School Districts Slow To Switch To Online Purchasers

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They materialized on the Web about a year ago with such befuddling names as Simplexis, Epylon, and Kawama.

Those sites and others promised to train the efficiency of the Internet on the bureaucratic world of school purchasing, just as electronic commerce was transforming the sale of goods and services in the consumer and corporate markets.

They had big money behind them in the form of millions of dollars in venture capital. One company, Simplexis.com, was able to snag former U.S. Secretary of Education Lamar Alexander as its chairman.

But the companies soon faced some hard realities. First, school districts didn't flock to their sites as quickly as they would have hoped. Second, just as the school purchasing sites were getting off the ground, Internet business models lost favor with investors, putting an end to the quick march to public stock offerings and dot-com riches enjoyed by older companies.

For More Information

Here are the World Wide Web sites for the four leading companies helping schools purchase goods and services over the internet:

A year later, some of the purchasing sites are already out of business or are looking to merge. But others have adapted their business plans and just may be poised to catch on.

"The good news is we're still here, and we're starting to get the traction we had hoped to get nine months ago," said Mark L. Smith, a senior vice president of Eschoolmall.com, based in Horsham, Pa. "The adoption rate in schools [for online purchasing] is much slower than it has been in traditional business."

Some observers view Eschoolmall as one of the three or four viable online-purchasing Web sites aimed primarily at schools. The other survivors are Simplexis and Epylon Corp., both based in San Francisco, and Kawama.com, based in Santa Ana, Calif.

Kawama, however, was said by some observers to be down to a handful of employees and seeking a buyer. The company was launched last year with money from Sylvan Ventures, the venture capital arm of the Baltimore- based education company Sylvan Learning Systems Inc.

Maura Hudson, the marketing director for Kawama, said an announcement about "funding and strategy" for the company could come this week.

"When you have a wide number of players, only a few will end up surviving," she said.

School Secretary's Role

The idea behind the online-procurement model is simple: Get schools to shed their time-consuming, labor-intensive purchasing practices, and capture a piece of the estimated $85 billion they spend on supplies and services each year.

A magazine ad from Epylon captured the basic inefficiencies involved in the traditional model. Showing a high school microscope, the copy read: "It took 7 faxes, 9 phone calls, and 3 weeks to buy this."

"The school secretary might have a catalog that is six months old, so then there is a mistake on the order form because the product may no longer be the same," said Ted Murguia, the senior vice president for sales and partner services at Epylon, which was launched in late 1999 and is the oldest of the school procurement sites.

"The people who are doing the purchasing—teachers, maintenance folks, school secretaries—we need to make their jobs easier," Mr. Murguia added.

The companies share some basic strategies. They all partner with a host of suppliers of office products, textbooks, cleaning supplies, athletic equipment, and other goods. They have online versions of product catalogs that allow teachers or purchasing officials to make selections. They have systems for routing electronic forms, so that if a teacher wants to buy chalk for the classroom, the principal can sign off and then the purchasing official can check the district budget to see if there is money available.

The companies have several revenue streams. First, they charge transaction fees to suppliers, which is typical in electronic commerce. Epylon takes anywhere from 2 to 5 percent of sales, Mr. Murguia said.

The companies also typically charge districts licensing fees for their software and for integrating it with their financial software. Eschoolmall charges license fees ranging from $2,000 to $15,000 per year, depending on district enrollment, plus additional fees for systems integration or customization, the company said. Simplexis charges similar fees.

In the past year, the companies have been fine-tuning their sites so they can accommodate traditional public-sector purchasing practices, such as requests for quotations, competitive bids, and an audit trail that can be printed out.

Perhaps because school officials were slow to embrace the services, Simplexis, Epylon, and Eschoolmall have found another way to market to them—by partnering with companies that provide computers and financial programs to schools. Simplexis has teamed with the International Business Machines Corp., while Epylon has aligned itself with Deloitte Consulting and Accenture, formerly known as Andersen Consulting. Eschoolmall has partnered with accounting and consulting firm PricewaterhouseCoopers. "The channeling strategy is very important for us," said Mr. Smith of Eschoolmall.

Both Epylon and Simplexis had licensing agreements with Education Week to reprint articles on their sites. Those agreements have expired.

Creating a Market

For schools, online purchasing is supposed to bring cost savings by demanding less time and effort from employees to process paper forms and purchase orders. In districts that have begun using online procurement, officials say those savings are real.

The 49,000-student Minneapolis district studied several online- purchasing sites before contracting with Epylon recently. The district already has an internal online finance system. It plans to integrate Epylon with that system so school employees at the building level can make purchases with the click of a mouse.

But even with only the partial integration of Epylon at district headquarters, the processing cost of each purchase has dropped from $354 to $219, officials calculated.

"It's almost like the difference between writing a letter and using the phone," said Greg Mead, the district purchasing director. "I think right now a lot of people are waiting to see how this works, but in two years, most big school districts will be doing this."

In the 10,500-student Mentor, Ohio, school district, purchasing has been pretty traditional, said Assistant Treasurer Bill Parkinson. A teacher goes through a catalog, then turns in an order sheet to the school secretary, who types it into the district's financial software program. After going through various forms and approvals, the order is completed.

"This costs us about $85 and can take four weeks to complete," Mr. Parkinson said. Now the district is installing Simplexis' software, which could mean "we cut our time from four weeks to 24 hours," he said.

"That's more time for the school secretary to answer phones and deal with parents," he added.

Peter J. Stokes, the executive vice president of Eduventures.com, a Boston firm that researches education businesses, said "institutional inertia" has been the main obstacle keeping more districts from shifting to online purchasing.

"The challenge these companies face is making a market," he said. "If they succeed, the returns should be phenomenal. But it's just very early in the market."

Like most early-stage Internet businesses, the online-procurement sites all confirm that they are not yet profitable. None has gone public yet, and they aren't likely to do so in the near term.

Simplexis started with some $35 million in venture capital. As business took off slowly, the company went through two rounds of layoffs to keep costs down.

"As of today, we have about half that money in the bank," said its chief executive, Amar Singh. "We expect to be cash- flow positive in early 2002."

Simplexis now has 40 employees, down from a peak of about 70. It isn't clear how involved Mr. Alexander is in the company on a day-to-day basis. Simplexis executives tried to arrange an interview with the former education secretary and presidential candidate, but later said his busy schedule wouldn't permit it. Mr. Alexander is teaching a course this spring at Harvard University's John F. Kennedy School of Government, titled "The Ultimate Start-Up: The American Presidential Campaign."

Epylon has raised some $51 million in venture funding, including investments from Deloitte's and Accenture's venture arms. It has about 150 employees, Mr. Murguia said.

"We're here to build a business," he said. "As long as schools are spending money, we're going to continue to grow this company."

Mr. Smith of Eschoolmall said his company was backed by small private investors and has what it takes to be one of the survivors of the shakeout.

"We think it will ultimately come down to two or three players," he said. "We plan to be one of them."

Vol. 20, Issue 31, Page 8

Published in Print: April 18, 2001, as School Districts Slow To Switch To Online Purchasers
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