Sustainable Public Financial Management

Doug Hadden, VP Products

The term “innovation” is overused by technology companies – particularly large enterprise software vendors. (I’ve written about the limits of innovation as companies dominate markets in Software Innovation: “The Witch is Dead” and ERP Innovation: Is that all there is?)  It’s become cheesy. I had an interesting Twitter exchange with Ray Wang, the CEO of the Constellation Research Group  about the nature of technology “innovation” these days which seems to be about acquiring companies:

@rwang0: so as I said last night.. today was a big #acquisition day. hope everyone got what they wanted & customers can rest peacefully #futureofwork

@freebalance: @rwang0 I acquired some cheese today, but didn’t write a press release on how I agreed to acquire the cheese. Next step: move the cheese.

@freebalance: @rwang0 also planning to acquire olives& pickles to package as cheese appliance & then call it #innovation to solve BigCheese problems

Mergers and Acquisitions = Innovation?

Don’t get me wrong – small companies who get acquire often have disruptive and innovative products. The process of acquiring companies is not particularly innovative. Companies are acquired to fill out a product footprint, acquire customers or move into new markets. What gets my goat is that the acquiring company, particularly in the enterprise software space, markets this packaging of acquired products as “innovation”.

The two largest enterprise software companies seem to be fighting a war of words about who is the most innovative for “big data”. In my mind, it seems to be an argument of whether packaging pickles and olives with cheese is more innovative than stuffing cheese into olives.(And then trying to tell us that we suffer from a big cheese problem – we’ll be no longer competitive with “little cheese”.)

What did these two companies do other than package:

• Business Intelligence software from acquired companies
• Database technology from acquired companies including use of open source SQL and NoSQL software
• Hardware to accelerate performance

Cheesy Innovation

I don’t have a problem with the notion that the appliances peddled by these companies ares applicable to many markets and will perform better than previous solutions. I don’t believe that this represents breakthrough innovation because:

• Almost all or all of the components were acquired
• Embedded databases have been around for a long time
• Database scaling has been somewhat perfected by commercial Web 2.0 and Cloud providers
• Hardware applications to accelerate software performance have been around for some time (and customers have often been forced to leverage hardware to overcome software inefficiencies)

One of these big ERP companies, after an acquisition overlapping with a current product offering committed to “selective innovations” with the now-to-be-obsolete product. Is that even possible? Like: “we’ll select inventing the wheel and the thermos but skip the internal combustion engine.”

Not to mention that the other big ERP firm has released software intended to aid integration among all the acquired software and are calling that “innovation”.  That’s not innovation – that’s plumbing!

I’m not suggesting that packaging and integration is easy. It’s difficult stuff – almost the equivalent of the Apollo 13 oxygen solution - except that the parts are well-known with integration methods and there is no parts scarcity. There’s a time constraint, though: announce the product 6 months to 6 years before it’s really available.

Let’s make “Innovation” less cheesy

Technology vendors should sign up to an “innovation” in marketing code of conduct by using the following terms:

• Disruptive Innovation: when it is new, different, patentable (but not an alternative to a different way) that can shake up an industry
• Incremental Innovation: when significant improvements are made to an existing product that opens up new markets or inefficiencies by orders of magnitude
• Design Innovation: where an existing technology category is shaken up by something more effectively designed (like Apple innovation)
• Cleverness: when technology packaged or integrated in a different way (think sandwich rather than bread and cheese)
• Enhancement: when improvements to products were made

Doug Hadden, VP Products

IT cartels, IT innovation, and “metamovements.” What do these have in common? What does it have to do with Government information technology?

Strategic Inflection Point

I believe that this represents a “strategic inflection point” for Government IT. The same kind of strategic inflection point described by Andrew Grove when Chairman of the Board for Intel:

They represent, in my description of it, what happens to a business when a major change takes place in its competitive environment. A major change due to introduction of new technologies. A major change due to the introduction of a different regulatory environment. The major change can be simply a change in the customers’ values, a change in what customers prefer. … But what is common to all of them and what is key is that they require a fundamental change in business strategy, and that’s almost a definition of a Strategic Inflection Point. A Strategic Inflection Point is that which causes you to make a fundamental change in business strategy. Nothing less is sufficient.

This is a strategic inflection point for the way that governments manage information technology and the way in which software vendors support governments.

This “double dip” strategic inflection point is driven by:

1. Innovation Necessity: Budget constraints at a time of citizens demanding improved government performance and transparency at lower cost.
2. Value, Risk and Innovation Paradigm: Traditional methods to understand value have become obsolete in the age of social media.
3. Digital Darwinism: IT agility challenges incumbent Government IT providers.

1. Innovation Necessity

John Suffolk, the former UK Government CIO, suggested that governments should not waste a good financial crisis. It’s not just about finding innovative ways to reduce IT costs.  This crisis has seen the rise of what Umair Haque, Director of the Havas Media Lab and founder of  Bubblegeneration, calls the Metamovement:

The Metamovement is a movement of movements. Not all these movements are similar; no two are exactly like; each can be readily distinguished from the next. The Arab Spring is part of the Metamovement; the London Riots were part of the Metamovement; protests spreading across America, under the banner of Occupy Wall St, are all part of the Metamovement.

