Agility is part of the Unit 4 positioning. The fact that the sponsor is company positioned as agile found that ERP customization is costly doesn’t make the study incorrect. Or, the conclusions any less frightening.
High Total Cost of Ownership (TCO) and restricted business agility are the open secrets of the Enterprise Resource Planning (ERP) world. Why? The technology used by leading ERP vendors is, frankly, obsolete. Not all of it: just the core. The foundation.
So, it’s no wonder that methods developed in the 90s to solve pre-Y2K problems have started to show their age. Especially in cloud computing. And, the opportunities and threats that come from globalization.
The value of this report is that it goes beyond the impact of ERP customization as a high implementation cost that generates delays. This study looks at the impact of making changes to ERP customization to support compliance, reorganization, improved processes etc.
What is this “customization”?
Jutras doesn’t define customization. Many observers see customization as all adaptations to software from configuration through to software code development. My sense, based on the results of the study, that customization is defined as changes that require some element of coding. This includes Business Process Management (BPM) tools that requires elements of coding, scripting, call-outs from the ERP software to other code, and software code customization.
ERP vendors developed customization methods to enter new markets: different verticals, countries, customer sizes. And, customers needed to implement competitive differentiated practices. So, high cost and long implementation cycles. Which is why there is so much guff about implementing so-called “best practices” to reduce the customization hangover experienced by so many organizations.
No customization in FreeBalance?
FreeBalance provides Government Resource Planning (GRP) software. One of the characteristics of this software is that there is no customization as I have defined it with the exception of integration with sub-systems and some elements of business intelligence. (And, rather than make integrators or customers build functionality that we don’t have, we commit and put this functionality into the main line of the code.)
FreeBalance supports this no customization model because we can and we should. We can because we’re focused in one “vertical market”. We should because it is ethical. In my opinion, it is not ethical to force high costs to public organizations. As you can see from our government customer list , long-term financial sustainability is a critical factor. Our GRP software has to affordable in the long run to enable developing nations like Afghanistan, Kosovo, Sierra Leone, Suriname and Timor-Leste to grow and improve governance.
Government is the ERP customization canary in the coal mine
Jutras found that more than 1/3 of the organizations surveyed have implemented extensive ERP customization and almost 2/3 have experienced moderate customization. Only 4% of respondents reported little or no customization.
Which makes the “good practice” guff from ERP vendors a “buy case” and not a “use case”!
You may be surprised to learn that governments require more agile business systems than the private sector. Yes, governments are not known for agility. What they need are systems that enable change – more change than is experienced by the private sector including:
Legal reform that changes GRP configurations because governments cannot adopt new processes without a legislative approval. So, governments change configurations often.
Organizational structures change more frequently based on government objectives that includes merging ministries, eliminating ministries, splitting out ministries, and privatization.
Moves to transparency and accountability that are orders of magnitude more complex than compliance changes in the private sector.
ERP systems used in government tend to be more customized that in the private sector. One analyst commented on an ERP implementation in a G8 country as being so highly customized that it bore no resemblance to the original code. It’s frightening how much public money is wasted needlessly because of ERP adoption in government.
To be fair, there is only one publicly reported incident of Unit 4 failure in government and that could be explained through a number of factors. (And, from 2004) But, the leading 2 ERP vendors have a lot of explaining to do.
The other ERP open secret is that governments that have departmental level ERP systems have completely different customizations. So, the move to “shared services” to share a single ERP in these governments to save money is, frankly, a pipe dream . CIOs looking to implement ERP shared services using one or both of the 2 leading vendors need to read this report so that they are not complicit in wasting public money.
We’re seeing increased interest in cash management among developing country governments. There are very few Public Financial Management (PFM) ‘best practices’ yet many good practices that are better depending on the country context.
What are the differences between managing “cash” and “liquidity”
More developed countries make the distinction between cash management as a long-term planning and analysis function and liquidity management to ensure adequate cash is on hand. Short-term investments to ensure that there is effective use of the cash on hand are considered a treasury functionrather than a cash management function exercised through spending ministries.
