The rise of electronic commerce, the exchange of value over digital computer networks, is rapidly changing the way business is transacted among government agencies, between government and business, and between government and citizens. This change represents two challenges for New York State. First, it threatens the state’s historic preeminence as the nexus between information and commerce. Second, it challenges New York governments to develop E-Commerce solutions to serve citizens, governments and business.

The experience of Y2K computer remediation has shown that New York state and local governments can work cooperatively with control agencies, the private sector and other interested partners when faced with a technology challenge. E-Commerce is no less an important challenge than Y2K, with more impact on the future economic health of our communities.

To move forward, we recommend the following.

First, Strong leadership is critical. A handful of states have organized their government E-Commerce activities by making strategic choices regarding investments and programs that cross government agencies and levels. New York should establish a similar structure, developed at the highest level of government and including state and local government, control agency, private sector, and legislative representation.

To implement this activity, the Governor should designate a senior executive as the e-commerce champion. The executive would convene an E-Commerce Advisory Committee consisting of representatives from the legislature, control agencies, state and local governments and the private sector. This group would be responsible for studying and making recommendations regarding e-commerce policy issues such as taxation, education, consumer privacy, universal access, and economic development.

To support a government-wide implementation strategy, the Governor and Legislature should continue to support funding for inter-agency initiatives, with particular emphasis on e-commerce. The state could also establish, under the aegis of the Office for Technology, e-commerce training, policies and standards activities for individual agencies and governments to build upon. Areas of particular emphasis should include: Navigation and interface design; legacy system integration for order fulfillment and improved processes; and data exchange standards and methods.

Policy issues uncovered through individual and interagency e-commerce projects, training, and standards work should be shared on a regular basis with the Advisory Committee.

Second, E-Commerce must be treated as an economic development priority. New York is engaged in a competitive race with other states and foreign countries to support new Internet-based industries and develop new high-skilled and high paying jobs. To succeed, we will require a superior telecommunications infrastructure, a highly skilled workforce, an environment where E-Commerce firms thrive, and a consistent strategy to implement electronic commerce in government transactions, as well as providing a supportive atmosphere for private transactions.

The Governor’s continued support of the state’s technology research and development capacity is an important cornerstone in our technology future. The E-Commerce Advisory Committee could serve a strategic planning function in this area, and make recommendations to the Governor, Empire State Development, and the Legislature for further action.

Third, security of E-Commerce transactions must be assured. Government has an important and unique stewardship role as collector and guardian of citizen information. Any E-Commerce program that involves the exchange of confidential citizen information must therefore be secure and protected against theft and misuse.

To implement this recommendation, we suggest that the Office for Technology coordinate the activities of its security work group, the NYT security staff, and the staff dedicated to development of electronic signature regulations, to insure an integrated response. We also recommend that adequate technical and staff resources be identified to support state and local governments in their efforts to manage information security.

More generally, the governor and legislature must make important and difficult policy determinations about the level of information security and privacy necessary to mandate in E-Commerce transactions. The E-Commerce Advisory Committee can act as a sounding board for these discussions.

Finally, deployment of technology resources must occur more rapidly. The development and deployment of new information technologies no longer occurs over the space of years, but rather over months. The current procedures for identifying, choosing, financing and contracting for technology innovations in government are ill suited to the need to effectively manage this change. This is particularly true for projects that cross agency and government boundaries.

Given this reality, New York State policymakers should consider technology as an important Research and Development investment and explore ways to better fund it for the long run. New York has established a Technology Entrepreneurial Fund for interagency projects, under the aegis of the Office for Technology. We also need to shorten procurement cycles and accommodate new products and services (e.g web hosting, E-Commerce outsourcing, etc.)

We recommend that a work group be formed under the State Procurement Council to explore issues related to procurement and E-Commerce. The responsibility of this group would be twofold. First, it can identify E-Commerce applications and practices that could be used to support electronic government procurement. Secondly, it can identify traditional procurement practices that slow the deployment of E-Commerce and other technologies in rapidly developing environments, and make recommendations for improvement.

Overview

Historically, New York has been the preeminent location for the marriage of information and commerce. The rise of New York as the information exchange point between the United States and the world is evidenced by several factors, including the strength and size of New York-based stock exchanges; the location of the nation’s major print, radio and television corporations; the siting of the United Nations; and the development and maintenance of an excellent infrastructure of waterways, highways, railroads, and airline and communications facilities.

Today, we are in danger of losing our historical dominance in this area. The rise of electronic commerce (or E-Commerce) is rapidly changing the relationship between information and commerce. Where previously infrastructure constraints and limited resources required concentration of economic information and the human resources necessary to make sense of that information in a few locations (predominately New York), the rise of the Internet means that the transfer of information with economic value can occur anytime, anywhere, and in an instantaneous fashion.

