Select Next to continue

13. Common eProcurement Business Models 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. 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. 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. Select Next to continue

14. Cost/Risk-based Outsourcing Decisions Cost Internal > Cost-Outside System operation Outsourcing zone SW development (tactical) Hardwaremaintenance Risk Internal < Risk Outside Risk Internal > Risk Outside System specification System evolution SW development (strategic) In-sourcing zone Cost Internal < Cost-Outside Select Next to continue

15. Business Model design: Parties and Roles G = Government as Principal Governance B = Government as Buyer Governance PSP = Government as Public Service Provider Governance P = Private firm as Partner Governance C = Private firm as Contractor Governance S = Private firm as Supplier Governance Public sector Private sector Select Next to continue

16. General Business Model Government Resources Partner Work Accountability Government Results Partner Contractor Government Capex Financial Responsibility Partner Opex Government Government Partner Government User Fees Buyer Ownership Partner Supplier Contractor Third Party Select Next to continue

17. Government-Centered Business Model G C C G G G G G G G G Governance Governance G C C G C G G B Fees s Select Next to continue

18. Government-Centered Business Model G C C G G G G G G G G Governance Governance G C C G C G G • 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. B Fees s Select Next to continue

19. PPP-Centered Business Model G P G G G G P P P P P P P P P P P G G G G G B Fees s StrategicSystem PilotSystem Select Next to continue

20. Adding Risk mitigation features to BM Certification requirements Project Management Professional standards Reporting obligations Early cancellation Contractual provisions Performance bond Formal change mgmt. Optional exit milestones SLAs Fixed fees. Penalty clauses Fee caps Risk/revenue sharing Revenue caps Cost sharing Revenue sharing Select Next to continue

21. 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 Suppliers really do not benefit from bidding – they benefit from winning contracts - so their fees should be related to contract value • The government benefits from increased competition, so the government should pay for elements such as bidding fees. • 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. Select Next to continue

22. Designing Pricing Model Select Next to continue

23. Ownership analysis Select Next to continue

24. 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. eGPBusiness Model Decisions: Summary Select Next to continue

25. 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 Select Next to continue