SEND ME NO PAPER! S P E C I A L R E P O R T. Western Australia. Electronic commerce purchasing of goods and services

Transcription

1 SEND ME NO PAPER! S P E C I A L R E P O R T Electronic commerce purchasing of goods and services by the Western Australian public sector Report No 10 November 1998 A U D I T O R G E N E R A L Western Australia

2 A U D I T O R G E N E R A L Western Australia 4th Floor Dumas House 2 Havelock Street West Perth WA 6005 Telephone: (08) Facsimile: (08) info@audit.wa.gov.au VISION of the Office of the Auditor General Leading in Performance Auditing MISSION of the Office of the Auditor General Through Performance Auditing enable the Auditor General to meet Parliament s need for independent and impartial strategic information regarding public sector accountability and performance. The Office of the Auditor General is a customer focused organisation and is keen to receive feedback on the quality of the reports it issues Office of the Auditor General Western Australia. All rights reserved. This material may be reproduced in whole or in part provided the source is acknowledged.

3 SEND ME NO PAPER! Electronic commerce purchasing of goods and services by the Western Australian public sector Report No 10 November 1998 A U D I T O R G E N E R A L Western Australia

4 AUDITOR GENERAL Western Australia THE SPEAKER LEGISLATIVE ASSEMBLY THE PRESIDENT LEGISLATIVE COUNCIL SPECIAL REPORT SEND ME NO PAPER! Electronic commerce purchasing of goods and services by the Western Australian public sector This Report has been prepared consequent to examinations conducted under section 80 of the Financial Administration and Audit Act 1985 for submission to Parliament under the provisions of section 95 of the Act. Performance examinations are an integral part of my overall Performance Auditing Program and seek to provide Parliament with assessments of the effectiveness and efficiency of public sector programs and activities, thereby identifying opportunities for improved performance. The information provided through this approach will, I am sure, assist Parliament in better evaluating agency performance and enhance Parliamentary decision making to the benefit of all Western Australians. D D R PEARSON AUDITOR GENERAL November 18, 1998

5 Contents Executive Summary 1 Background 1 Summary of recommendations 6 Introduction 9 Background 9 Examination focus and approach 13 Electronic purchasing national and State overview 14 National developments 14 Western Australian overview 16 Recommendations 19 Redesigning the purchasing cycle 20 High volume/low value purchasing 20 Recommendations 26 Electronic purchasing within the Western Australian public sector 27 The fuel card 27 The corporate credit card 29 Electronic funds transfer 30 Electronic data interchange 32 The Electronic Marketplace 39 Recommendations 41 Electronic purchasing the way forward 43 Leadership and coordination 43 Developing a business case 46 Agency next steps 50 Recommendations 51 Appendix I Purchasing in the year Appendix II Summary of key electronic commerce controls 54 Corporate credit card 54 ReserveLink EFT 55 Internet electronic commerce 55 Appendix III Developing an electronic commerce business case 60 Appendix IV Glossary of terms and acronyms 61 Performance Examination Reports 64

6 Electronic commerce purchasing of goods and services by the Western Australian public sector Executive Summary Background Electronic commerce is here to stay. In Australia we long ago accepted that the Information Age is a reality; a reality evidenced by Organisation of Economic Co-operation and Development (OECD) rankings which place us second in the world in terms of computer penetration and roughly eighth in the world in terms of installed computer power. 1 The Western Australian public sector spends about $3 billion per annum on goods and services, excluding construction. This special report focuses on the public sector purchase of goods and services from private sector suppliers using electronic purchasing, part of the wider field of electronic commerce. However, many of the topics covered in this report are relevant to all forms of online services. Within the Western Australian public sector, online services is an umbrella term comprising both electronic commerce and the delivery of government services online to the public. The Western Australian Government is committed to public sector online services. Electronic purchasing national and State overview Electronic commerce raises legal and regulatory issues that cut across regional and national boundaries. Within Australia, there is recognition of the need for governments to agree on some common national principles, standards and protocols when implementing electronic purchasing. The Western Australian Government, and a number of its public sector agencies, are active participants in initiatives to establish a national approach towards supplier registration and tender management. The Office of Information and Communications (OIC) has been established, within the Department of Commerce and Trade, to take the lead role in facilitating and coordinating the development of online services within the Western Australian public sector. 1 Introduction to the Gatekeeper report, Office of Government Information Technology, Canberra, May