But what is E-Commerce? Broadly, it involves the transfer of information of monetary value via electronic networks. From a government perspective, it is a component of the broader notion of electronic government—the provision of services, information, and processes via digital networks. Government E-Commerce involves the exchange of value, be it in the form of credit card or bank payments, government procurements, social service payments, or documents that authorize the bearer to make or receive payments. It occurs in transfers between government and businesses, government and citizens, and government to government.

As such, E-Commerce represents a dual challenge to New York State governments. First, we must act in concert with the private sector to insure that communications services and networks, technology-related businesses, and the government infrastructure support the continuation of our community’s role as a broker of information to the world. Second, government itself must learn to use the new tools of electronic business to provide better, faster and more cost-efficient services to our citizens.

What follows is an analysis of some of the trends in the rise of E-Commerce that require the attention of government officials and professionals.

The Growth of E Commerce on the Internet—Trends and Issues

In June, 1999 the U.S. Department of Commerce released a report on the growth and impact of the Internet and E-Commerce in the US and other nations.[1] The report found that during the past year, the number of worldwide users of the World Wide Web (or the web) increased by 55 percent. Other studies have estimated that approximately 40% of all Americans have Internet access at home or at work. This percentage is higher than any other region, with Canada (36%), the Nordic countries (33%) and Australia (31%) not far behind.

The growth of the Internet has provided a tremendous boost to the nation’s economy. The Commerce report estimates that technology sales have accounted for 35 percent of the nation’s real economic growth, while decreases in technology costs have dropped the inflation rate by .7 percentage points. The capital outlay for information technology has been greatest in four industries of great importance to New York: telecommunications, radio and TV broadcasting, security and commodity brokerages, and health services.

The impact on the workforce has been equally dramatic. The Commerce Department estimates that by 2006 almost half the U.S. workforce will be employed by industries that are either intensive users or producers of information technology. Wage gaps between these “knowledge workers” (who require higher levels of education) and other workers will continue to widen.

E-Commerce growth rates and their impact on the structure of economic activities are equally dramatic. Estimates of the growth of E-Commerce made in 1998, which called for total business-to-business on-line E-Commerce rising to $300 billion in 2002, have had to be revised upward more than threefold to $1.3 trillion in 2003, based on recent trends. More dramatically, retail E-Commerce growth projections have had to be adjusted upward more than fivefold over the same period, from between $7 and $15 billion, to between $40 and $80 billion in more recent estimates. The figures also indicate that the major share of E-Commerce will not occur in the retail E-Commerce sector, but in business-to-business sales of goods and services.

The growth of on-line E-Commerce does not, however, tell the whole story. A study by Cyber Dialogue[2] estimated that while $11 billion in sales occurred on-line in 1998, a further $15 billion in sales occurred where items were ordered on-line and paid for off-line, and another $51 billion in sales decisions were impacted by information gathered over the Web. These figures underscore the importance of viewing the Web not only as a mechanism for customer and citizen purchases, but as an important vehicle for education and informed decision making about purchase and access to goods and services.

Who’s participating in this rise

For policy makers, a key concern has always been the impact of new economic, political, and social developments on their constituencies. Are all sectors of society benefiting equally from this new system? Are there haves and have-nots with respect to E-Commerce and the growth of this powerful new medium of information exchange and use?

A second report issued in the summer of 1999 by the Department of Commerce[3] indicates that this may be the case. While the report showed that Internet access is growing rapidly among people in all demographic groups and geographic locations, disparities among groups are widening in many cases. For instance:

· Households with incomes of $75,000 or more are more than twenty times more likely to have Internet access than those at the lowest income levels.

· Whites and Asian Americans are more likely to have access than Blacks and Hispanics.

· Americans in rural areas and inner-city neighborhoods have less access to the Internet than other Americans.

· Single parent households (particularly female-headed households) have less Internet access than other groups.

· Access in the Northeast states lags behind Western and Midwestern states.

· Use of computers and the Internet are positively related to the amount of income and the education level of American households.

The report also found that the gap in home and work Internet access between Asians and Whites on the one hand, and Blacks and Hispanics on the other, widened between 1994 and 1998 by approximately 6%, while the education/income gap between those with the most and least resources grew 29% during the same period.

Those citizens without connection to the Internet at home or work tended to use libraries and schools as their main access points. This was particularly true for Blacks and Native Americans, who used these facilities at a rate twice as great as Whites. At these locations, Internet access was most commonly used for e-mail (53.6%), information searches (50.2%), to take courses (44.6%) and to do job related tasks (38.8%). 53.9% of unemployed individuals without home access used libraries to access the Internet for job searches.

The news for New York citizens was mixed. While the report indicated that Internet access in New York State was approximately 1.6 million New York households in 1998, this translated to Internet access of only 23.7% (36^th among states and Washington, D.C.).