The Metamovement questions institutions. It demands a change in the status quo of how governments interact with citizens. This has a huge impact on policy and regulation. This is manifested in a demand for improved transparency through Government IT.

As Alex Howard of O’Reilly Radar has pointed out, recent cut-backs in the United States does not mean the death of open government.

Takeaway for Government IT: the government performance and transparency demand is a cornerstone of the Metamovement. Initiatives like the Open Government Partnership is likely the “end of the beginning” for open government data. IT information silos, proprietary technology and focus on IT “control” in government inhibit the ability for countries to respond effectively to citizen demands.

2. Value, Risk and Innovation Paradigm

Government IT decisions tend to be risk-adverse. Small steps are taken, primarily with incumbent software vendors. Yet, this can create an environment that limits innovation and cost savings through what former American Federal Government CIO Vivek Kundra calls “IT Cartels.”  This can result in attempting to find cost-savings through legacy technology“economies of scale” when  modern technology can generate technology can generate more agility while reducing costs and aligning performance with budgets.

As Harvard professor Clayton Christiensen has written, there are significant the differences between disruptive innovation and sustaining innovation. Successful leaders in any category, such as incumbent IT providers, are unlikely to challenge the status quo through disruptive innovation because it disrupts business models.

This fact is addressed in Geoffrey Moore’s new book, Escape Velocity: Free Your Company’s Future from the Pull of the Past. Moore, who developed the Crossing the Chasm technology analysis, addresses this lack of innovation among incumbents. As Mark McDonald of the Gartner Group summarizes:

Moore’s central premise in this well written, actionable and highly recommended book, is that companies have a structural bias for investing in things today that cause it to starve out the new products and services that will generate growth in the next 2 -3 years.

My sense is that this “starving out” reflects Government IT and incumbent vendor approaches to innovation.

Takeaway for Government IT: there needs to be a new approach to risk & results in increasingly transparent world. The Metamovement does not demand tweaking. It does not want a 10% improvement. Traditional approaches to risk in Government IT have become increasingly risky because it is almost certain that these approaches will not result in what citizens want.

3. Digital Darwinism

Brian Solis of Altimeter Group observes the change in the IT landscape. As he says in a blog entry promoting his upcoming book Digital Darwinism:

The reality is that we live and compete in a perpetual era of Digital Darwinism, the evolution of consumer behavior when society and technology evolve faster than our ability to adapt.

Nothing today is too big to fail nor too small to succeed. Disruption not only faces every business, its effects are already spreading through customer markets and the channels that influence decisions and behavior. What works against you also works for you. And, it is what you do now that defines your ability to compete for today and the future. You already recognize the importance technology plays in your business. That’s why you’re here. But recognizing the difference between emerging and disruptive technology and measuring its impact on your business, customer relationships, and products is a necessary discipline to successfully evolve.

Solis also connects the Metamovement with this change in IT in video trailer.

Kay Plantes from the Plantes Company describes some of the fundamental ways that the information age has transformed the economy. She describes the movement from closed to open markets where  ”there was protection for leaders and leading products.” Plantes observes:

In this world, the old strategies of protecting positions through cost cutting, innovating products, branding and marketing just don’t cut it anymore.

Citizens are looking for what Ray Wang, founder and CEO of Constellation Research, calls the “consumerization of IT.” Wang points out that the CIO focus on safe and secure IT limits organizational effectiveness.

For the next generation of knowledge workers, entering the workplace often feels like entering a computer science museum

Takeaway for Government IT: There are significant limits to innovation among many Government IT providers. Make no mistake, governments will innovate the relationship with citizens. The key is that Information Technology should enable these changes. Old models, legacy technology can ensure that ‘big’ will fail.

Doug Hadden, VP Products

Technology columnist and blogger Josh Greenbaum reflected on a question: which of the two leading Enterprise Resource Planning (ERP) vendors is the most innovative.  My view, as captured in my comment to the post, is that neither of these software vendors is particularly innovative. Any recent innovation seems to come from company acquisitions, not generated from internal research and development.

Theory of Technology Innovation

Harvard professor Clayton Christiensen has written the book on technology innovation. More specifically, many books on innovation. Christiensen describes the differences between disruptive innovation and sustaining innovation. Successful leaders in any category become unlikely to challenge the status quo through disruptive innovation because it disrupts business models.

Where is ERP Innovation?

[Note: we don't consider FreeBalance to be an ERP vendor. We've been ERP-free for almost 30 years focused exclusively on government.]

This seems to be a trend in the consolidating ERP market where acquisitions become the primary tactic to achieve growth to support the strategy of building a large maintenance annuity.

My view is that the current “innovations” touted by major ERP vendors come via acquisitions or aren’t innovations at all – just market following to maintain market share (and the maintenance revenue business model).

