Sustainable Public Financial Management

FreeBalance is certainly not the first company to claim to be customer-centric. And of the many that do, it’s often a classic example of marketing spin. But in 2006, FreeBalance resolved to become a truly customer-centric company with customer-centric development processes and a model quality management system. The task was by no means easy, but after all the hard work—reorganization, new compensation plans, new measurements, improved accountability measures—the results speak for themselves: FreeBalance customer satisfaction rates have improved; customers are purchasing new modules faster than in the past; and product planning is more effective.

The question remains: how do you tell the spin from the real thing? Here are some signs:

1. You can call the CEO directly.
2. The company reacts quickly to and exceeds expectations in emergencies.
3. Customer cases and satisfaction is tracked in real-time.
4. The company uses anyone within the company, regardless of position, to support you.
5. Staff is compensated and evaluated on customer satisfaction.
6. There is at least one customer steering committee generating company priorities.
7. Company staff attends the same conferences that you do.
8. Company executives ask you for your opinions.
9. Company executives know the status of your important cases.
10. Processes are ISO-9001/2000 certified.

Many software vendors treat customers just like Dr. House on the popular American Television program treats his patients. Dr. House avoids meeting them directly—according to House, patients are liars and idiots.

But a company that isolates its most experienced people from its customers is far from customer-centric. Interestingly, there is no clear incentive for a company to do so. The many advantages we afford our customers influence and reinforce our own. At our end, we have found that interactions between customers and company executives, product managers and software developers provide us the important context to make good decisions that conventional market research cannot offer. So as we continue to distinguish ourselves as the leading providers of government finance software, our good decisions translate into even better choices for governments around the world.

A new software version, and more features. Our computer screens are buried in the rubble of features. New features, complex features. Features you will never use, features you will never know how to use. Making the software harder to use.

Users are overwhelmed with ‘featureitis’. Software that once was easy to use has become difficult. . Software once easy to use now boggles the mind, and those few features that might have been useful are drowned in the din of “feature noise.”

There was a time in financial software when new features were valuable and welcomed. But fast forward to today, and users are understandably reluctant to upgrade to new versions—after all, no one appreciates unnecessary complexity. Alan Cooper, in his book, The Inmates are Running the Asylum, explains why software engineers are keen to include so many features in new software releases. Clayton Christensen in Seeing What’s Next explains how the addition of these new features leads to diminishing returns. And, because software is often designed to accommodate many industries and many types of users with many objectives, software is consequently packed with many burdensome and unnecessary capabilities.

Usability and TLAs

Technology companies tried to overcome this dilemma by introducing the concept of ‘usability’, but in doing so they ended up making software that was ‘usable’ rather than ‘easy to use’. Vendor usability labs test various methods to mitigate the feature noise—employing ‘wizards’ to assist in a particular task or by hiding functions that are not often used. But the software remains complex and presents a steep learning curve.

Meanwhile, the industry has become enamoured with the use of Three Letter Acronyms (TLAs) to complicate software. Vendors talk about SOA, CRM, SLA, PPM and CPM. Vendors do not talk about capacity building and sustainability—they all talk about TCO – “Total Cost of Ownership.”

Tools and Applications

The window-style user interface of Microsoft, Apple and UNIX vendors is the dominant metaphor for software today. These interfaces, while effective for software tools, are less effective for software applications. A software tool (like a spreadsheet application) can achieve many tasks. The user requires functions to be arranged in logical sets: ‘file’ functions are located in one place, ‘formatting’ in another. The software engineer, who cannot accurately predict how the tool will be used, is thus tasked with providing a reasonable and logical functional design.

A software application like IFMIS, however, is considerably different. It is not a general tool. There is an established workflow, and user objectives are predictable: requesting a requisition, approving a purchase order, receiving goods, performing bank reconciliations, and the like. A design focused on a logical presentation of functions can in this case be confusing. The user is performing a task and the software should understand this, just like good airline reservations software which communicates the process to the user without presenting the visual noise of unnecessary embellishments.

Meeting Goals

Software should be designed to meet user goals and should be simple to use for the task at hand. Perhaps new software should take a cue from the Philips Corporation, which is attempting to make electronics simple, or from Apple, which greatly contributed to the simplicity of a new generation of portable digital multimedia players.

We at FreeBalance believe it’s time to bring the ‘simple’ back to software. It’s straightforward: software that is easy to use is also easy to sustain. Software that is simple can be useful for capacity building, and software that understands the users’ goals can implement much faster, enabling governments to more rapidly accrue benefits and achieve its goals of modernization.