Retail E-Commerce use in 1998 among American households seemed to be limited to those households with home Internet access. Among this group, 24.5% reported using the Net to shop or pay bills.

The Internationalism of E-Commerce

The growth of E-Commerce has several significant impacts on state and local communities, particularly with regard to their roles in a restructuring of the economic system. These impacts are several, and have financial, legal, human, and societal implications.

The major impact of E-Commerce on finances relates to the increased mobility of capital markets. As William Wriston, former chairman of Citibank, noted, “money goes where it’s wanted and stays where it is well-treated.” Increasingly, economic development decisions are made not at a local, state or even national level, but on a worldwide scale. Capital necessary to support new economic development can move freely from locality to locality and, as many Asian economies recently discovered, can be quickly withdrawn from nations with weaknesses in their economies and financial structures. This can exacerbate problems for nations and localities, particularly those without a strong economy.

What this means for state and local governments is that competition for scarce financial resources make them more vulnerable to withdrawal of capital investments if their economies weaken or they are perceived as not managing their assets in a professional manner. Good financial controls and open and understandable governmental processes are critical to maintaining investor confidence. The ability to effectively implement new technologies and ways of conducting business embodied in E-Commerce send a strong signal that a state or locality is actively seeking ways to improve service delivery and effectively manage government spending.

In the legal sphere, the internationalization of E-Commerce means that increasingly legal structures to support or regulate commerce must be enacted on an international basis, unless a locality wishes to opt out of the international economy by restrictive legislation. For instance, international agreements on information privacy, copyright and intellectual property, taxation, and trade necessary to promote international E-Commerce, will tend to erode national and local government discretion. In a nation like the United States, which is based on the principle of Federalism, this shift could have significant policy and legal impacts.

With respect of human resources, a greater emphasis will be placed on educational assets, since the greatest number and highest paid positions will be in knowledge-intensive industries. But as Peter Drucker noted, “Knowledge knows no boundaries,” and the Internet allows knowledge workers throughout the world to cooperate and coordinate their activities to support commerce. Therefore, communities with higher percentages of educated citizens will receive proportionally more benefits than those with under-educated citizens, particularly with respect to the income tax base.

Finally, with respect to societal values, the rise of the Internet and E-Commerce will present a huge challenge of balancing the needs of humans for a stable identifiable local community against the trend toward turning all goods into international commodities. Tom Friedman, the New York Times columnist, has labeled this tension as a choice between the Lexus and the Olive Tree. In this case, the Lexus symbolizes improved goods sold at an international level regardless of national boundaries, while the Olive Tree symbolizes a real community, rooted in local soil.

The National League of Cities, in a 1999 report entitled “Governance in the Digital Age: The Impact of the Global Economy, Information Technology and Economic Deregulation on State and Local Government,” raised similar issues. In response, they suggested five steps that communities should take to balance local and global requirements in an E-Commerce environment, including:

1. Using competition and community rather than bureaucracy to provide essential public services;

2. Developing public-private partnerships to build upon community economic strengths and to guide employment programs for adults and youths.

3. Making strategic investments in public infrastructure, especially telecommunications and transportation, to integrate local economies with regions, nations and global partners.

4. Embracing and promoting new information technologies, which can improve the delivery and quality of public services and strengthen the economic viability of communities. And,

5. Reforming taxes to minimize economic distortions and attract investment.

The final issue, taxation, has recently received much attention by policy makers. Four areas in particular, are likely to be impacted by the rise of E-Commerce and knowledge-intensive industries. These are:

· sales tax revenues (related to the sales of goods and services on-line);

· property taxes (tied to the investment of physical capital—buildings, land, and machinery);

· franchise taxes (such as agreements between local governments and cable providers); and

· income taxes (levied on wage earners in information and other industries).

The relative impact on states and communities of shifts in each of these sources of government revenues will depend on local reliance on each of the above financing mechanisms, as in the growth of technology based industries, infrastructure, and jobs in New York and other states.

Implementing E-Commerce in Government

If you shopped online or performed online commercial transactions over the past months, you probably noticed that the best sites shared similar characteristics.

First, when you found the site, you were presented with an interface that was easy to read and easy to navigate. By entering certain key words like an author or performer’s name, the category of toy or age of child, or the type of investment you wanted, you were brought to another location that narrowed your search. Once you selected an item, often after reading other people’s comments, reviews, or research about the item, you added the product to your “shopping basket.” If you had visited the site previously, information about your previous purchases would have been analyzed, and the page you were viewing might include suggestions for other similar items you might like.

When you were ready to complete the transaction, you clicked on a button and were transferred to a secure part of the site. There, you either entered your password or were asked to enter identifying information, such as your home address, e-mail address, and credit card number. This information was encrypted and transferred back to the site, and your order was confirmed.

