2009 11 Business Case For ‘Erp’ In Government
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Imagine our surprise when we were invited to speak at the Financial Management Institute Professional Development Week about the value of ERP in government. Why? For one thing, FreeBalance is not an Enterprise Resource Planning vendor. We're a GRP vendor, as we have spoken about frequently in this blog. ERP vendors operate in many vertical markets - FreeBalance provides software for governments only. Nevertheless, we took up the challenge. The presentation was focused for Government of Canada financial managers, but it is applicable to many countries. We focused on three elements of the Treasury Board Secretariat Investment Planning Policy: value for money, total cost and project governance. We think that we did a very good job presenting an objective viewpoint. We didn't talk about FreeBalance and how our solutions are more applicable than generic software for governments.
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2009 11 Business Case For ‘Erp’ In Government
- 1. Business Case for ‘ERP’ in Government of Canada www.fmi.ca November 25, 2009 Doug Hadden VP Products
- 5. ERP functional footprint introduction 1 Forrester
- 7. With budget pressures, governments are looking for effective ways to quantify the return on IT investments. Private-sector methods are a good start, but not the solution. Gartner July 2003
- 9. + statistics 1 1 IDC value
- 10. Benefits Balance Efficiency Productivity Effectiveness value
- 11. Benefits Balance Efficiency Productivity Effectiveness Transform value
- 12. Capacity Balance Efficiency Productivity Effectiveness value Capacity
- 13. Benefits Value Capacity value People are Money Decisions are Money Time is Money
- 14. Sample Approaches Efficiency Capacity Productivity Effectiveness value CPM BPM Outsourcing
- 16. ERP Value Portfolio Argument value (1 x ERP) < (n x BOB)
- 17. ERP Value Portfolio Argument value (1 x ERP)- (IT Costs) > (n x BOB)- (IT Costs) integration
- 22. Typical ERP Benefits Tangible Benefits Realized Intangible Benefits Realized value 1 Deloitte Maintenance Cost Reduction Revenue Enhancement Cash Management Improvement IT Cost Reduction Procurement Cost Reductions Service Order Management Cycle Time Improvement Faster Financial Close Cycle Productivity Improvement Inventory Reduction Personnel Reduction Redeployment Greater Flexibility Improved Cost Structure Integration Standardization Improved Customer Responsiveness New/Improved Processes Improved Information Visibility
- 24. ERP Footprint internal external social structural government 2.0 “ back-office” e-government value
- 28. Software to Services Ratios 1 0 2 4 6 8 10 12 14 16 Commercial Government Software Services cost 1 Office of Management + Budget 1 5 1 15
- 30. Typical Enterprise Software Acquisition Cost 1 cost 1 Averaged across many published reports Total Software Costs 22% Computer Hardware and Networking 20% Internal costs 22% Consultants for Implementation 36%
- 31. Change- the gift that keeps on giving 1 1 IDC cost 0 10 20 30 40 50 60 Need Extra Functionality Changes in Business Process Change in Reporting+ Analysis Change in Business Info Req's Mistakes Other
- 32. 66% of all IT projects either fail outright or take much longer to install than expected because of their complexity. The Economist October 2004
- 34. Governance + Risk risk Risk Private Sector Risk Government
- 36. Risk is Good RISK ~ REWARD risk
- 37. Risk Factors political technical GOVERNMENT CHANGE MANAGEMENT risk
- 40. Governance risk capacity building communi- cations RISK ~ REWARD Risk Private Sector Risk Government staged sustainable politics is communications
- 41. ERP- Long-Term View 1 0 50 100 150 200 250 300 350 400 450 500 Benefits ($M) 1. AMR Research conclusion Phase II Phase III IT Operating Expense Reduction Business Operating Expense Reduction Additional Net Income Reduced Materials Costs 2/3 of Benefit Cost of Consolidation
- 42. Capacity Balance Efficiency Productivity Effectiveness conclusion Capacity Transformation Sustainability
Notas do Editor
- FreeBalance was asked to provide a presentation about this subject after the originally scheduled speakers were unable to attend the FMI conference
- We don’t see ourselves as an ERP vendor. By definition: ERP requires software that operates in more than 1 vertical market, supports financial, HR, SCM and CRM as a minimum. FreeBalance provides solutions only for Government with a product footprint that covers financials, civil service management, electronic government procurement and budget management.
