Electronic Commerce

When tax returns flood into state capitals this spring, the letters "EC" may flash across the mind of a harassed revenue director. Or a county government procurement manager, staring at a pile of bids, might think about EC as a way to cut costs. Based on the buildup that electronic commerce has gotten, both might be forgiven for believing that EC would solve their management headaches today.

But they would be too optimistic. Instead, state and local government information technology executives are now laying the building blocks for EC across the nation. Regional electronic benefits transfer networks are springing up, several states have authorized the use of digital signatures, and many states have EC pilot programs under way.

The drivers? Increasing financial and data management pressures are forcing states to think about "doing business with the taxpayer electronically," said Terry Garber, manager of technology management in South Carolina's Department of Revenue. States have begun "taking those aspects of the enterprise that are now connected by paper and transforming them into electronic formats whenever possible."

In fact, state and smaller governments may be setting the pace for public-sector EC, experts say. "The states may well be ahead of the federal government in EC," said Michael McKenzie, division vice president for state and local government for Electronic Data Systems Corp. (EDS). "There are a lot more different things being done on the state side because states touch the citizens more directly than the federal government does. The state has a service to deliver."

At the same time, state and local government EC development is somewhat insular, as befits a market of 50 states and thousands of smaller governments. "There's kind of a piecemeal approach to EC today," said Carolyn Purcell, executive director for the Texas Department of Information Resources. "Agencies are developing small applications, and that makes it a good opportunity for agencies and states to cooperate."

Experts say state and local governments face three key challenges in laying the foundation for broad-based electronic commerce: First, a technical and legal foundation for EC has to be established; second, states must figure out how to ensure all vendors have equal access to EC systems; and finally, states are facing a universal management question: how best to finance EC development.

Digital Signature Systems

Some of the most advanced work on secure state EC has taken place on digital signature systems. But while DSS technology, which provides a personalized digital key for data transmissions, is often viewed as a key enabling technology for EC, it is not considered fail-safe. DSS does provide a system of messaging authentication and repudiation: Once a message is sent, it's hard for a sender to deny sending it. On the other hand, the message itself is not encoded.

"Digital signature authenticates the sender of the information," said Ken Allen, digital signature coordinator for the state of Utah's Department of Commerce. "You can know with reasonable assurance who is sending a document and if it has been tampered with."

Moreover, most state legal systems are not ready to handle digital signatures; the first law covering digital signatures was passed by Utah just two years ago. And so far only a few states, including Florida and Washington, have followed suit. "Most laws that are out there today are based on the idea that commerce moved on wagons or ships-a face-to-face signing or declaration that sealed the deal," said Mike Connor, director of EC for G2 Research Inc., a Mountain View, Calif., research firm. Changing those laws to reflect electronic transactions takes time.

Most states, like Georgia, are proceeding cautiously. In that state, a bill was submitted during the last session-"essentially the Utah statute for digital signatures," said David Rabin, a partner at Morris, Manning&Martin LLP in Georgia.

"The people in Utah did great work," Rabin said. "But we're kind of `After you, Alphonse.' And that's a valid position. Nobody knows if we will need a big infrastructure. In five years we may see it, but we don't know." A vote on the Georgia statute should come in the first few months of 1997.

An EC team from Washington state also took a look at Utah's program and brought it to the attention of Secretary of State Ross Monroe, who became a champion of the cause. Washington's digital signature law was signed-digitally-on March 29, 1996. Since then, the state has been working on small projects designed to further its understanding of digital signature technology and its uses.

"We approached digital signature as one part of electronic commerce, as an enabler," said Linda Mackintosh, director of corporations for the Washington secretary of state's office. "We're on the Pacific Rim, and one out of every four jobs involves international trade. We want to make sure we retain our lead as a trade state, and a digital signature strategy was part of it."

So far the main project completed is a system to request card key applications. At Washington's Department of Information Services, a manager can request building access electronically and send an application to each of the division's assistant directors for security. "Those requests had been done electronically in the past, but they had never been signed before," said Carlene Covey, a computer information consultant for the Department of Information Services.

Ensuring Market Access

Even once those laws are changed, it will be a challenge to ensure that EC is available to everyone. For example, when Indiana ran a small electronic procurement pilot project in early 1996, it found that one of its biggest challenges was making sure all its vendors had equal electronic access to procurement information that the state was making available on-line. "We need to figure out how to ensure access for a large majority of our vendors so we don't put smaller businesses at a disadvantage," said Jay McQueen, deputy commissioner for the Indiana Department of Administration. "Historically, when someone wanted a bid package, we just footed the bill."

To solve the problem, Indiana worked with some of its state and local institutions to provide public gateways to the procurement information. "We have a strong tie with our library, and the Better Business Bureau also bought in, and both have access to our Access Indiana system," McQueen said. "That means that there will be some accessibility to the system, even if someone can't afford it or can't understand it."

South Carolina is working on how best to push one of its EC programs out to users. Specifically, it is trying to figure out how to provide software to potential users of its Tax Connect program, which allows businesses to file their state sales taxes electronically, in order to help grow the service.