7 SEND ME NO PAPER! Executive Summary A Chief Executive Officers (CEOs) Online Services Consultative Group has recently been formed to facilitate the adoption of online services within Western Australia. It comprises mainly State public sector CEOs with some local government representation. The Department of Contract and Management Services (CAMS) provides a range of electronic purchasing infrastructure and support services to assist public sector agencies implement OIC online service strategies. Western Australian public sector agencies operate in a devolved management environment. Increasingly, therefore, agencies will likely seek to compare the services offered by CAMS to those offered by other providers, and choose the option(s) that best suits their needs. Redesigning the purchasing cycle Common purchasing processes are typically complicated, requiring multiple approvals, and generate paperwork. Moreover they are often applied to all purchases, irrespective of their value, complexity and degree of risk. High volume/low value purchasing remains a significant activity for some Western Australian public sector agencies. Electronic purchasing offers the opportunity to cut costs, improve customer service and implement more effective purchase and payment control. These gains are not obtained by simply automating existing manual processes. Leading organisations are demonstrating that it requires redesigning all phases of the purchasing cycle, as illustrated in a case study of the Victorian Department of Natural Resources and Environment (VDNRE). This process redesign also seeks to maximise the capture of purchasing data within financial management information systems (FMIS) for improved expenditure analysis and control. Electronic purchasing initiatives within the Western Australian public sector Past and present electronic purchasing initiatives within the Western Australian public sector include: the fuel card; the corporate credit card; Auditor General WA 2

8 Electronic commerce purchasing of goods and services by the Western Australian public sector Executive Summary electronic funds transfer (EFT); electronic data interchange (EDI); an electronic commerce gateway (the Gateway); the developing government contracting information bulletin board; and a CAMS sponsored Electronic Marketplace, currently under development. The fuel card, introduced within the Western Australian public sector during the mid 1980s, is a simple form of electronic purchasing that is now the accepted method for purchasing fuel within the Western Australian public sector. It has proved to be effective because significant work process redesign resulted in time and cost savings for both agencies and suppliers. The corporate credit card, introduced nearly ten years ago, has enjoyed less public sector wide acceptance. Nevertheless, it is an effective purchasing and payment tool, providing that appropriate management controls are in place and usage is monitored. The corporate credit card is superior to its traditional alternative, the local purchase order form (LPO). For many agencies, the credit card has simplified purchasing procedures and reduced the number of cheques issued. However, some agencies experience bottlenecks at the invoice approval and payment phase. This is often because work process redesign may not have preceded implementation. EFT is replacing traditional forms of payment, such as cheques and cash. During the 1990s, agencies have been making increasing use of EFT to pay for goods and services, some through their own systems and many through an arrangement provided by the Treasury Department (the Treasury). The future development of EFT within the Western Australian public sector lies in its better integration within the purchasing cycle through agencies FMIS. EDI is a means for trading partners to electronically exchange, computer to computer, predefined commercial documents using international standards and formats. The history of the public sector s experience with EDI has been one of limited success, yet a case study, of the Western Australian company Atkins Carlyle Group (Atkins), demonstrates the productivity gains that modern Internet based EDI applications can now bring to both purchasers and suppliers. 3

9 SEND ME NO PAPER! Executive Summary The Gateway, a facility in use since October 1997, can convert electronic purchase orders to an appropriate form that can be accepted by any supplier, be it EDI, fax or post. The Gateway is also used by some agencies to electronically exchange non-purchasing operational data within a secure and controlled environment. CAMS is currently developing two main online service initiatives that will support across government electronic purchasing. The government contracting information bulletin board an Internet web site that aims to facilitate public access to current and recently awarded government tenders, and eventually provide other tender management functions. The Electronic Marketplace an Internet based electronic commerce system for use across government that aims to provide online functions such as cataloguing, ordering, invoicing, payment and management reporting. The Electronic Marketplace is currently under development and is to undergo pilot testing prior to tendering and wider public sector rollout. CAMS is actively consulting with agencies in developing its plans for the Electronic Marketplace. However, it is a key strategic procurement initiative within government and past experience suggests that its future success will depend upon: a shared vision and joint ownership between policy making bodies, CAMS and participating agencies; a clear understanding of respective roles, responsibilities and commitments; robust inter-agency service level agreements that include details of deliverables, funding arrangements and methods for dispute resolution; and ongoing liaison and consultation with industry. The successful implementation of the Electronic Marketplace would be assisted by further high level strategic oversight, and support, from across government. Auditor General WA 4