- Treasury Board Secretariat guidelines are complex. I’ve identified 3 important areas: value, cost and project governance that are critical when looking at ERP in Government.
- This is my point of view: the deeper the potential benefit of any IT project, the more difficult it is to measure or find measurements. Government organizations need to take a long-term view on value and cost – ERP costs are long term. And, ERP is complex, so there is a high risk for failure.
- There is a major ERP value problem. A recent report from Aberdeen pointed out that ERP costs are well understood, but the value is not.
- There has been an attempt to leverage private sector measurements in government – with limited success.
- Of course, there many Three Letter Acronyms available. Government organizations recognize that many of these measurements are promoted by the vendor community and may not be useful.
- The reasons why public and private sector organizations acquire ERP software differs and has differed over time. A model for identifying value types is required.
- There are many techniques that are used to measure benefits. The three main inter-related themes are: Efficiency – typically the efficiency and cost of organizational processes Productivity – typically work results from personnel Effectiveness – typically the capability to grow, adapt and manage
- When combined with information technology, efficiency, productivity and effectiveness can transform organizations – particularly when enabled by organization change
- The bell curve represents personnel capacity in most organizations. Capacity is built on efficient processes that enable less skilled workers to achieve productivity and highly skilled workers to achieve effectiveness. ERP software, like any other enterprise software, is designed to facilitate these three objectives. Two organizations implementing the very same ERP software could witness different degrees of success and benefits. This can be explained by differences in capacity: IT capacity, functional public financial management capacity, and leadership capacity
- The value proposition is predicated on the notions that: People cost money and you need to accomplish more work with the same staff or reduce the number of people in an organization Time is money so processes need to be streamlined Decisions are money, requiring improved decision support
- Typical solutions to achieve this include: Business Process Management to improve efficiency Outsourcing to reduce personnel costs Corporate Performance Management to improve decision-making
- There are numerous efficiency benefits that are shared between the public and private sectors. The notion of reducing IT costs is an important theme in ERP.
- ERP software companies present an interesting portfolio argument. ERP companies agree that the feature sets for multiple Best of Breed applications are richer and more valuable than using a single ERP software in organizations. (To be fair, many ERP companies will claim that their applications are richer when software was developed for that domain specifically. ERP software was not designed for government originally.)
- But the overall cost/benefit is better with a single ERP – according to ERP vendors. Rather than diversify the portfolio of products as one would do for financial investments, one reduces the portfolio to reduce IT costs. There are numerous promoted benefits for this including one application to support, same user interface across applications. The most compelling benefits appears to be integration – arguably easier to integrate when using only one application suite.
- Productivity in the public service automates low value work and redeploys staff to do more important work. This can create a scalable organization that can take on more strategic work.
- There are numerous effectiveness benefits. Some areas of cost reduction can be further augmented through information tools.
- Transformational benefits are the most difficult to articulate. Many of these benefits are hard to measure.
- That’s because of the holistic affect of transforming organizations and processes. It is often difficult to prove cause and effect. And it is difficult to look into a crystal ball to determine which benefits could come to fruition. That’s because there is no objective measurement in the public sector – government organizations cannot tie benefits to profit.
- Deloitte found that there are many intangible benefits reported by organizations that implemented ERP. It is interesting that “integration” was not high on the list, and was considered intangible.
- This market is undergoing change: The first generation automated key aspects of public financial management. This market started to change in 2006 where technology became important – a sign of a maturing market. There was a move to adopt more Commercial Off-the-Shelf software. Integration became a theme – many experts did not call this market ERP, but rather IFMIS – Integrated Financial Management Information Systems Governments are automating the entire budget cycle. Participation within government and external to government is increasing thanks to new Web 2.0 technology – known as Government 2.0. We are seeing signs of transformation in government.
- We view government automation as structural or social, internal or external. ERP software has traditional been Business Process Management (BPM) focused – structured. This sits in the back-office. The footprint of enterprise software in government is reaching out to structural/external or e-government, and to internal and external social networking. The need to integrate now extends beyond the back office.
- There are 3 important cost dimensions. It is important to recognize that the total cost can far exceed the initial contract cost for ERP software.
