Sustainable Public Financial Management

Representatives from Caribbean governments participating in the CARTAC FMI Conference in Belize questioned software company license schemes. Many government representatives felt that vendor licensing methods and costs are too high, particularly during a time when revenue has dropped because of the financial crisis.

FreeBalance provides flexible licensing options to make software for public financial management more financially sustainable.

Licensing Trends

The enterprise software market has matured. Post-sales maintenance represents the largest revenue contributor for large software companies.  Many software companies are attempting to increase revenue from service, support and licenses. Some companies have become more active in auditing customer implementations to find more revenue.

Most enterprise software vendors have stopped “concurrent” licensing in favour of “named user” licensing to optimize revenue. This trend is not good news for customers. Almost all vendors provide a sliding scale of quantity discounts. This model has come under fire. Some vendors are providing software license models that relate better to customer value.

Licensing Methods

Software vendors are providing the following licensing options:

1. Tied to size of servers used based on processors, processor speed and memory

• Advantage: does not require monitoring the number of users
• Disadvantage: many customers purchase larger computer capacity than needed & formulas can be difficult to use

2. Concurrent licenses based on the maximum number of users at one time

• Advantage: can be a better value to customers than named users
• Disadvantage: often requires buying sufficient concurrent licenses to handle peak times

3. Named user licenses

• Advantage: ensures that full-time users can use the system
• Disadvantage: often high costs, particularly for organizations with occasional users of the software

4. Occasional user licenses (generally with a subset of functionality enjoyed by named users)

• Advantage: provides option for infrequent use and can provide a good value
• Disadvantage: formula for occasional users may not match usage and the subset of functionality may not be relevant

5. Monthly rental, typically by users as used in Cloud Computing

• Advantage: enables acquiring or releasing licenses to match changing requirements, usually includes maintenance and is particularly attractive for growing organizations
• Disadvantage: often requires up-front costs, charges by named user and the total cost over time can exceed typical license schemes

6. Site and Enterprise licenses

• Advantage: organization can negotiate a good price and not be concerned about additional costs for new users
• Disadvantage: often negotiated based on future projected users meaning that there can a lack of usage creating so-called “shelf-ware”

7. Costs based on Customer Budget or Total Employees

• Advantage: often used for enterprise licenses and can provide a way to link cost with value
• Disadvantage: total budget or total number of employees does not always relate to value in many organizations

8. Cost or Efficiency improvements

• Advantage: vendor shares in the value of improvement
• Disadvantage: formula is often difficult to enforce and many customers will find other methods less expensive

Best Value for Government

Software vendors need to be flexible by combining many licensing methods to provide effective value to government organizations. Large governments can leverage tbe buying power of blanket contracts to optimize prices.

Caribbean governments do not have the buying power enjoyed by G7 countries. And, there are characteristics that need to be considered in software licenses including:

• Relatively large number of occasional users or users of specialized components rather than entire modules
• Relatively large size of the civil service where teachers, military and police are part of the Government establishment
• High burden of the financial crisis including the availability of cash to pay for needed licenses and post-warranty maintenance
• Need to optimize the entire cost to the government, not just licenses
• Staff turnover that can make some license models difficult to maintain

These considerations need to be mapped against different licensing models. Software vendors should support a combination of models because the profile of usage can differ throughout the budget cycle. For example, most budget preparation users access the system for a limited time once a year. Accounting users are often use financial software most of the day and leverage almost all software features. Yet, goods receiving clerks use only a portion of software. That’s why FreeBalance enables government customers to combine license methods to achieve the best value.

User group meetings were part of the CARTAC FMI Conference in Belize earlier this month. We had more than a day of discussions with our FreeBalance customers from the Caribbean region.

We find that the most successful technique for user groups is to spend more time listening than talking. It is extremely important for software vendors to understand the customer context. Data collected from the FreeBalance Customer Portal and from e-mails is just a starting point.

FreeBalance provided a quick overview of the product roadmap, new products and new customers. However, this was a “PowerPoint-free zone”. We used techniques of lateral thinking developed by Edward de Bono.  Many of us at FreeBalance have been trained on this “6 Thinking Hats” method.

Our first order of business was to discuss the state of customer support. FreeBalance has developed an ISO-9001/2000 certified process for customer-centric product development, implementation and support. Customer support processes can always be improved, particularly when supporting customers globally.

