The Hostway Blog

Electronic Procurement

The concept of electronic procurement for a small business not yet comfortable with new technology can be overwhelming. E-procurement takes many forms and has become a requirement for doing business with the government. But the electronic procurement requirements that we describe here are not unique to the government. They are the same as a large private-sector business requires of its suppliers. Therefore, it is essential that any business at least consider these issues, whether it does business with the government or not.

Electronic procurement with the government typically takes two forms: ecommerce Web sites and/or Electronic Data Interchange (EDI).

  • Doing Business via Government Web Sites: As a consumer, you've most likely purchased a product or service such as an airline ticket or an item of clothing on one of the many ecommerce Web sites. When you complete your order by entering the required information and electronically submit your order via a Web site instead of calling or mailing in your order or visiting a store location, you are participating in electronic procurement. The information that you provided is electronically connected into the merchant's internal systems. The benefit to you as the consumer is saving time; the benefit to the merchant is saving the costs associated with processing a paper order, paying phone order takers, printing a catalog, and maintaining a store location.When it comes to government-sponsored, ecommerce Web sites, the set-up is similar to the one described above, except that in this situation, the government agency is the consumer, you are the merchant, and it is the government that provides the Web site for performing various procurement transactions, such as displaying requests for proposals, submitting bids, delivering invoices, etc. This is a great benefit if you have a limited number of order transactions because the only technology it requires of you is a computer, Internet connectivity, and a Web browser. A contractor will need to speak with the buyers of each agency to determine if an ecommerce Web site is available, where it is located (the Web address), and what procurement functions can be performed. Also, you may need to obtain a username and password from the agency to access the site.
  • Doing Business via EDI: Government agencies that do not offer an ecommerce Web site will most often require a contractor to communicate order transactions via EDI, the second form of electronic procurement with the government. EDI is a set of standards that defines how data/information is presented in an electronic form, thereby allowing the electronic equivalents of common business documents, such as invoices, forms, bids, requests for quotes, purchase orders, etc., to be transmitted electronically between the computers of what are called "trading partners." A trading partner can be the federal government, a prime contractor, or another commercial business.

Why Are EDI Standards Necessary? For purposes of illustration, let's say that the government has contracted with you for certain supplies and wants to receive your invoice electronically. You go ahead and oblige by sending your invoice file in a format that is unique to your system. Since the way that data is presented in the government's system is also unique, in order to import your file into its system, it must first convert the data into the format that matches the format required by its system's database. Now imagine how difficult it would be for the government to manage this process if each of the thousands of government contractors were each to send electronic invoices in a format unique to their system.

So, instead, the government asks its contractors to convert their files into a standardized format (EDI) prior to sending into a standardized format. Using EDI as the standard, the government receives only one standardized format for all invoices and only has to manage converting files into one file format for each document type (invoice, purchase order, shipping notification, etc.).

Who sets EDI standards? There are nonprofit committees that define EDI standards for the country. The set of standards most often used is called ANSIIx12 4010. Within that set of standards, there are many documents, referred to by versions and numbers (e.g., 810 is the standard invoice document, 850 is the standard purchase order document, and 997 is the standard functional acknowledgment that confirms the receipt of the files by each party).

An explanation of these standards and the specifications for each version can be found here and here.

Converting Data into EDI. There are three basic options for getting your data into EDI format. It's best to check out all options, as prices and functionality vary greatly.

  • Translation Software: There are many EDI companies that offer software that allow you to "map" the various data conversions that need to occur in order to convert your files. There will be upfront costs to purchase and install the software, and you will also have to pay an employee, often called an EDI coordinator, to manage the software or pay a consultant to do so.
  • Third-Party Solutions: Many EDI companies offer services that take your paper or electronic files, convert those files to the required EDI format, and then deliver those files to the right location. Typically the fee for this type of service would be based on the number of transactions and the number of unique formats being translated (called "templates"). For instance, an 810 invoice is one template and an 850 purchase order is a second template.
  • Hosted Software: Finally, some EDI companies offer solutions that allow you to take advantage of the translator software technology without the cost of purchasing and maintaining the software. You simply send your electronic files over the Internet in the format you normally use to the EDI host company. The EDI host converts your files into the EDI format required and then delivers the files to the specified location. Charges for this service typically include a one-time set-up fee for each trading partner and a smaller monthly fee that may or may not be based on the number of transactions.

Which is the best option for you? In order to define a return on investment for any of the options, you should take the following factors into account:

  • Transaction Volume: Certain solutions will have a per transaction fee. Understanding the number of transactions your business will perform will allow you to estimate your monthly costs.
  • Employee Costs: It is helpful to find out the cost to process a paper document in order to determine savings that may occur by implementing an EDI solution.
  • Opportunity Cost/Cost of Not Doing Business: You should understand the dollar impact if you choose not to do business with the government (or with another trading partner). This helps greatly in determining what your business can "afford" to spend on a solution.

A recent development in data exchange is the use of XML (extensible markup language), a new high-powered web language developed for e-business. Unlike HTML, which displays text and images on Web pages, XML enables the exchange of structured data over the Web. This new technology will allow greater integration of e-partners, so they can track material/parts/supplies through the supply chain.

What EDI Can Do for You. Here are just some of the advantages of being EDI-capable:

  • increased business opportunities; remember that once you've mastered EDI with the government, you can use the same technology to provide EDI to your larger, private-sector trading partners.
  • faster and more accurate processing of orders, resulting in improved inventory management and, best of all, greater customer satisfaction.
  • faster billing; since orders are filled and delivered sooner, billing and closeout can occur sooner.
  • < li>lower mailing costs, a reduction in mail room sorting/distribution time and elimination of lost documents.
  • improvements in overall quality through better record keeping and fewer errors in data.
  • better information for decision-making; EDI provides accurate information and audit trails of transactions, enabling you to identify the areas offering the greatest potential for efficiency improvement or cost reduction.

Exchanging EDI Files. To manage various security and tracking issues associated with exchanging the high volume of files the government exchanges, it uses what is called a Value Added Network (VAN). In simplest terms, a VAN is a for-profit private-sector business that provides and manages a collection of secure mailboxes that are used to deliver and receive order files.

If you are doing business with the government, via EDI, you will need to acquire a mailbox from a VAN from which you will pick up and deliver files from and to the government via a dial-up connection. The VAN of your choice will offer you technical assistance in this area.

It is not a requirement that your mailbox be located on the same VAN as the government's. Most VANs have agreements with one another that enable them to exchange files. However, there is a cost for this, referred to as an Interconnect Fee. If you're doing business with only one government agency, you may decide to obtain a mailbox on that agency's VAN to avoid Interconnect Fees.

There are many other fees for optional ancillary services VANs offer. The main fee incurred is the "per kilo character" charge (per 1000 characters). VANs are becoming more competitive these days, so be sure to compare prices. As an ancillary service, most VANs also offer third-party translation services.

In closing, our advice is to use the information we have provided to perform a methodical appraisal of all the solutions available to you, and then choose the best one for your company.


Winmark Business Solutions (WBS) is a free Web site for small businesses and entrepreneurs containing over 6,000 pages of business-critical information and downloadable tools at www.WBSonline.com. WBS is a division of Winmark Corporation, a multi-brand franchiser with nearly 900 franchise locations in North America. With over 25 years working with small businesses, WBS draws upon years of experience to bring important small business articles, information, tools, forms, checklists, calculators and downloadable forms.