10 Electronic commerce purchasing of goods and services by the Western Australian public sector Executive Summary Electronic purchasing the way forward Electronic purchasing is a tool that can assist the public sector get better value for its purchasing dollar. To be effective, it needs to be implemented as a part of strategic business and procurement planning both within agencies and, where applicable, across government. Electronic purchasing is also part of a wide ranging change process occurring within society. When managing change, the people issues are often the hardest to deal with. Agencies need to recognise and manage this change process, particularly where it impacts on their staff, suppliers and customers. Work process redesign needs to be embraced. High value-added strategic procurement and financial management activities need to be distinguished from low value-added transaction processing activities. Action is required by key agencies to identify and overcome constraints including: legal issues the more complex legal issues will need to take account of national and international developments. Often law making and regulation lags behind technological changes and agencies need to carefully consider this as a business risk; public sector purchasing and payment regulations OIC and the Treasury plan to work with agencies, in consultation with the Auditor General, to identify and amend outdated regulations based on paper documents and written signatures; and telecommunications infrastructure the provision of adequate carrying capacity is critical for electronic commerce implementation, particularly to rural and remote areas. OIC and CAMS are currently evaluating the infrastructure requirements, and associated funding implications, and aim to go to public tender by early

11 SEND ME NO PAPER! Executive Summary As with any computer system implementation, or significant change to business practice, agencies need to consider the data integrity and system control implications of Internet based electronic commerce. The essential pre-requisite is an organisational commitment to information security, reinforced from senior management down, that includes: sound internal information security practices; protecting information when connecting to the world through the Internet; and ensuring that the data received is the same as the data sent and that information is protected and kept private before, during and after transmission. Agency electronic purchasing initiatives should be soundly based around a business case that takes into account the ability and willingness of suppliers, particularly small business, to participate. For many agencies, particularly if their experience with electronic purchasing to date is limited, a phased approach that provides some immediate and easily obtainable gains may be a preferred option. Agencies that purchase few goods and services, but have a more significant role in the provision of information to the public, may find it more productive to focus upon improving and redesigning these information services. Smaller agencies, with limited resources and expertise, may find it effective to piggyback upon electronic commerce developments within CAMS and/or other larger public sector agencies. Summary of recommendations Agencies should: recognise that electronic purchasing is part of a significant long term change process and manage accordingly; adopt work process redesign as an essential and ongoing requirement; base initiatives on a comprehensive business case; examine their purchasing profiles, as part of strategic procurement and business planning, to identify opportunities for productivity improvement; Auditor General WA 6

12 Electronic commerce purchasing of goods and services by the Western Australian public sector Executive Summary consider the willingness and ability of their suppliers to participate; optimise purchasing data capture within their financial management information system; look for opportunities to better utilise simple electronic purchasing tools, such as the corporate credit card; consider a range of options and suppliers when implementing more advanced electronic purchasing applications; comply with public sector wide electronic commerce principles, standards and protocols; address fundamental information security issues, especially when utilising public networks (such as the Internet) that potentially open up their private computer systems to the world; and carefully consider gaps in the law regarding the legal status of electronic transactions as part of broader business risk. The Office of Information and Communications (OIC) should lead and facilitate the implementation of electronic purchasing within the public sector by: carrying out its online service strategies and action plans; developing, in consultation with the State Supply Commission (SSC) and the Department of Contract and Management Services (CAMS), public sector wide principles, standards and protocols that facilitate agency choice and are consistent with national agreements; working with agencies and the Treasury Department (the Treasury), in consultation with the Auditor General, to identify and amend outdated payment regulations; arranging high level strategic oversight, and support, within government for relevant CAMS projects and contracts; identifying and facilitating initiatives with significant across government costs, savings and/or other benefits that are difficult for individual agencies to address; and identifying and resolving policy and practice issues that arise, referring more complex or contentious issues to Government. 7

13 SEND ME NO PAPER! Executive Summary SSC should ensure that its State supply policies support OIC online service strategies and agency electronic purchasing implementation. CAMS should support OIC online service strategies and agency electronic purchasing implementation by: developing the government contracting information bulletin board, in partnership with agencies and OIC in order to identify and address associated design, management, security and legal issues; facilitating, in consultation with the Treasury, OIC and agencies, more effective utilisation of the corporate credit card; working with the Treasury, OIC and agencies to identify opportunities for Smartcard common-use-contracts; and continuing to work with OIC and agencies to determine where it can best add value in arranging for the provision of needed infrastructure and support services and where it can best leave agencies to make their own arrangements. Auditor General WA 8