"Right now, one of the many issues we are dealing with is how to bring the small- and medium-size taxpayer in and make it cost-effective," said Jan Key, a revenue manager in South Carolina's Department of Revenue. Options include providing the software directly or letting developers bring it to market. Ultimately, the decision may come down to a question of sheer resource allocation.

"The volume of the returns and the complexity has grown so much over the past 10 years [that] we're having a hard time coping," Key said. "You do anything to work with that volume and complexity-scanning, imaging, telephone filing, whatever it takes."

Making the Business Case

Even if it means outsourcing the job, "whatever it takes" to develop state EC systems inevitably involves spending taxpayer money. And unfortunately, the formula or metrics for justifying such funding are hard to come by.

"A lot of states have gone through budget cuts for several years," G2's Connor added. "And the concept of running a government like a business has swept in. But they don't have the metrics that enable them to say, `Here's what our costs of doing business are; here's what an EC system can do for us.' Those arguments have been missing."

Others are more blunt: "We haven't really made the case for establishing electronic commerce," Texas' Purcell said.

For states, the value of an EC system is often best expressed on the cost side. "Not only do you get the traditional IT benefits of faster speeds and lower errors," said Scott Stone, program director for strategy and marketing for IBM's Government Services Delivery Organization, "but in the procurement area, you can consolidate your number of suppliers. And that's the heart of the value: simultaneously expanding the sourcing process and buying from the smallest number of vendors possible."

Some states have kept their EC costs low by having the vendor take some of the risk up-front. In Indiana, for example, there were almost no costs for its on-line procurement proj-ect. "We had no problem because our partner in the project was a vendor," McQueen said. "They footed a fair amount of the bill because they hoped to sell us a system later."

User fees are another way to generate funds to operate EC systems. In South Carolina and other states that adopted Tax Connect, minimal funding was required because the states pay on a fee-per-service basis. "States use Tax Connect," Garber said. "They pay for those services. It's simple."

Washington state has succeeded financially simply by keeping its projects small. "We craft those pilot projects," said Dave Kirk, strategic initiatives manager in Washington's Department of Information Services. "Everyone understands that we are going in to find out if there is a real benefit from a business perspective. In some cases, the justification is that they know there is a need, and they have to start the project somewhere."

Lessons Learned

There are EC success stories out there, and even less successful projects have enabled states to learn lessons that will help them with future endeavors.

Most states have learned that EC needs a champion or series of champions ready to back the effort to the hilt. Utah's digital signature plan, for example, started when an attorney in the state's Administrative Office of the Court wanted to establish an electronic filing process. "In going through that process, we found we needed some kind of digital signature," Utah's Allen said. That was all it took to get the ball rolling.

While a successful pilot program doesn't always translate into a successful program, pilots can be useful for generating lessons learned. "We just wanted to see if we could do it," said Indiana's McQueen of the state's electronic procurement project. "It worked out pretty well throughout. We wondered at times if people submitted a bid that didn't get there, but we didn't seem to have any problems. It was a good test, but right now we are trying to figure out what to do from here."

One of the most effective-but complex-methods of launching an EC program is to team with other states with similar goals, where expenses can be shared or where the federal government has an interest in providing up-front support. South Carolina, for example, was chosen in 1991 as a pioneer state for the Internal Revenue Service's Fed-State Electronic Filing Program. Today more than half the states participate in the program.

"It's grown to the point where we have about 300,000 electronic filers every year in South Carolina, out of a total of about 1.7 million returns," Garber said. "Those returns don't have to be keyed, mail doesn't have to be opened, and the returns are more likely to be accurate than paper returns."

With the Fed-State program running smoothly, Tax Connect was created and EDS was hired to provide a connected, value-added network to about 30 states. "We had the IRS program under our belt, and we began looking at business taxes," Garber said. "The business world was moving toward [electronic data interchange], and we felt that if they were willing to use it for business, they might be willing to use it to file tax returns."

The Tax Connect program now varies from state to state, according to what the states want to implement. In South Carolina, companies can file their sales tax electronically. Today about 10 companies file, but those filings account for more than $1 million a month in revenue. "When we started, we thought first of those large, multistate operations because they are more EDI-capable," Key said. "But a number of companies that have businesses only in South Carolina find it very interesting."

With Tax Connect, the number of employees in the revenue department has dropped, while the volume of returns has gone up. "What we've found is what almost every state participating has found," Key said. "You have to use every type of technology to decrease the amount of paper coming in. The taxpayer is looking for better service-and without paper. We have fewer errors, and it takes less time to process the return."

While Tax Connect is a multistate program, most experts caution states against reaching beyond their grasp in starting to set up EC services. "All our projects are fairly limited in scope," Washington's Kirk said. "We don't recommend any state taking on those large, mission-critical projects with a high price tag.

"We have specific things we need to learn from each project, even if there's a minimal development effort," Kirk added. "It's the cake-vs.-Pop-Tarts approach. Instead of making a big cake that takes an hour, we want something you can just pop in a toaster and just takes a minute or two."

"A few things have become clear," Texas' Purcell concluded. "You need to prepare a good plan and make sure that your laws are in shape to support electronic commerce. And remember that this is a re-engineering effort. Think out of the box because electronic commerce is not just business as usual."

Gerald Lazar is a free-lance writer based in Tenafly, N.J. He can be reached at jl4hire@ix.netcom.com.

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