We believe that the traditional model used by software vendors that separate products from services under serves the international market. Services and products need to be tightly integrated to ensure success. The user group selected 11 topics for discussion. These opics were discussed in detail in the order of priority.

We gained significant insight into some business processes in use by our customers. Our international team participated through the FreeBalance Customer Exchange by providing more questions.

FreeBalance produced a report after the user group session and we are following up on action items. We will propose some support process changes and build our product roadmap.

Many Caribbean governments face similar challenges. These challenges are being discussed at the Caribbean Regional Technical Assistance Centre (CARTAC) FMI conference being held in Belize. IT retention is a shared challenge.

Many emerging economy countries struggle with civil service capacity building. Caribbean countries appear to have a higher capacity than many emerging economies. Yet, there is an economy of scale problem – Caribbean countries are small with vibrant economies Vibrant economies have strong private sectors. Governments in the Caribbean compete against the private sector for IT jobs. And, fluency in English gives IT government professionals in the Caribbean with many emigration options in North America.

Caribbean governments have succeeded in building IT capacity. This capacity can be quickly lost to the private sector. One presentation today showed how IT turnover was the highest of any category in the government.

Lessons Learned

CARTAC is a unique organization – run by regional governments who set priorities, rather than donors. These governments share practices and technology. Caribbean governments can leverage lessons learned from software steering committees like the FreeBalance International Steering Committee (FISC) and government user groups as practiced by Government of Canada clusters like:

• Setting the direction of financial software management companies
• Certifying new versions of software as acceptable
• Managing software customization (for vendors other than FreeBalance)
• Collective support and assistance

Civil Service Reform

Many Caribbean countries are reforming the civil service to support retention. Incentives and changes to salary scales have been used. Caribbean countries have discovered that salaries are not enough to retain IT employees. Retention has been improved by providing training to improve skills and presenting IT professionals with new challenges. Government benefit programs can provide good value and stability. Succession planning helps staff to foresee advancement.

Interesting Ideas

There were some interesting ideas advanced that could improve IT capacity building and retention. An appropriate management of outsourcing non-core functions can release IT professionals to handle important functions. The use of multimedia and Web 2.0 technology can improve capacity building and training.

The introduction of the new version of the Apple operating system, Snow Leopard, has generated controversy:  bloated software, usability and environmental sustainability.

The Snow Leopard Controversy

A Wall Street Journal review points out that Snow Leopard has few new features: ‘Apple has made it clear the new OS wouldn’t sport new eye-popping features, but would instead be focused on what it calls “refinements” and “fine-tuning.”’ A Wired Magazine review concludes that Snow Leopard provides “minor improvements.” But, a Forbes Magazine review concludes that Snow Leopard is “a remarkable act of discipline that has broken a decades-long trend toward ever more bloated operating system software.”

All reviews point out that Snow Leopard uses far less disk space and operates much faster than the previous version. Most conclude that this is somehow unimportant relative to potential new features.

Do features represent value?

Alan Cooper explains why so many technical products fail in his book, The Inmates are Running the Asylum. Features often get in the way of usability. Many new technology products have succeeded by having less features and better usability than incumbent products.

Harvard University professor Clay Christensen has shown that the ability to consume new product features rises slower than vendors’ ability to add features. New features are perceived to have low value. Customers resist upgrading to new versions of software because the costs (time and licenses) exceed value.

Enterprise software has reached this “tipping point”. Customers do not want to upgrade to new versions of operating systems or ERP software. The irony is that “maintenance” is representing higher portions of enterprise software revenue. Forcing customers to upgrade to new versions of software reduces vendor support costs. And, many enterprise software vendors are increasing maintenance prices.

Feature bloat and usability

Feature proliferation makes software less usable. Enterprise software bloat has been identified as a usability problem for more than a decade. An analysis by ASA Research in 2005 addressed the concern of “bloated, over-priced, complex ERP solutions.”

Feature bloat is of particular concern in the public sector and in emerging countries. There is more staff movement in the public sector than the private sector. Many emerging countries have limited human capacity. Complex software with feature bloat is the “cost of doing business” in the private sector and a burden in the public sector. Any improvement in usability by removing unneeded features can improve productivity and reduce training costs for all users.

Feature bloat and environmental sustainability

Every new feature and every new database table consumes computing resources. Computing technology has become more efficient but more widespread. This has generated concern that ICT4D, Information and Computer Technology for Development, may be environmentally unsustainable. Many emerging countries do not have reliable or clean sources of energy. Computing technology may be contributing to climate change.