How are GRP systems used to improve cash management?
Commitment accounting, used in GRP, provides early insight into cash requirements by tracking the commitment cycle of requisitions (soft commitments or pre-encumbrances), purchase orders (hard commitments, obligations or encumbrances), goods receipt and expense vouchers.
Manuel Pietra, our President and CEO, presented the case for using GRP to reduce procurement corruption at a seminar at the Harvard Kennedy School last week. This is an updated version of that presentation with more details.
Impact:Total global annual government procurement is estimated to be $9.5 Trillion .
Other factors:Procurement efficiency, effectiveness and competitiveness are other important governance factors
Scenario:Lifecycle for an important multiple year public investment program such as the building of a new hospital.
Government Resource Planning
The technical GRP lifecycle can be described as follows:
Enterprise-grade ICT Platform as foundation including a secure infrastructure
User group controls have been defined in the ICT Platform
The hospital public investment program is defined during budget preparation, part of Government Performance Management functionality, and the budget has been approved by the legislature
Core Public Financials part of GRP includes commitment accounting functionality used to ensures that the government does not overspend the budget (integrates with the budget passed by the legislature) and tracks all accounting transactions related to the hospital program
Public Expenditure Management integrates with commitment accounting through a procurement cycle begins with the approval of a commitment from a purchase requisition that generates a Request for Proposal (RFP) to qualified bidders as part of the tendering process that results, in this case, a winning “turnkey” contract based on evaluation criteria to a winning bidder or consortium
Proposal opportunities were presented via the web through e-procurement and the winner of the proposal and contract size is posted
Payment is provided to the winning bidder through payment management based on the contract provisions typically based on the government acceptance that building milestones have been reached
And the entire cycle is stored in an audit trail to improve Government Performance
The hospital acquisition scenario described provides multiple corruption opportunities:
Vendor collusion to provide only a single winning bid
Bribes by vendors to manipulate the process such as changing the evaluation criteria unfairly
Approval of a bid by family members
Payment for goods and services not received
GRP systems contain three classes of toolsets that can be used to overcome corruption opportunities:
Controls that prevent civil service users from manipulating the process
Transparency that expose inner government workings to provide oversight
Decision-making to enable tracking compliance and performance
Some governance tools from the FreeBalance Governance Framework can be leveraged in this scenario.
There are universal governance tools operating at every stage in the procurement lifecycle including:
Chart of Accounts that aligns all government financial activity to budgets, users, purpose, organizational structure and accounting types to reduce accounting manipulation
Segregation of Duties to ensure that multiple individuals are involved in the procurement cycle making manipulation more difficult
Integration to ensure that the commitment rules in use in the commitment accounting system are respected in the procurement system
Procedure Workflow that articulates the proper processes and prevents system user from changing rules such as the length of time that vendors have to respond to the RFP
Alerts from the workflow that notifies interested parties such as internal audit or the Minister of Finance about milestones in the tendering process providing more oversight
Dashboards that provides exception reporting to managers about the process
Some governance tools augment specific parts of procurement lifecycle:
Secure infrastructure is augmented by control tools such as data integrity that prevents manipulation in underlying databases, encryption that prevents people from accessing certain types of data, and general IT security such as virtual private networks to reduce ICT manipulation
User group controls is augmented by user management such as password controls
Budget preparation is enabled through structured multiple year planningdecision-making such as MTEF that leverages historical data to ensure that the planned hospital budget is realistic
Commitment accounting is enabled through budget and commitmentcontrols that ensures that obligations do not exceed commitments and that items not part of the hospital procurement are acquired
Procurement is enhanced through e-procurementtransparency that enables comparing contracts over time to expose potential manipulation
Payment management is enhanced through secure paymentcontrols such as Electronic Funds Transfer (EFT) that reduces the opportunity for the fungibility of cash and ensures traceability
Auditing is enhanced through decision-making tools that trace every function, transaction and approval in the system from payments back to the original plan through the audit trail
Institutions and institutional characteristics such as capacity and political will are necessary to effectively leverage the governance capabilities of GRP. However, there is evidence that GRP systems, by themselves, reduce corruption:
Controls prevent many corruption opportunity points
Transparency through front-office systems changes behaviour because of the embarrassment factor
Knowledge that all transactions are tracked changes behaviour because of the threat of being caught
Institutional governance enablers that are critical across the procurement lifecycle include:
Capacity of stakeholders including businesses, civil society, legislature, anti-corruption organizations and the civil service for management and oversight
Political Will by stakeholders such as the executive to support anti-corruption activities
Standards used in public financials that provides better information to stakeholders
Compliance processes and norms within the government
There are other institutional characteristics that are important during the lifecycle include:
Accounting procedures used by the government that provides appropriate fiscal discipline using good practices and integrated with controls
Access to transparency technology and maturity of civil society institutions during and after public investment procurement which can extend back to budget preparation to hold the government to account
The independence and enforcement options for internal and external audit institutions to trap corrupt practices
It can be argued that appropriate institutional arrangements for anti-corruption will have limited impact without an effective underlying technology system:
Auditors will be forced to track spending and compliance violations through paper files or across incompatible information systems
Transparency mechanisms could result in publishing only the information that procurement officers wish to be published
Manipulation of procurement processes will be difficult to uncover without an audit trail “smoking gun”
Disconnection with the original budget process could result in the purchase of goods and services that have little to do with the intention to build a hospital
Cash payment will reduce the ability for auditors to “follow the money”
There are numerous signs that are used to measure the governance effectiveness of PFM in this scenario:
Public Expenditure and Financial Accountability (PEFA) assessments are widely accepted as showing the PFM state-of-the-art in any country. PEFA provides detailed analysis of the comprehensiveness, efficiency and quality of PFM processes
Transparency International Corruption Perception Index that uses surveys to determine the perception of corruption in a country
Actual incidents of procurement corruption and prosecuted procurement corruption that becomes well-known in the country
In this anti-corruption scenario:
GRP systems support automated transparency in the form of an e-procurement portals
Governance tools within the GRP help to control corruption
Transparency through the e-procurement portal changes stakeholder behaviour reducing corruption
Procurement transparency improves the perception of corruption such as the Transparency International Corruption Perception Index
Improved corruption perception and corruption processes will result in improved rating in the meta World Governance Indicator, Control of Corruption
Although PEFA assessment lack some detail on procurement processes, a GRP with tools and enablers will help to improve ratings for:
PEFA B Comprehensiveness and Transparency
PI-5 budget classification could be improved to show objectives and sector programs within the government books
PI-6 increase in the comprehensiveness in budget documents thanks to improved planning and accessibility of procurement details
PI-10 increase in the availability of financial information to the public via the e-procurement portal and through improved reporting
PEFA C(ii) Predictability and Control in Budget Execution
PI-19 improved value for money through increased competition and improved commitment and procurement controls
PI-20 effectiveness of controls for non-salary expenditures through budget, commitment and process controls integrated across accounting and procurement systems
PI-21 effectiveness of internal audit through improved capacity, independence and access to audit trails
PEFA C(iii) Accounting, Recording, Reporting
PI-22 improved timeliness of accounts reconciliation via integration and automation including bank reconciliation from payments made to the vendor providing the hospital
PI-24 improved quality and timeliness of in-year reports through integration, automation and the use of international standards and good practices in accounting procedures that shows potential gaps between the proposed budget and actuals
PI-25 improved quality and timeliness of in-year reports through integration, automation and the use of international standards that shows the impact of public investment projects like the hospital to the government books
PEFA C(iv) External Audit and Scrutiny
PI-26 improved scope of external audit through independence, capacity and access to the procurement audit trail
Governance Indicators and Outcomes
The improvement of meta governance indicators like the Control of Corruption improves trust and investment in countries. These indicators are used by credit agencies. Foreign Direct Investment (FDI) can increase. “Doing Business” ratings can improve based on the transparency of government procurement that represents significant portions of business opportunities within developing countries.