The conference speaker presented PFM credentials – a list of successful IFMIS implementations in Emerging Countries. Yet many of the examples are case studies – for unsuccessful implementations.

In 2003, Bill Dorotisky and his colleagues at the World Bank produced a landmark study about bank funded Integrated Financial Management Information Systems (IFMIS). The statistics at the time showed that only 43% of the projects were delivered as specified, 50% on budget and 21% delivered on time. The assumption at the time was that implementations should take between three and five years—the finding was that they took an average of seven.

Speakers from International Financial Institutions are the December 2007 ICGFM conference described seven successful IFMIS implementations. Five of these implementations were FreeBalance.

Why? At FreeBalance, we derive the value of any IFMIS implementation from its sustainability. In other words, while it is a self-evident prerequisite to deliver what was specified, when it was specified, and for how much it was specified, ‘success’ lies in the ability of our customers to extend these initial accomplishments and comfortably adapt them to evolving government processes.

We recognize that goals can expand during an IFMIS implementation—it is legitimate to revise the scope of a project and take a little more time at a higher cost than was anticipated. But not twice the time; not even 20% more time.

An IFMIS is not successful just because the vendor’s marketing department said so. Or, because an obliging government spokesperson said so.

We believe it’s successful when unbiased independent third parties confirm it’s successful.

The World Bank estimated in 2003 that only 6% of reviewed Integrated Financial Management Information Systems (IFMIS) projects were highly likely to be sustainable. 25% were considered unsustainable. Although the Bank has shied away from an update of these disappointing statistics, we have reason to believe that a more recent survey would be less discouraging—mostly as a consequence of governments’ increased capacities and improved project control mechanisms. (Of course, many governments have acquired FreeBalance software too!).

Many IFMIS implementations, even in highly developed country governments, have continually proven both expensive and difficult to sustain. Millions of dollars are spent just upgrading to new software versions.

Sustainability Challenges

Our experience with implementations, the advice of our FreeBalance International Steering Committee, participation in conferences and market research points to the following challenges:

1. Capacity building: Many civil servants resign from public service to join the private sector, requiring continuous training cycles for replacements. And emerging nation governments often modernize processes that require further capacity building.
2. Maintaining efficiencies. Legal reform may be needed to leverage the benefit of automated systems. Currently, many governments are paper-bound, requiring printed documents and physical signatures. Improved efficiencies are difficult to sustain when limited by such physical processes.
3. Budget and Accounting Classification. Improving government performance often requires modifying the chart of accounts to support performance measures or international standards like Statistics. Public Financial Management systems are often difficult to adapt to these changes, and the chart of accounts may prove to be too complex for users.
4. Sequenced reform. Continuous improvement often requires PFM process changes such as a move to accrual accounting or the establishment of consistent civil service promotion standards.
5. Controls linked to capacity. The government budget, commitment and approval control structure often requires modifications to yield favourable results. Many governments roll out strict granular control systems that burden managers for expenditure and budget transfer approvals. As civil service capacity increases, controls should become aggregate and provide more flexibility for civil servants who are more aware of day-to-day needs.
6. Decentralized capacity. Rolling out financial systems to line ministries and sub-national governments often exposes capacity challenges. The systems that are successfully in operation at the Ministry of Finance may be too complex for other government entities.
7. Decentralized functionality. The functionality desired by sub-national governments and smaller line ministries may differ from what is needed by the Ministry of Finance and larger line ministries.
8. Credible multi-year budgets. Government programs often take more than a single year to show results. Planning and analyzing multiple year budgets to support MTEF (Medium Term Expenditure Framework) guidelines requires more complex scenario planning and analysis than single year budgets do.
9. Off-Budget Expenditures. Many donors directly fund government agencies for their projects. These funds are typically not reported within the government financial system. This reduces the credibility of the government budget.
10. Performance Management. Managing for results to support government performance goals or millennium challenge goals often requires additional changes to budget classification, budget planning, analysis and devolution of powers.

Learn More from Your Colleagues

Awareness of sustainability challenges is the first step. We believe that sustainability ought to be the most important considering for the acquisition of an IFMIS. Our best advice – learn from those who have been there.

Sustainability is a major discussion point when public financial management experts meet at conferences. The International Consortium on Government Financial Management (ICGFM) and Association Internationale des Services du Trésor (AIST) are productive international forums for discussing challenges and devising good practices.