- There are internal personnel costs during the requirements phase that should be considered: research, seminars, conferences, requests for information, planning sessions, requirements definition, managing the request for proposal process, evaluating bids, participating in demonstrations
- It’s interesting that many organizations view project management as an overhead cost. This is the most critical factor for the success of ERP in government.
- There are numerous statistics available depending on how services is defined and whether long-term services are counted. It is common to find statistics for ERP implementations in government at 7-1 to 15-1 ratios. The literature supports the notion that ERP services to software cost rations are higher in government than the private sector.
- On-going costs must be considered. The internal and external costs for any upgrades should be considered for at least 1, if not 2, major upgrades. World Bank procurements require vendors to provide a 5 year calculation.
- This represents averages from a number of industry reports showing that between 1/5 and ¼ of the implementation cost is related to software. This does not include the long-term costs – training staff, hiring consultants for upgrades, software maintenance etc. More on that later.
- The long-term cost for external services for ERP to handle change is a good thing for consultants, but a bad thing for governments. We find that there is a big difference between the private and public sector approaches to ERP. Companies tend to use the ERP upgrade as a compelling event for business process re-engineering. The ERP software is customized to meet these needs. It is unlikely that major changes are made to the core ERP applications over time. Governments operate differently. Re-engineering is limited by legislation. Governments frequently upgrade configurations. This change management adds long-term costs. It’s interesting that change is a large driver for future costs – yet the survey includes mostly private sector companies. It is also interesting that mistakes are a low driver of change – so maybe governments should be less concerned about making mistakes and more concerned about change.
- It is very easy to find publicly available statistics about failure rates of large IT and ERP projects in both the public and private sectors. Treasury Board has 64 measurements to help determine the level of risk – it’s clear that the risk is high.
- And, the literature seems to suggest that risk is higher in government.
- There are 3 main risk elements. (My source: Jorge Claro – Claro and Associates)
- But risk can be good. High risk projects can have a high reward.
- Standard project methodologies help. But, there is something different about government. So, it is important to manage the highest risks where technology is complex and elements where politics is highly evident. This needs special attention to government change management. This seems to be a theme when third parties analyze ERP implementation success and failure in government.
- The change management risks for ERP in government are: Extent to which the system is customized. Highly customized ERP systems can meet requirements better than generic configurations. However, standard configurations are easier to implement and support. These also tend to be easier to manage and easier to facilitate upgrades. Extend to which the system is implemented in stages or not. Some believe in the quick win phased approach. Some believe in the big-bang approach. Experts in the ERP system often do not understand government. The Treasury Board Investment Planning Policy identifies critical success factors and recommended project governance characteristics. The majority of these reflect the need for enhanced change management.
- Where are the good practices? Vendor success stories are often marketing – “we had this problem, installed the ERP, and all the problems disappeared”. Even when the success story is true – usually doesn’t offer any value. It should be noted that there is no separation between church and state for IT analysts. Vendors buy services from these analysts, so it is difficult for the analysts to remain completely objective. Trend information from analysts are helpful Forrester has a “vendor selection process” that is useful. Organizations in the Government of Canada can access members of Cluster groups. (In Canada: 2 major ERP vendors, FreeBalance, government-developed software and a small Canadian vendor). The costs to be a Cluster member provides a good barometer for the long term costs Yes, conferences are well worthwhile. (We’re big fans of www.icgfm.org)
- How can government organizations reduce the risk of ERP failure? Training and capacity building. The ERP systems should be sustainable – meaning that the majority of support, training, customization, maintenance, upgrades etc. should be handled without external consultants. Communications Staged implementations. Not everyone will be happy about change. So, it is necessary to show the benefits of change which can only be accomplished through phased roll-out of functionality. Most important is the communications. Politics is communications. There is a need to engage everyone prior to buying a system. All stakeholders need to be engaged throughout every stage. User requirements are needed.
- AMR found that the majority of benefits occur after the 3 rd phase of an ERP implementation. This can be beyond year 4 of the project – so a 5 year cost/benefit TCO might not be the most effective method.
- Transformational benefits accrue when there is high organizational capacity. This high capacity also improves long-term sustainability of the ERP system.
- Repeating my point of view from the beginning. The US Department of Defense discovered the second side for printing and photocopying http://www.huffingtonpost.com/2009/07/29/shock-government-discover_n_246805.html which is expected to save over $100M
- To get more about sustainability and the debate of whether governments should acquire ERP or GRP, please visit our blog.