Calculating Total Cost of Ownership (TCO) for Government IFMIS
This is section 1.3 of a series of blog entries creating a Government IFMIS Technology Evaluation Guide. This includes information to assist in evaluating IFMIS options and the technology requirements for FreeBalance IFMIS implementations. These series will be combined with feedback to produce a comprehensive Technology Evaluation Guide to be published on our web site.
Introduction to TCO
Governments purchase Integrated Financial Management Information Systems (IFMIS) software to improve fiscal transparency, efficiencies and outcomes. Unlike the private sector, the government “bottom line” is not profitability. It is mandate and outcomes. Traditional Return on Investment (ROI) analysis is much more difficult for government than the private sector. However, IFMIS options that enable government to meet outcomes can be compared.
TCO is an important concept because it reflects the true cost to the government of the IFMIS acquisition. TCO is a financial calculation that identifies the cost element for sustainability. TCO helps identify cost elements that can be managed to make the IFMIS more sustainable by the government.
FreeBalance software is distinguished from most IFMIS solutions because of a low TCO. Many of the high cost elements for typical IFMIS solutions do not apply to the FreeBalance Accountability Suite.
Calculating the Total Cost of Ownership
TCO reflects the entire lifecycle costs for acquisition, implementation and maintenance of an IFMIS.
Average of TCO studies of enterprise software across multiple industries.
IFMIS Product Acquisition Costs
- Internal personnel costs and consulting fees for needs analysis and the development and maintenance of a request for proposal
- Computing hardware, networking and required bandwidth for the computing infrastructure to support the IFMIS. This includes disaster recovery sites, testing centre, provisioning of reliable power and long-term telecommunications contracts
- Middleware software including databases, operating systems and systems management tools necessary to support the IFMIS
- The IFMIS software license costs are typically based on the number of users or size of the government
- Internal personnel costs for accepting shipment of products and adding to fixed asset systems
- Most of the product acquisition implies long-term life-cycle maintenance costs
Software Implementation Costs
- Internal personnel costs and consultant costs to articulate the current processes, forms and report requirements
- Installation, provisioning and set up of the IFMIS software and configuration of the appropriate middleware
- Internal personnel costs for any changes to current processes required by the software or good practices. This could include comprehensive business process re-engineering and require consultants
- Configuration and customization costs, typically accomplished by external consultants or the software vendor
- Phased implementation including pilot, testing and analysis including internal personnel and consultants.
- Change management processes during initial implementation
- Testing and quality assurance, both internal personnel and consultants
- Technical training for middleware, networks, computers and systems management
- Functional training for IFMIS users
- Development of any special documentation or user guides that describe the government processes and how these are accomplished within the software
- Project management including government stakeholders and senior project consultants. This includes project planning, communications and risk management
- Acceptance testing, primarily accomplished by internal personnel
- Additional implementation phases may occur such as adding additional software modules, more users or new government entities
- Maintenance costs for all hardware and software purchase, which includes vendor customer support
- Government personnel acting as first line support for equipment and software. This also includes case management to track bugs and enhancements while maintaining the vendor relationship
- System tuning of databases, operating systems and networks as number of transactions increase
- Changes to configuration, reports or forms accomplished by internal staff or consultants
- Bandwidth and other telecommunications costs
- New fiscal year processing including carry-over of previous year funds accomplished by internal staff or consultants
- Upgrade costs associated with moving to a new version of the IFMIS software. This includes change management to ensure that any customization accomplished in the previous version is added to the next, testing and acceptance
Typical Enterprise Software Costs
- The IFMIS software license costs can represent as little as 10% of the TCO, not including the internal personnel costs
- The software costs including IFMIS and middleware tends to represent between 25% and 33% of the acquisition costs, not including the internal personnel costs
- Computer hardware and networking represents more than 25% of the acquisition costs, not including internal personnel costs
- Implementation service can represent as low as 40% of the acquisition costs. Internal staff costs tend to run about 50% to 75% of the consulting costs
- The ratio of implementation costs using consultants runs between 1.2:1 to 5:1. With internal personnel costs included, that ratio can run as high as 7:1 to 15:1
- Tier 1 ERP applications tend to have a higher TCO than Tier 2 because Tier 2 applications are closer oriented to specific customer market requirements and Tier 1 applications tend to have more flexibility in customization
- Upgrading to the latest version of an ERP application is estimated as low a 4 months for a small implementation, but averages 8 to 9 months for larger implementations. One estimate is that the upgrade process will consume one internal staff member for every 35 users of the system
High Consulting Fees
Consulting costs are highest when there is a need for customization. A recent survey suggested that only 7% of ERP applications are implemented without any customization in industry. At least 60% of installations required customization of the underlying ERP code in order to meet the business processes of the organization.