14 Electronic commerce purchasing of goods and services by the Western Australian public sector Introduction Background The term electronic commerce can be broadly defined as any commercial activity conducted electronically. Australia has been receptive to electronic commerce. In 1997, Australians conducted an estimated 1.5 billion electronic financial transactions - excluding those made through automatic teller machines (ATMs) worth an estimated $16 trillion. 2 While most of this value was processed through financial markets and wholesale banking, much of the volume was processed through: electronic funds transfer point of sale (EFTPOS) 0.5 billion transactions; electronic funds transfer (EFT) 0.3 billion transactions; and credit cards 0.1 billion transactions. Electronic commerce can be business to consumer or business to business. Business to consumer, or retail electronic commerce, focuses upon marketing and gaining a new customer base. Although predictions vary, retail electronic commerce is expected to grow rapidly through the Internet. Business to business electronic commerce focuses upon improving the efficiency of processing common commercial transactions, such as making purchases and payments. The fundamental need to control these commercial transactions has not changed, although the means by which this control can be achieved has. Electronic controls have the potential to be more efficient, effective and timely than traditional manual ones, although they are less visible being built into the computer system. However electronic commerce also poses new security, legal and privacy risks that must be identified and resolved if consumers and traders are to have confidence in this emerging business medium. 2 Electronic Commerce Statistical Survey Commonwealth Department for Industry, Science and Tourism

15 SEND ME NO PAPER! Introduction Online services The Western Australian Government is committed to public sector online services as part of its broader aim to position the State to gain the benefits and competitive advantages associated with the Information Age. Within the Western Australian public sector, online services comprises: electronic service delivery the electronic delivery and enhancement of government services; and electronic commerce commercial transactions conducted in whole, or in part, electronically. This special report deals with electronic purchasing from suppliers, an important part of business to business electronic commerce for the Western Australian public sector. The relationship between electronic purchasing and the Government s wider online services strategy is shown in Figure 1. Wider Community Electronic Purchasing from Suppliers Other Electronic Commerce Applications Electronic Service Delivery Can be closely linked Electronic Commerce Online Services Government connects to community Figure 1: The focus of this special report is electronic purchasing This special report deals with electronic purchasing from suppliers. Electronic purchasing is an important part of electronic commerce for the Western Australian public sector, which spends about $3 billion per annum on goods and services, excluding construction. Source: OAG and OIC Auditor General WA 10

16 Electronic commerce purchasing of goods and services by the Western Australian public sector Introduction Although distinguished conceptually, electronic commerce and electronic service delivery can be closely linked. They both entail new ways of doing business that often require a radical redesign of existing business processes. Many of the computer system development and work redesign steps that need to be addressed are common and they both aim to improve cost efficiency and customer service. Electronic purchasing The State Supply Commission s (SSC) statistics for 1997 indicate that, excluding construction, the Western Australian public sector spent nearly $3 billion in financial year on goods (about $1 billion) and services (about $2 billion). As electronic commerce gains pace, markets that were once local and regional increasingly become national and international. The way the public sector spends this $3 billion will further benefit Western Australian businesses, especially if it can facilitate their adoption of technology, that will assist them to compete in developing global electronic marketplaces. The way organisations, both public and private, undertake purchasing is changing. Leading organisations are embracing the opportunities that technology provides to radically redesign the way they do business rather than, as in the past, mainly automating their existing manual processes. Common purchasing activities, such as raising requisitions and processing invoices, are being redesigned or eliminated if they are not adding value to the process. The process of making purchases and payments - known as the purchasing cycle - is part of wider organisational business and procurement planning. The purchasing cycle comprises four principal phases as follows: purchase planning; ordering paying; and record keeping and monitoring. 11

17 SEND ME NO PAPER! Introduction The purchasing cycle is an iterative process the outcome of today s purchasing decision should feed into tomorrow s purchase planning. The four principal phases of the purchasing cycle, and their associated activities, are shown in Figure 2. PHASE 1 Purchasing Planning supplier performance monitoring budgeting and PHASE 4 management Record Keeping exception reporting and Monitoring reliable audit trail define a purchasing need purchasing policy compliance market search seek bids: quality/price /delivery supplier past performance approve order place order confirm order PHASE2 Ordering receive goods/services match receivals to order approve payment make payment PHASE 3 Paying Figure 2: The purchasing cycle The purchasing cycle comprises four principal phases: purchase planning; ordering; paying; and record keeping and monitoring. It is part of wider organisational business and procurement planning. Leading organisations are looking to redesign essential activities and eliminate non-essential ones. Source: OAG The above diagram has been condensed, as a margin note, to assist the reader interpret case studies and purchasing methods presented later in this report. The above four phases of the purchasing cycle have been presented in a pie chart as follows, with shading to indicate the degree of process redesign/ enhancement: Auditor General WA 12