The procurement “output” – the acquisition of a hospital through a process that reduces corruption can enable a small developing country to improve health outcomes. Some health outcomes are used by donors such as the Millennium Challenge Corporation (MCC) when evaluating funding decisions. Other health outcomes are tracked as part of the Millennium Development Goals (MDGs).
These health outcomes are not trivial. MDGs are highly politicized and play a significant role in donor and government priorities.
It is true that exogenous factors can prevent the smooth transition from GRP systems to improved health outcomes. Yet, it is clear that a lack of corruption controls in the hospital procurement will negatively impact any governance outcomes.
Public investment programs are critical in developing countries. Infrastructure is needed to improve the transportation of goods to market. Hospitals and schools are needed to improve health and education.
Public investment programs are also fraught with corrupt practices even in developed countries. GRP systems are leveraged to reduce procurement corruption and to trap incidences of procurement corruption through:
ICT security techniques to reduce manipulation
User management integrated with GRP controls
Audit trails and alerts to track manipulation of GRP systems
Integration among systems to prevent corruption at interface points
Transparency through e-procurement to enable civil society and competitors to monitor procurement
Workflow that ensures that government procedures are used
These tools and techniques are best leveraged by governments with anti-corruption political will, good civil service and civil society capacity and audit organizations with sufficient capacity, independence and enforcement.
It was a privilege earlier today to engage in a graduate class at the Harvard Kennedy School of Government. One of our mandates at FreeBalance, as a for profit social enterprise, is to build and share good practices in Public Financial Management (PFM). This is a unique labor of love for us – to share our experiences to help countries grow. We do not restrict this knowledge to only our government customers.
The FreeBalance team has been building up our methodology on reform sequencing for the past few years based on our experiences in 20 countries and the engagement with the greater PFM community. This was our first opportunity to present an new and comprehensive framework for technology-enabled governance.
The genesis for this good practice document is interesting. FreeBalance is a Canadian company based in Ottawa with a large installed base in the Canadian Federal Government. So, we have some insight into the complexities of public finances and human resources in a G8 country. Canada is considered to have one of the most advanced structures for governance in the world. And, our Canadian customers, thanks to the governance of “clusters”, have driven our products for almost 30 years.
Our mission has been to take our robust Government Resource Planning (GRP) software to less developed countries. Good governance, in my opinion, is not a “zero sum game.” It has a network effect in that improved governance in one country has positive effects in other countries.
The dark side of success?
In the course of events in the past decade, procurement cycles for government Integrated Financial Management Information Systems (IFMIS), as they are often called, were accelerated for post-conflict countries. The international community recognized that software and capacity building was necessary to rebuild government. And, FreeBalance software that was highly flexible for government, and only government with support for Canadian government requirements from decades past, gained a foothold.
The ultimate reward for success in fragile states – the only COTS vendor to have success under these difficult conditions – was an assumption that our software and expertise was only viable for “underdeveloped countries”. That’s certainly been the fallacy that major Enterprise Resource Planning (ERP) like to propagate.
There are some interesting observations that I have made from our on-going research into the PFM domain that may be of interest to you:
Many developing countries have leapfrogged developed countries particularly with the support for International standard, budget transparency and multiple year planning. Some might say that there is a double standard where donor countries and multilateral financial institutions expect better governance mechanisms in post-conflict countries than they support themselves.
The success rates for ERP software in government is meager. In very developed countries with high human capacity and good project methodologies. We encounter so many stories of ERP problems in government that we often fail to realize that ERP does not have a good track record in the private sector. The “enterprise” sector. It’s true that we update our ERP failure ERP Fail page as we learn about problems that have been reported publicly. We learn about far more failures and issues that are not reported. Which stands to reason – it is very embarrassing to country governments or IFIs to expose these problems.
The term “innovation” is frequently used in the enterprise software domain to the point where it’s lost all meaning. Vendors tout mobile technology yet the core of their software is client/server. They throw hardware (in-memory) to accelerate processing as if this hasn’t been done before by anyone. And, they continue to present the fiction that the larger the company then the lower the risk to customers.
