One of the latest examples comes from Seattle-based DemandStar. The e-bidding procurement platform for state and local governments recently said that it had gained 200 new clients in the first half of this year, which already equals the number of agencies the company added in all of 2020.
The pandemic, with the sudden shift to remote work and the need to quickly source protective gear and related goods, stands as one of the main reasons for the growth at DemandStar and its competitors.
But that’s not the only explanation for why such digital procurement operations have gained popularity and look likely to head into 2022 with even more steam behind them. Indeed, competition promises to increase, especially with a giant such as Amazon hoping to gain more dominance in this part of the government technology industry.
PROCUREMENT GAINS
A closer look at DemandStar illustrates the issues at play.
During that time, the company’s technology has enabled at least $7 billion worth of contracts, with $1.8 billion coming in the first half of 2021.
The company, founded in 1998, operates an online marketplace that connects suppliers to governments. Businesses that bid through the system pay fees for those services — specifically, via subscriptions to bid notices — while governments can use the technology for free.
While the pandemic certainly provided a catalyst for that growth, local and state governments are increasingly finding it convenient to work with digital procurement systems that provide an easily accessed pool of suppliers, said DemandStar CEO Ben Vaught. Suppliers, for their part, can avoid the hassle of having to register with hundreds of governments individually to access those bids, he said.
The shift from paper-based legacy systems to digital tools is often bumpy, but in Vaught’s view, the technology his company sells comes with an advantage designed to overcome inertia.
“The online software matches their paper-based processes,” he said. “When you create a new bid in the system and publish, it mirrors what (those governments) would do when publishing to websites or local newspapers.”
FROM PAPER TO DIGITAL
The growth in digital government procurement comes as the business-to-business tech world continues to make hard progress in moving past paper-based bids, invoicing and similar systems — a push made possible by the increasing involvement of digitally comfortable millennial-age professionals in B2B commerce, among other factors, according to studies.
According to consumer data provider Statista, global B2B online commerce increased 18.2 percent year over year in 2019, reaching $12.2 trillion. By 2027, that market will hit $20.9 trillion, underscoring the general opportunity for all types of providers of digital procurement services and technology.
As for the U.S., local and state governments spend an estimated $3.25 trillion annually, dwarfing the contract figures reported by DemandStar but also highlighting the market opportunity. The general move toward online government services is also picking up speed, further boosting the appeal of cutting-edge procurement technology.
“Many counties are moving to cloud-based software applications in general,” said Rita Reynolds, CIO of the National Association of Counties. “First, because current vendors are moving from on-premise to cloud-based. In other words, counties can’t host the current version of the application on their own networks. Second, because of the increased reliability, efficiencies, cost and most importantly, the continuity that a cloud-based offering provides.”
AMAZON’S PROCUREMENT PLAY
Those trends have attracted all types of players to this space. That includes Amazon.
The retailing, cloud-computing and logistics giant since 2015 has operated a B2B online marketplace in which public-sector business is now one of the fastest-growing segments, thanks in part to the pandemic. Amazon recently said that the marketplace serves five states, 90 of the 100 largest U.S. cities and counties and other public agencies. The marketplace also offers diversity and certifications services so that suppliers and governments don’t run afoul of local procurement laws.
Meanwhile, other, less famous companies continue to expand their own digital procurement efforts.
For example, OpenGov in June said it was buying five-year-old cloud-based procurement firm ProcureNow, a move that furthers OpenGov’s goal of being a one-stop shop for many local and state government tasks.
In March, Chicago-based Marketplace.city, a five-year-old operation that helps more than 200 governments find supplies online, said it had raised $1 million. The company’s pitch is that it doesn’t seek to replace legacy systems as much as to bring more data, context and transparency to the procurement process. That means sharing pricing among participating clients. Marketplace.city, much like DemandStar, does not charge public agencies, but instead collects a 7 percent fee from winning bidders.
Another sign of growth comes from Periscope Holdings, a GovTech 100 business that earlier in July won a contract from the Texas Department of Information Resources to supply procurement software and services to state and local government agencies including education.
The company, which launched in 2001, maintains a network of 500,000 suppliers, according to Brian Utley, Periscope's CEO. One of the main drivers of this growth — as is the case with DemandStar and other competitors — is the ability to scale relatively efficiently.
“Our solutions are scalable for however broad or focused the initiative — which contributes significantly to our ongoing growth,” Utley said in an email interview. “We are also working with cooperatives like Texas DIR to make it as easy as possible for public-sector organizations to purchase our solutions at a reduced price.”
He credits pandemic purchasing with driving more agencies to online procurement.
“During the pandemic, we learned it wasn’t enough to have your key contractors, as those contractors quickly became out of stock,” he wrote. “We learned that having the ability to source from a large pool of suppliers was essential.”
MORE PROCUREMENT ACCESS
He also points to other factors that will continue to help boost the revenue of these technology providers. That includes increasing pressure to award more contracts to minority- and women-owned firms, along with efforts to source supplies from smaller and local businesses. The idea is that a digital process can help governments achieve those goals more quickly than paper-based systems.
“It’s challenging to think of a time when we have seen more RFPs for public procurement solutions than we have this year. I think that comes down to procurement being identified as the department that can fulfill strategic goals and objectives, like diversity and inclusion,” Utley wrote. “Providing fair, transparent procurement has always been the cornerstone of public-sector procurement, but now there is a heightened focus on diversity and inclusion initiatives — and procurement technology like ours is key to achieving supplier diversity and inclusion goals.”
As for proving more support for smaller businesses, even Amazon, for all its massiveness, has been on a kick for more than a year to promote its various third-party marketplaces as friendlier places for relatively minuscule operations. That includes its public-sector operations.
Indeed, as DemandStar’s Vaught sees it, digital procurement technology can help level the supplier playing field.
“The new shared supplier networks really help folks winning their first or second government contracts,” he said.
WHAT COMES NEXT
The future seems bright for these digital procurement companies.
For one, as Utley told it, expectations of one-stop shopping for government procurement officials will continue to increase — indeed, those expectations reflect demands in the B2C world, and among the younger, digitally focused professionals now making their marks in local and state governments.
“Agencies can comparison shop across their own contracts, cooperative contracts, other public-sector contracts as well as the open market,” he wrote.
Federal action also could spark more local and state governments to adopt these newer tools, according to Vaught. Take President Joe Biden’s infrastructure plan, under debate in Congress. Assuming a plan passes, that will likely mean a mountain of money for local utility districts, and more supply decisions for all that new work.
In fact, agencies that oversee local water and electrical systems stand as one of the hot areas of growth for DemandStar, he said, and that trend looks likely to keep up well into 2022.
“The rubber meets the road at these local utility districts,” he said.
He also doesn’t seem too worried about the presence of Amazon in this space, even given Amazon’s long and ongoing history of disruption to a variety of industries.
“Amazon does offer a great product for the public sector, but not for a certain class of high-friction purchases,” he said. “You can’t buy an elevator on Amazon.”
It will be harder to turn away from this newer procurement technology as time passes, at least according to his outlook.
“Once you go digital, you never go back,” Vaught said.