18 Electronic commerce purchasing of goods and services by the Western Australian public sector Introduction Significant redesign/enhancement 1 Partial redesign/enhancement Little or no redesign/enhancement Examination focus and approach The examination comprised: an overview of the electronic purchasing environment within the Western Australian public sector; an analysis of purchasing data from three comparable Western Australian public sector purchasing agencies to provide an indication of purchase order volumes and values; a review of electronic purchasing developments within selected private and public Australian organisations; and consideration of the issues to be addressed as electronic purchasing gains pace within the Western Australian public sector. Work/job redesign is an integral part of electronic purchasing. This special report therefore addresses the need for public sector agencies to effectively manage the associated people issues. However, broader issues associated with society s transition to the Information Age, for example taxation, trade, social and employment impacts, were beyond the scope of the examination. Although this special report deals with electronic purchasing, much of its content is relevant to the broader issues and challenges facing the Western Australian public sector as it moves towards the delivery of online services. 13

19 SEND ME NO PAPER! Electronic purchasing national and State overview There is recognition of the need for national agreement on some common electronic purchasing principles, standards and protocols. Agencies within the Western Australian public sector operate in an increasingly devolved management environment. They will therefore need to be advised of the key principles, standards and protocols to be applied when implementing electronic purchasing. The Office of Information and Communications (OIC) has the lead role in coordinating electronic purchasing implementation within the Western Australian public sector. The Department of Contract and Management Services (CAMS) provides electronic purchasing infrastructure and service support to assist public sector agencies implement OIC online service strategies. National developments International organisations such as the United Nations, the Organisation of Economic Co-operation and Development (OECD), the Group of Seven nations (G7) and Asia Pacific Economic Co-operation (APEC) are addressing the global trade, legal, economic and taxation impacts of electronic commerce that cut across international boundaries. Within Australia, there is recognition of the need for governments to agree on some common national principles, standards and protocols when implementing electronic commerce. The Australian Government has established the Online Council as a forum for Commonwealth, state and territory ministers, and local government, to agree on national strategic approaches to government use of information and communication services. The Online Council first met in March 1997 and includes relevant Commonwealth and state government ministers and the president of the Australian Local Government Association. Auditor General WA 14

20 Electronic commerce purchasing of goods and services by the Western Australian public sector Electronic purchasing national and state overview A national Australian Procurement and Construction Ministerial Council (APCMC) has been formed to facilitate a nationally consistent approach to public sector purchasing, contracting and electronic commerce. It comprises a relevant minister from each state and is presently chaired by the Western Australian Minister for Works and Services. Two of APCMC s key objectives are to facilitate: the development of a simple and unified approach to online catalogues, 3 through which Australian government agencies can place orders with suppliers. As electronic commerce becomes more common, having an online catalogue could become as important as having a telephone listing in the Yellow Pages ; and a single point of entry and registration requirements for all suppliers, including those from New Zealand. Once registered, a supplier will use the same unique identifying code when dealing with any government within Australia and New Zealand. This is intended to facilitate a range of commercial, taxation and regulatory dealings with governments. For electronic purchasing, supplier registration could provide a solution to the problems of authorisation and identification, particularly when trading over the Internet. Suppliers will not want to have to separately register with individual governments, much less with individual government agencies. In July 1998, the Victorian and Western Australian State Governments signed an agreement to jointly develop contracting and purchasing skills and services, including electronic commerce initiatives, through the Procurement and Contracting Centre for Education and Research (PACCER). Other state and territory governments have also expressed interest in joining. 3 An online catalogue contains a description and price list of goods and/or services offered. It requires each good or service to have a unique identifying code or, if this proved too difficult to achieve, a standard text description that could be located by an appropriate Internet search engine. 15

21 SEND ME NO PAPER! Electronic purchasing national and state overview Western Australian overview The Office of Information and Communications (OIC) role is to lead, facilitate, coordinate and work in partnership with agencies, businesses and communities in order to maximise Western Australia s transformation to the Information Age 4. OIC became fully operational in January 1998 and is located within the Western Australian Department of Commerce and Trade. It reports through that Department s Chief Executive Officer (CEO), and its Minister, to the Cabinet Standing Committee for Information and Communication Issues. In line with the priorities and strategies approved by the Cabinet Standing Committee, OIC has recently issued a number of useful action plans that it is now progressing to tender for implementation. They include: electronic service delivery the provision of government services online to the community; electronic commerce the conduct of business transactions electronically. This covers both business to business (e.g. government buying from suppliers) and business to consumer (e.g. government collecting revenue from the public) electronic commerce; and building confidence, trust and acceptance a plan to address and minimise the legal, audit, security and management risks arising from electronic commerce and service delivery. A CEOs Online Services Consultative Group has recently been formed to facilitate the adoption of online services within Western Australia. Its scope of responsibilities include providing input to OIC policies and providing periodic reports to the Cabinet Standing Committee for Information and Communication Issues and other relevant bodies. It is chaired by the CEO of the Department of Commerce and Trade and comprises mainly State public sector CEOs with some local government representation. An Information and Communications Policy Advisory Council (ICPAC) has also been formed to provide further input to Government on the development 4 Strategic direction of OIC approved by cabinet in March Auditor General WA 16