The fifth released document, embedded below, describes good practices in anti-corruption through the use of Government Resource Planning (GRP) systems. Back and front-office GRP systems can be powerful tools to prevent and uncover financial corruption such as ghost employees, tax evasion and procurement collusion. It’s clear that political will and accountability mechanisms are required to leverage tools. Independent audit and the rule of law are clearly required.
Anti-corruption initiatives tend to focus on creating special commissions. This is critical. But, it seems to me that there is a general assumption that technology, but itself, does not have any particular effect on corruption. There’s also the suspicion that automation can automate corruption – make corruption more efficient.
Our experience suggests that setting up controls and an audit trail dramatically changes behaviour. Controls can prevent circumventing the system. Audit trails and reports can expose corrupt activities.
Good governance solutions to help achieve sustainable growth through the progressive activation of GRP functions in line with improved public service capacity in Suriname
FreeBalance today announced that the Government of Suriname is deploying a comprehensive FreeBalance solution including software, services, support and capacity building. FreeBalance Accountability Suite software is being deployed throughout the government starting with the Ministry of Finance. The implementation will include all line ministries, sub-national governments and parastatal entities (public works and education).
The FreeBalance solution will enable the Government of Suriname to achieve its Public Financial Management (PFM) reform objective to sustain economic growth. “The highest priority for the Government of Suriname is to sustain economic growth. Sustainable growth will enable us to increase public sector development and citizen service delivery. PFM reform is considered a foundation for these objectives,” said Adelien Wijnerman, Minister of Finance of the Republic of Suriname. The Government of Suriname will be using a modified “platform” approach to PFM reform consisting of four overlapping phases. This approach ensures that there is not an overwhelming “change management” burden and recognizes the need for “small” wins to socialize change. This good practice is a key part of the FreeBalance i3+qM methodology designed for sequencing PFM reform based on the country context.
FreeBalance is also extending its operations in Suriname to include a permanent presence in Paramaribo to support the project and the Government of Suriname. “We are fully committed to supporting the PFM reform objectives of the Government of Suriname. We recognize the need for a strategic partnership is required,” said Manuel Pietra, President & CEO of FreeBalance. “This method ensures financial sustainability as information systems are adapted to the sequence of PFM reform appropriate to Suriname. “The permanent presence in Paramaribo is bolstered with the support of FreeBalance staff and resources from service, support, sales, project, and development offices around the world. This global workforce brings an additional and unique blend of experience, lessons learned, and good practices to the project.
My sense is that many are incredulous that Afghanistan has a rating just below Italy.
The point is that Afghanistan makes 6 of the 8 documents that should be public by the OBI public. The other 2 are used internally. Public engagement was rating weak and there is room for improvement. Publishing the additional 2 document and increasing public engagement will improve the rating.
The Government of Afghanistan uses the FreeBalance Accountability Suite. This enables the government to publish budget information if there is political will to do so. The Government of Timor-Leste publishes information directly from our software in a Transparency Portal and the Government of Liberia has announced an electronic billboard project to show government expenditures. I suspect that Liberia will also be using FreeBalance back-office software to support this initiative.
To be clear, I am not saying that our software is a magic anti-corruption/good governance pill. I’m saying that the tool, when there is political will and commitment can be used for transparency and accountability. And, the governments of Afghanistan, Honduras and Liberia should be acknowledged for their governance achievements.
The first released document, embedded below, describes methods of calculating the Total Cost of Ownership (TCO) for Government Resource Planning (GRP) systems. I think that this could also be used in general TCO analysis for Enterprise Resource Planning (ERP) systems in the private sector.
FISC 2013 is our Seventh Annual FreeBalance International Steering Committee conference. The FISC approach differs from the traditional technology user group conference in many ways – good ways, we think
For one thing, FISC is about enabling customers to influence FreeBalance, not the other way around.
In the spirit of transparency, we were live tweeting from FISC last week and we’ve ‘storified’ it below.