FreeBalance is a member of ICGFM. We encourage every public financial management practitioner to attend conferences and take advantage of presentations and documents on the ICGFM web site. The winter conference is being held from December 1 to 3 this year in Washington, DC. The ICGFM blog will host updated presentations and videos of the conference and beyond.

FreeBalance also participates in regional conferences. We recommend regional conferences from Centro Latinoamericano de Administración para el Desarrollo (CLAD) and the East and Southern African Association of Accountants General (ESAAG). The World Bank and various regional donors are also hosts to highly informative conferences.

Note

We have started a blog series on knowledge transfer from our participation in PFM conferences.

A major enterprise software vendor recently increased maintenance fees. These fees cover product support and provide software upgrades. Do these fees help governments to sustain PFM implementations?

No. Maintenance is but one necessary component for sustainability.

Governments calculate multi-year support and maintenance costs when comparing proposals from multiple vendors. This is for good reason: high recurring costs can make software financially unsustainable. Yet, these costs are often insignificant when compared to other built-in (but less explicit) costs, including:

• Continuous technical training for large IT staffs to maintain complex technical infrastructures.
• Long-term contracts with expensive consultants to maintain systems and processes. For example, a recent analysis of an IFMIS implementation showed that consulting fees represented three times the cost of the software.
• Change management processes and consulting fees to support upgrades to new versions of the software (particularly when it is necessary to maintain any code customization) and to support reform and modernization.

Maintenance is Vendor Revenue

Internal civil service and external consulting personnel often cost more than maintenance fees. Yet, many vendors receive more than half of annual revenue from these maintenance fees. These vendors often force customers to upgrade and incur costs by refusing to support previous software versions.

Commercial Off-the-Shelf (COTS) software does indeed require customer support and maintenance fees. But government customers should not be forced to upgrade software outside of budget cycles. And, the personnel costs to maintain software should be optimized. However, the current modes of assisting customers in software upgrades have remained static for too long. Software vendors receive the same maintenance fees regardless of the customer personnel costs.

FreeBalance has developed an alternative approach that reduces this Total Cost of Ownership (TCO) to make software more financially sustainable. This should really be though of as the Total Cost of Sustainability.

Generic Software Maintenance Model does not provide Financially Sustainable Systems

Why is it so rare to find software vendors that are focused on the total cost to the customer? There are numerous factors at play that affect vendor priorities:

• Many vendors are focused on making their organizations operationally efficient or innovative—two of the business models advocated in the famous Discipline of Market Leaders. Most software vendors avoid the third business model, ‘customer intimate’, because they view the market as being Inside the Tornado.
• Many vendors rely on third-party consulting companies for implementation. Some vendors have large professional services departments that generate revenue for software upgrades. Making software easier to implement and upgrade reduces the vendor and partner revenue streams.
• Larger vendors focus on ‘owning the customer’ by providing a complete portfolio of infrastructure and application software. These vendors compare the high cost of maintaining a single vendor set of applications to maintaining multiple vendor sets of applications. Vendors have no incentive to reduce upgrade costs for customers unless it is driven by competition. And vendors who ‘own’ customers recognize that switching costs can be more prohibitive than supporting current software.
• Most vendors do not integrate the product development, support and implementation groups within the company. The customer support group attempts to overcome product upgrade problems through documentation and the formulation of troubleshooting guides. Customers often band together in user groups to help each other out. This only mitigates the upgrade costs.

At FreeBalance, we believe that the expertise developed from our sole focus on government financial management and the integration of business groups has enabled us to develop software that is much less expensive to upgrade than the average. This ‘customer-centric development model’ was confirmed by our achievement of ISO-9001/2000 certification last year.

Better Sustainability Calculations

Government organizations can determine the Total Cost of Sustainability by requiring vendors to reveal the following:

• Average amount of time taken by other government organizations to upgrade to a new version of the software and the number of consultant hours required.
• Average number of personnel required to maintain and support the system within the government.
• Features and functions that reduce the burden for upgrading, including parameters, accelerators, and other configuration options.
• Average amount of time taken by other government organizations to change the system configuration to support reform and new national standards.

It’s no secret: large IT projects often fail to meet customer expectations. One study in 2003 demonstrated that only 34% of large IT projects were successful, while another on Enterprise Resource Planning (ERP) projects revealed an average variance of 182% of estimated cost and 230% of scheduled time.