22 Electronic commerce purchasing of goods and services by the Western Australian public sector Electronic purchasing national and state overview of information, information technology, communications and telecommunications strategies and policies. ICPAC has representatives from industry, the public sector and academia. Part of ICPAC s role is to independently advise Government, through the Cabinet Standing Committee for Information and Communication Issues, on strategies and policies recommended by OIC. Agencies within the Western Australian public sector operate in an increasingly devolved management environment. This environment aims to progressively free agencies from prescriptive central agency control and direction, while still providing an overall framework of key principles and policies that serve as a guide to agency decision making. Within this devolved management environment, OIC has the primary responsibility for providing agencies with guidance on key electronic purchasing principles, standards and protocols. These guidelines will be needed by agencies when implementing more advanced electronic purchasing implementations, particularly if they choose to do so independently of the Department of Contract and Management Services (CAMS). CAMS provides a range of procurement and asset management services for government and specialises in contract management. CAMS is one of two Western Australian agency representatives on the Australian Procurement and Construction Council (APCC), the support body to APCMC. CAMS is currently developing a number of infrastructure and service support initiatives, in consultation with OIC and agencies, in order to support online services within government. Two initiatives of particular relevance to electronic purchasing are: the government contracting information bulletin board an Internet web site that aims to facilitate public access to current and recently awarded government tenders. It is already linked to other Australian government bulletin boards and will develop links to other Western Australian agency bulletin boards. It has the potential to provide cost effective options for future tender preparation, advertisement and management; and 17

23 SEND ME NO PAPER! Electronic purchasing national and state overview an electronic marketplace (the Electronic Marketplace) an Internet based electronic commerce system for use across government. It aims to provide a range of online functions and services such as ordering, cataloguing, invoicing, payment and management reporting. The Electronic Marketplace is discussed later in this report. All agencies, excepting government trading enterprises, are likely to be required to utilise, or interface with, the government contracting information bulletin board 5. CAMS will therefore need to work with agencies to agree: the structure of the government contracting information bulletin board, including how it will interface with existing agency bulletin boards; how to consolidate across government tender data and facilitate seamless access for users; and a process for working through the management, security and legal issues that will arise, particularly as additional tender management functions are added. Other agencies have important roles to play in specific aspects of electronic purchasing implementation. These agencies include: the Small Business Development Corporation (SBDC), which provides services and support to small business. It has an important role in promoting electronic commerce to small business and in ensuring that small business is a participant in government electronic commerce initiatives; the Department of Commerce and Trade, which is the host agency for OIC and, through its various functions, has many interactions with the Western Australian business community; SSC, which has the role of administering the devolution of purchasing authority to agencies and setting purchasing policy. SSC is, along with CAMS, represented on APCC; the Treasury Department (the Treasury), which regulates the financial regulatory framework through the Financial Administration and Audit Act 1985 (FAAA) and its Treasurer s Instructions (TIs); and 5 The government contracting information bulletin board aims to meet a recommendation from the Commission on Government (COG) to make public the awarding of government contracts. Auditor General WA 18

24 Electronic commerce purchasing of goods and services by the Western Australian public sector Electronic purchasing national and state overview Recommendations the Auditor General, who is responsible under the FAAA for auditing agency financial statements and performance indicators and for examining broader public sector compliance, control, accountability and performance issues. Agencies should comply with public sector wide electronic commerce principles, standards and protocols. The Office of Information and Communications (OIC) should lead and facilitate the implementation of electronic purchasing within the public sector by: carrying out its online service strategies and action plans; and developing, in consultation with the State Supply Commission and the Department of Contract and Management Services (CAMS), public sector wide principles, standards and protocols that facilitate agency choice and are consistent with national agreements. CAMS should support OIC online service strategies and agency electronic purchasing implementation by developing the government contracting information bulletin board, in partnership with agencies and OIC, in order to identify and address associated design, management, security and legal issues. 19