Within a short time, you received an e-mail verifying your order and telling you when your item would be shipped. When the item was shipped, you received another e-mail. Within a few days, the item was received.

But this is not the whole story. Behind the scenes, the web server might have transferred the order to a legacy inventory database, or might have relayed the order to a distribution center or even another organization for order fulfillment. Your credit card information and payment amount was automatically transferred through the Automated Clearinghouse (ACH) network to a credit card company, who authorized payment and charged your account. The funds would be then be credited to the company’s books, giving a minute-by-minute view of cash receivables.

In short, you experienced a combination of customer-centered research, navigation, and page presentation; customer-to-vendor E-Commerce; vendor-to-vendor E-Commerce; and strong security.

Can government do the same thing? The technical answer is yes, but several things need to operate in harmony, and several changes are required.

First of all, we must acknowledge that the environment in which government agencies operate is far more complex than the commercial sphere. Where a commercial site offering a product may require electronic linkages to supplier and distribution agents, government E-Commerce will require not only vendor-supplier linkages, but also connections among federal, state and local governments and non-profit providers, as well as across geographical boundaries. This will require an unprecedented level of cooperation and coordination to succeed.

New York State governments, like other localities in the United States, are beginning to respond to the challenges posed by the Internet and the rise of E-Commerce, but much remains to be done. For the purposes of clarity, these challenges and some activities undertaken by New York state and local governments to meet these challenges are presented in the following categories:

· Policy Initiatives

· Research, Navigation and Presentation.

· Fulfillment

· Establishing Security and Trust.

· Citizen to Government E-Commerce

· Government to Business E-Commerce

· Government to Government E-Commerce

· New Implementation Initiatives

Policy Initiatives

In the legislative arena, two pieces of NY legislation passed in 1998 and 1999 will help the growth of government E-Commerce in New York State.

The first, called the Electronic Value Transfer Act and passed in 1998, established a process to allow state agencies to accept electronic payments from citizens. This legislation, which was preceded by a similar measure to authorize local government receipt of credit card payments, established an Electronic Value Transfer Administrator function, now housed at the NY Department of Taxation and Finance to work with agencies, the Office for Technology and the Division of Budget to establish regulations, undertake cost/benefit analyses, and negotiate contracts for credit and debit card services. A draft EVT Request for Proposals has been developed, and is currently under review by agencies and vendors.

The second major piece of legislation likely to significantly impact the rise of government E-Commerce in New York State is the Electronic Signatures and Records Act, enacted in September, 1999. This legislation allows state and local government agencies to use electronic signatures for identification purposes under regulations to be established, while protecting citizen information privacy, and permits the development of regulations to support the widespread adoption of electronic records as alternatives to paper documents. The program falls under the oversight of an Electronic Facilitator function located at the state Office for Technology.

Research, Navigation and Presentation

Many state and local government web sites provide attractive sites, information on programs and services available to consumers through their units, and several have sections highlighting new programs and services. State agencies like the Office for the Aging, the State Education Department, the Department of Health, SUNY, Taxation and Finance and the Department of Transportation also include search capabilities, as do cities and counties like New York, Westchester, and Dutchess.

However, New York governments are not presented as a single network of services to consumers based on citizen interests rather than functional organization boundaries. Today, our state’s citizens cannot visit a single site and find all state and local government programs in the area of their interest or need. An OFT work group and the Forum’s Web Master’s Guild are beginning to tackle this issue, but much more work needs to be done.

Fulfillment

Another key area in Electronic Commerce is fulfillment. This is the ability to follow up orders or requests with the product in a timely fashion. The recent negative experience of of some commercial E-Commerce sites that were not able to fill holiday orders and as a result suffered both financially and in customer goodwill, underscores the importance of this component.

The ability to link ordering to fulfillment in a seamless electronic environment requires, more than any other E-Commerce component, the ability to integrate web-based capacity with the legacy systems that agencies have used for years to track changes in things like taxes, drivers licenses, professional licenses, and other products of government. Today, many government systems are not linked seamlessly to web sites, nor are they integrated with each other, either within or across agencies. The future of effective government Electronic Commerce requires that we pay serious and sustained attention to this component, and develop the tools and commit the resources to meet this challenge.

Establishing Security and Trust

Electronic commerce, like other forms of commerce, requires the establishment of trust between buyers and sellers. Different levels of trust exist in all forms of commerce, and different levels and types of commerce require different levels of trust. This phenomenon is explained in the following excerpt from the eCommerce Trust Study, by Cheskin Research.[4]

Trust is understood by most consumers to be a dynamic process. Trust deepens or retreats based on experience. The trusting process begins when an individual perceives indications—“forms”—t