In the best of cases, high capacity organizations use software designed specifically for their markets. This is partly to minimize the risks involved in implementing solutions that are not specialized or proven for their particular needs.

What does that say for IFMIS projects for government in Emerging Countries? For one thing, vendors are ready with a portfolio of reasons to blame the customer. Blame the victim.

In this portfolio of blame, the victim is accused of:

• Having unreasonable expectations—it wanted too much too soon.
• Lacking an adequate number of trained staff.
• Not being sufficiently committed.
• Demonstrating poor project management.
• Frequently changing direction
• Not effectively articulating the business process.
• Being reluctant to manage organizational change.

There’s no doubting the gravity of these risks. But when governments provide detailed requests for proposals requiring vendors to demonstrate sufficient qualifications, and when vendors quote on fixed price contracts, how is it fair to affix responsibility on governments for all these risks?

Success is found not only in implementation, but in sustainable implementation. That is why it is incumbent upon software vendors and consulting companies to work together with governments to mitigate these risks lest they become permanent fractures.

• Unrealistic expectations. The proposed software must be able to meet the customer’s timeframe for implementation. If the IFMIS software takes three years to implement when the requirements call for one year, it’s time to rethink the software.
• Trained staff. In our experience, capacity building is a primary determinant of success. It’s tempting to cut back on training to reduce proposal costs, but it’s not just about the software—it’s about quality public financial management and broader IT training. Vendors should thus insist on training.
• Not sufficiently committed. Any organizational change tests commitment. Quick, tangible successes are necessary to foster commitment.
• Project management. The vendor must provide a specialized crew that helps and guides the government project management team—not the other way around.
• Frequently changing minds. Governments issue proposal specifications based on conditions at the time. Governments cannot be expected to know how current problems can be overcome or solve new problems that are introduced through the use of the software. Vendors should expect changes.
• Business process articulation. Governments acquire IFMIS to change business processes. Vendors should be experienced in government functions and should not need to ask generic business process questions. Instead, they should help facilitate the government’s adoption of good practices.
• Reluctance to change. Very few people like change—this is a fact of life. Only committed and passionate consultants can effectively motivate change.

You might expect vendors to have learned by now how to maximize success. But unfortunately, vendors who deny their responsibility for failure rarely learn. By analyzing why we do markedly better than industry standards, we have been able to codify successful approaches, improve our processes, and devise methods to effectively mitigate such risks. We understand that the software developer needs to be intimately involved with and committed to the success of the IFMIS project. We work with our consulting partners to ensure success. We value the ability of our software to better meet the requirements of emerging economy governments.

This blog explores sustainable Information and Communication Technology (ICT) for Public Financial Management (PFM). We explore proven techniques and technology from countries around the world, with a special focus on governments in Emerging Economies.

Governments have experienced mixed results when implementing ICT for PFM. FreeBalance customers have been very successful compared to industry averages.

We hope that we can share our practical experiences and market research to assist civil servants to optimize PFM systems, regardless of systems used.

What is Sustainability?

We are focusing on sustainability because we believe this to ne the most critical success factor. We define sustainability as:

• Implemented successfully – on-time and on-budget and meets government objectives
• Government control – civil servants manage entire system, not foreign consultants
• Adapts to reform – meets needs for modernization including civil service reform
• Lower cost of ownership – inexpensive to upgrade to new versions and support installed base
• Rolls out across government – can be installed in line ministries and sub-national government organizations
• Improves government outcomes – enables audit and performance management
• Environmentally sustainable – minimizes the use of electricity and non-renewable resources
• Sustainable fiscal program – provides effective tools for fiscal discipline including sustainable budgets

Explorations in Sustainability

We plan to explore important themes in sustainability:

• Capacity building – what techniques effectively build civil service ICT and PFM capacity?
• PFM sequencing – what PFM functionality has the most benefit at different stages of modernization? How do government needs and objectives change priorities?
• Implementation good practices – how can PFM project be managed for optimal results?
• Software maintenance – what software support, maintenance and upgrade methods are most effective? How should maintenance be priced? How can support be optimized
• Build or buy – what PFM software should be developed in-house and what should be acquired off-the-shelf? Which option adapts best to change?
• Open source – when should open source or commercial software be considered for government financial management? Which option has the lowest cost of ownership?
• Cloud computing – how can governments leverage cloud computing and shared services to reduce costs and improve efficiency?
• User interaction – how can software be designed to be easier to use and maintain?
• Total Cost of Sustainability – how long term costs can be reduced.