25 SEND ME NO PAPER! Redesigning the purchasing cycle Common purchasing processes are typically complicated, requiring multiple approvals, and generate paperwork. They are often applied to all purchases, irrespective of their value, complexity and degree of risk High volume/low value purchasing remains a significant activity for some Western Australian public sector agencies. Electronic purchasing provides tools to improve the productivity of this relatively low risk activity. Business process redesign is essential to effective electronic purchasing implementation. Electronic purchasing has highlighted the need to change outdated public sector regulations, based on the physical checking of paper documents. High volume/low value purchasing Electronic purchasing is part of society s transition from the Industrial Age to the Information Age. It has been said that the twentieth century office was modelled on the factory, with paper documents as the output, and that office technologies have been applied accordingly. Common purchasing processes, and their associated activities, have evolved in accordance with the requirements and technological constraints of the time. They are typically complicated, requiring multiple approvals, and generate paperwork that moves backwards and forwards between different staff and functional areas. All of the steps are candidates for process redesign, and some for elimination, when implementing electronic purchasing. A traditional purchase cycle process is shown in Figure 3. Until relatively recently, this process would have been fairly typical for any large Australian company or public sector agency. Not all organisations would include all steps, nor in the same sequence. Some organisations, for example those with a central store for receiving goods, would have additional steps and processes. Auditor General WA 20

26 Electronic commerce purchasing of goods and services by the Western Australian public sector Redesigning the purchasing cycle End User Supervisor Purchasing Section Accounts Section Supplier Completes requisition Approves Enter into requisition supply system Identifies sources of supply Receives copy of purchase order Receives goods and services Validates purchase order for payment Notes: Obtain quotes Raises purchase order Retains copy of purchase order Confirms purchase order Authorises purchase order for payment (1) Updates budget Updates supply system (1) Incurring officer signature (Western Australian public sector) (2) Certifying officer signature (Western Australian public sector ) Receives copy of purchase order Matches invoice to purchase order (2) Updates FMIS Pays invoice Receives purchase order Acknowledges purchase order Delivers goods and services Sends invoice Receives payment Figure 3: A traditional purchasing cycle in large public or private organisations Common purchasing processes are typically complicated. They involve multiple approvals and generate paperwork that moves between functional areas. When implementing electronic purchasing, all of the processes are candidates for redesign and some can be eliminated. Source: OAG A further feature of the traditional purchasing cycle is that most of the processes and practices are applied to all purchases, irrespective of their value, complexity and degree of risk. This means that the cost of making low value purchases can sometimes exceed their value. 21

27 Total Expenditure SEND ME NO PAPER! Redesigning the purchasing cycle In order to compare individual purchases by number and value, the examination obtained purchase order data from three comparable agencies for the calendar year The combined result of this data extraction and analysis is shown in Figure 4. All three agencies showed a similar purchasing profile. As a further check, and to account for purchasing undertaken without a purchase order being raised, the examination also analysed the agencies invoice data from their financial management information systems (FMIS) for calendar year Again, a similar profile emerged $80M Number of Purchase Orders Number of Purchase Orders Total Expenditure $70M $60m $50M $40M $30M $20M $10M 0 $ $ $ >$ Purchase Orders Grouped by Value Figure 4: Purchase orders raised in 1997, by number and value, in three comparable public sector agencies More than 90 per cent of purchase orders raised by the three agencies were for amounts less than $ However, a few large purchase orders (about one per cent of total orders raised) comprised about 80 per cent of total purchase order expenditure. Note: The purchasing patterns across the public sector may differ. Source: OAG and agencies The analysis suggests that high volume/low value purchasing remains a significant activity for some public sector agencies. Any productivity improvements that can be made to this relatively low risk activity can potentially free resources for use in areas of greater risk and/or need. Auditor General WA 22

28 Electronic commerce purchasing of goods and services by the Western Australian public sector Redesigning the purchasing cycle VDNRE Case Study 1. Purchase planning integral to reform 2. Ordering simplified 3. Invoices reduced and eliminated 4. Electronic data capture in FMIS Case Study Redesigning the purchasing cycle The examination sought to find an Australian public sector agency that had implemented electronic purchasing to improve the efficiency of its high volume/low value purchasing. With the aid of a consultant, the Victorian Department of Natural Resources and Environment (VDNRE) was identified. VDNRE was one of a group of agencies that undertook pilot electronic commerce projects in conjunction with the Victorian Government Procurement Board. Prior to 1998, VDNRE redesigned its existing purchasing cycle processes to reduce its invoice processing cost to an estimated low $7 per invoice. Nevertheless, VDNRE estimated that it could reduce its costs by a further $ per annum, if it could eliminate 80 per cent of its annual invoices. It has four main strategies to achieve this aim: special supplier agreements linked to electronic invoicing; expanded use of corporate credit cards; Internet purchasing - linked to invoice elimination; and a longer-term strategy to replace petty cash purchases with Smartcards. Special supplier agreements linked to electronic invoicing VDNRE is negotiating special payment processing and reconciliation arrangements with key suppliers that will provide a number of benefits including a large reduction in invoices. For example VDNRE has: negotiated with its telecommunications supplier to reduce the current invoices per year to only 12. Furthermore, these 12 invoices will be provided in an electronic format suitable for direct entry into VDNRE s FMIS. This will permit reconciliation and ing to appropriate sections for verification, monitoring and approval. VDNRE intends to expand the process to include a range of other utility providers, such as electricity and gas; and developed a system with a large stationery supplier through which it receives one invoice per month for up to purchases. The invoice information is supplied, reconciled and processed electronically thus eliminating the need for re-keying invoice data. Further developments are being investigated which will provide closer links between the vendor s 23