ERP implementation times for the first phase tend to last between 1 and 4 years. Sometimes the first phase can be comprehensive. More than half of all implementations take more than 2 years and most take longer than first scheduled according to one analyst. Another analyst has estimated that the average implementation time is 23 months.
However, government IFMIS implementations in developing nations have been estimated as, on average, 5 to 7 years. The longer the implementation time, the higher the external consulting and internal staff costs.
TCO in Government
IFMIS implementations in government are high risk. According to one analyst, 15% of ERP implementations in government have failed and more than half were over budget, over schedule or under delivered. Emerging country IFMIS implementations were delivered on time and on budget for only 21% of the cases. The factors that affect TCO for government includes:
- Adapting a private sector financial system for government often increases customization work to support government processes and international government financial standards. Software designed for the private sector tends to require a significant first phase of implementation where business processes are fully designed and customization well defined.
- Lower technical capacity in the public service can increase TCO. Some IFMIS applications require significant technical knowledge to implement and support including systems management and database tuning, often requiring external consultants permanently. Only 6% of IFMIS implementations are considered sustainable by emerging country governments according to one analysis.
- Larger technical footprint of the IFMIS in requiring multiple computers and application servers and consuming large amounts of disk space increases the TCO beyond the initial cost. The sophistication of the larger technical footprint requires more internal support, better software tools and higher technical capacity.
- Lower accounting functional capacity of the public service may require additional financial management training. Some systems are designed for more complex accrual accounting. Other systems have complex business processes that must be followed by public servants.
FreeBalance Software and TCO
- FreeBalance software is designed for government processes only and supports international financial standards in the standard configuration. Parameters are selected during implementation. This reduces TCO by:
- Implementing in less than one year, which can reduce project costs including internal staffing as much as 80% from the industry average.
- Virtually eliminating the need for code customization. Most government request for proposals indicate a need achieve government requirements with less than 10% code customization. Most FreeBalance customers require no code customization.
- Enabling modernization of the system over time. The software can support highly complex government processes but do not need to be fully configured for the final state. The software configuration can be upgraded over time. This can reduce the project costs for business process analysis and re-engineering by half.
- FreeBalance software supports rapid localization and translation so that the costs of adapting terminology or translating the software can be reduced by up to 90% from the industry average.
- FreeBalance software has been optimized for government financial management and does not include computer code or database tables that were designed for the private sector. The overall technical footprint including required server hardware and database size is less than half the industry average. This reduces TCO by:
- Lowering costs to acquire computer hardware and middleware like database management systems. The cost savings for infrastructure can be as high as 1/3 of the industry average. In particular, FreeBalance systems do not require reliable telecommunications to operate in distributed environments.
- Reducing support costs by external consultants or internal personal are reduced. FreeBalance systems installed in large ministries often require less than four ministry technical staff to support even for distributed systems. This can reduce internal personnel costs for support by up to 90% of the industry average.
- Eliminating the need, in almost all cases, to hire expensive external consultants to maintain the information system infrastructure.
- FreeBalance software is utilized only by government organizations. New features and modules are made available to all customers. This reduces the TCO by:
- Ensuring that any customization made on behalf of a customer is placed inside the mainline of the code and available as a parameter option for other FreeBalance customers. Many FreeBalance customers share the same government needs. Customers are assured that their features are properly maintained in the code reducing the time to upgrade from months to weeks.
- Removing the need for customers to purchase development software to create and maintain code.