Some computer and network device manufacturers have begun to reduce product power footprints.  Software manufacturers need to follow Apple’s lead to reduce bloat.

Doug Hadden, VP Products

Richard Allen provided interesting insight into whether development partners should use country financial management systems on the IMF PFM blog. Mr. Allen describes the risk associated with doing so and provides a prescription of how country systems can be used. The main focus of the article was on Sub-Saharan Africa.  I provided some comments on the IMF PFM blog that I expand below. FreeBalance is one of the major providers of government Integrated Financial Management Information Systems in emerging nations.

The implicit governance equation used when considering using country financial management systems can be troubling. Donors rightly identify the risks of using these systems: corruption, inefficiency, errors and so on. One can often focus on the risk of change without considering the benefits. Governments in Sub-Saharan Africa can question whether the minimum target for PFM quality is set too high. The equation often does not consider the inefficiencies of the current aid regime. There seems to be an “all-or-nothing” view for using country systems within the aid effectiveness community. Practical solutions for phasing in the use of country systems are available. Mr. Allen advanced the discussion in pragmatic terms.

What should the target be for PFM quality and effectiveness?

Governments around the world are reforming PFM processes. Many G7 countries have not achieved unqualified audits in the past decade. The Government of the United States does not account for trillions of dollars of long-term liabilities. Aid partner financial systems have also been shown to be flawed. Governments in Sub-Saharan Africa should not be expected to have better systems than the G7 or donors.

A practical minimum target should be set. This means “clear performance targets” as indicated by Mr. Allen. PEFA may be ideal. But, there is some concern about the application of PEFA. Many emerging nation governments see the value of PEFA for internal assessments but not necessarily for external assessments. Millennium Challenge Corporation indicators come from multiple sources but these may be too high level to be prescriptive.

Why should alternatives be costed?

Country PFM systems can be inefficient and prone to corruption. Some estimates show that inefficiency costs governments up to 20% in government procurement. Estimates suggest that corruptions costs up to an additional 20%. Yet, aid transaction costs could be even higher. (The material about aid transaction costs is mostly anecdotal.)

Aid executed by third parties in countries can be particularly inefficient through high sub-contracting, foreign personnel and reporting costs. Aid distributed to government agencies suffers from the same inefficiencies as country systems with the added problem of reporting costs. Poor outcomes result because of the lack of donor and government coordination. The question of whether to use country systems should focus on the notion of cost per unit of outcome. This can be unrealistic in most countries, so the cost per unit of output should be used temporarily.

Why phase in country systems?

Sequencing PFM reform is considered a best practice by the vast majority of experts in the fields. The aid effectiveness community is pushing for aid harmonization and the use of country systems, as indicated in the article. The Accra Agenda for Action (AAA) and Paris Declaration represent core beliefs for aid effectiveness. The aid community wants, as Mr. Allen points out, “donors to channel their lending through budget support operations, and similarly to use country systems for aid and investment lending operations.”

Some donors should try to use country systems to encourage governance. The European Community methodology where “aid resources can be clawed back by the EC if countries fail to meet” criteria can be used to ensure compliance. This provides practical experience for governments. Donors can mentor governments.

What about commitments and disbursements?

Effective outcomes are compromised when donors do not disburse promised aid. Sometimes this aid is not provided to governments because conditions were not met. Donors need to help governments to account for these liabilities within financial systems.

Government systems often appear to be black boxes to development partners. There is a focus on actual expenditures rather than the commitment cycle. Aid is often delayed because of inefficiencies or through disciplined fiscal procedures. Donors and governments need to know the commitment progress: purchase requisitions, civil service recruitment procedures, purchase orders and goods/services received for aid projects. This can be accomplished through country financial systems at low transaction costs relative to current methods.

What about COTS software?

The leading vendors of Commercial-Off-the-Shelf government financial management software provide comprehensive audit trails. Reports can be created from these systems in an encrypted manner, resilient to tampering and made available to donors. Among others, Ghana, Malawi, Sierra Leone, Tanzania, Uganda and Zambia use COTS software. COTS software does not eliminate inefficiencies or corruption. It does reduce errors, improve efficiency, and provide audit trails to uncover potential corruption.

Some Conclusions

The advantages of using country systems to manage aid disbursements exceed disadvantages in most cases. And, participating in the country systems enables development partners to assist governments to improve governance.