29 SEND ME NO PAPER! Redesigning the purchasing cycle Internet catalogues and the Department s Internet based purchasing application. This is intended to streamline the process further and provide a standard for negotiation with other suppliers. Expanded use of corporate credit cards VDNRE anticipates that approximately 50 per cent of current invoices will eventually be replaced by the expanded use of the corporate credit card. VDNRE has negotiated, and implemented, an arrangement whereby its credit card provider forwards a single electronic credit card statement each month, that contains all purchases made by all agency credit cards. Individual cardholders log on to the system to electronically approve purchases and: input supporting information, if required, that further describes the type or purpose of individual purchases; and amend or allocate an expense code for each purchase. The cardholder s supervisor also receives an electronic copy of the statement, which they are required to electronically acknowledge and approve. All electronic purchasing data in the monthly credit card statement, and information added by the cardholder, is captured and stored in the agency FMIS. VDNRE has contractually committed to pay its credit card provider the billed amount on a set day each month. VDNRE s internal checking and approval processes do not delay this payment. Any incorrect charges identified are followed up with the provider and adjustments made to the following month s statement. Internet purchasing linked to invoice elimination Authorised personnel enter purchase orders directly into an Internet based purchasing application. The orders are then processed by the FMIS and ed direct to the supplier. On delivery of goods or services, the order originator confirms receipt in the purchasing application and the FMIS automatically matches this receipt to the purchase order. It is a paper-less process that relies upon the checks and balances built into the system. Auditor General WA 24

30 Electronic commerce purchasing of goods and services by the Western Australian public sector Redesigning the purchasing cycle System implementation was accompanied by a significant work redesign exercise resulting in of VDNRE s staff being authorised to approve expenditure according to various authorisation levels. After initial piloting and refinement, the system is currently being rolled out to all departmental locations in the State. The main savings result from eliminating invoices and simplifying the ordering process. Replacing petty cash with Smartcards Smartcards differ from credit cards in that they contain a computer chip capable of storing value and recording transactions. VDNRE recognises that purchasing with Smartcards is a longer-term strategy that will take time to implement. In particular the rate at which it can introduce Smartcards will depend upon their level of acceptance by private sector suppliers. The ability of Smartcards to store, and then download into the FMIS, detailed purchasing transaction data should also lessen the future need for cardholders to retain supporting paper documents for petty cash and credit card purchases. Changes in government regulations The initiatives being pursued by VDNRE have necessitated the review of the Victorian Government s regulations for certifying and authorising officers. The elimination of invoices through Internet purchasing requires a change to Government regulations to enable the authorisation of payments to be made by electronic rather than physical signatures. VDNRE was also used in a lead role by the Victorian Government to pilot the elimination of invoices, thereby reducing the overall cost to the public sector of introducing new business methods. Summary The case study illustrates that: organisations can often make improvements to the efficiency of existing purchasing functions with little or no introduction of new technology; 25

31 SEND ME NO PAPER! Redesigning the purchasing cycle the implementation of electronic purchasing needs to be business rather than technology driven as it involves strategic decisions of how the organisation will do business with its suppliers; business process redesign is essential to effective electronic purchasing implementation; electronic purchasing can enable more comprehensive capture of organisational purchasing data; and within government, existing rules and regulations based on paper documents can be an obstacle to electronic purchasing implementation. Recommendations When implementing electronic purchasing, agencies should: examine their purchasing profiles, as part of strategic procurement and business planning, to identify opportunities for productivity improvement; consider the willingness and ability of their suppliers to participate; adopt work process redesign as an essential and ongoing requirement; and optimise purchasing data capture within their financial management information system. The Office of Information and Communications (OIC) should lead and facilitate the implementation of electronic purchasing within the public sector by working with agencies and the Treasury Department, in consultation with the Auditor General, to identify and amend outdated payment regulations. The State Supply Commission should ensure that its State supply policies support OIC online service strategies and agency electronic purchasing implementation. Auditor General WA 26