Analysis of recent ERP “Innovations”

Government CIOs and public financial management professionals should be wary of these so-called  innovations.

Innovation: Cloud services: major ERP vendors provide software on the “cloud”

Assessment: Slow Follower

• ERP vendors have fallen behind the major CRM, ERP and HCM cloud vendors with little uptake. One of the major vendors seems to have gone back to the drawing board so many times that it’s hard to keep up.
• There has been a lot of noise about which vendor has the best technology for cloud deployment. As analyst Ray Wang pointed out in a recent tweet, even the cloud leaders are using rather old technology. That’s the rub. Get under the facade and what do you find? Legacy client/server technology – 15 to 30 years old.
• The use of legacy technology makes it more expensive to deploy: maintaining old code, translation between legacy and web, shoe-horning something not meant for the purpose, adapting to meet customer requirements, larger technical footprint requiring more equipment resulting in power consumption etc.

FreeBalance Approach

• We took the approach of re-writing software in a completely web-native FreeBalance Accountability Suite. We used good software design practices to develop a technology built for the government domain.
• At the time of design, particularly in late 2006 and early 2007, we didn’t think that this was a particularly innovative approach. We’d tried the traditional approach of wrapping legacy technology and realized that it wasn’t sufficiently extensible and that the costs of maintaining this “kludge” would need to be passed on to customers. So, we thought that it was only a matter of time before the large ERP vendors introduced web-native applications. We hoped for a temporary “leapfrog” window of opportunity that would end by about mid 2011. And, we thought that we were taking our time!

What does this mean for government?

• Government organizations are accused of holding on too long to “rust”. Legacy systems require more maintenance over time. These systems become resilient to change – hold governments back from leveraging technology change. The web facade not withstanding, many government organizations are investing in the new rust.
• Governments who are looking at doing more with less. Creating efficiency, saving money. One technique for public financial management is IT shared services deployed as a government private cloud. The premise is that economies of scale can be achieved in this method. But, governments are finding that technology not designed for this purpose does not generate the expected efficiency – often adds complexity, reduces agility – all at a high cost to migrate and maintain.
• That’s why FreeBalance developed the technology from scratch to support shared services and shared services migration to standards

Innovation: Business Layer Middleware to enable intra-suite integration

Assessment: Laggard

• This is a bit of a variation on the above. Many ERP vendors have created or announced technology that enables integrating software packages from acquisitions. The notion is that it can provide implementation and maintenance benefits.
• Yet, the realization of these projects (and some of these projects seem to have disappeared) provides no particular innovation. It’s just a better way to get parts to work together. And, there seems to be a challenge to get all the parts working together to get the best possible solution across the vendor product suite.

FreeBalance Approach

• As described above, we used modern technology. We support web services. Reuse of business objects that we call government entities. Granular access to these objects. Designed to integrate with modern technology.

What does this mean for government?

• Integration is becoming an increasing opportunity in government. Government organizations need to “act as one”. Software vendor focus on intra-suite integration and use of legacy technology limits government agility to integrate technology to provide better value to people and better citizen services.

Innovation: Corporate performance management, real-time analytics and dashboards, in-memory databases

Assessment: Fast Follower

• Don’t get me wrong, there are some compelling performance management technology coming from ERP vendors. However, these all seem to mainly come from acquisitions: the three largest Business Intelligence companies were acquired by larger firms. As were in-memory databases. (Not that there haven’t been embedded databases for at least 20 years).

FreeBalance Approach

• We’ve worked with our government customers to understand what is needed in government performance management. Although we do not innovate on the “bells and whistles” and integrate with reporting and analytical tools, we’ve come up with a government-specific approach.
• Government performance is different. It’s budget-centric because the budget is the legal embodiment of government policy. Outcomes and outputs are not inputs to performance, as in the private sector – rather the results. This is much more difficult to conceive.
• Transparency and open data have become key government needs. Although many of the ERP vendors provide some toolkits, few are integrating front and back office transparency for 10 years of budget transparency like our customer, the Government of Timor-Leste.

What does this mean for government?

• Government CIOs can distinguish between the visualization tools and the performance integration tools.

Innovation: Vertical market “quick starts”, change management software, BPM integration, call-outs, upgrade kits

Assessment: Laggard

• There are significant costs to customize ERP and maintain those customizations in ERP software. Methods to mitigate these high cost problems are somewhat commendable, but this seems to be overcoming a design flaw.

FreeBalance Approach

• Our software was well-known for the ability to configure to meet most government requirements. We customized the software to meet government requirements. This meant that the new code became part of the main line and was fully supported by FreeBalance. No need to maintain BPM scripts, call-outs, custom code when upgrading.
• We recognized in 2006 that this configuration ability was a core differentiator. So, we extended it further to provide more flexibility and adaptability without the need for our government customers to write a single line of code.

What does this mean for government?

• Governments cannot accomplish “business process re-engineering” and adapt to many “best practices” without changes in legislation. Mandates change frequently. And, there are new demands for reform that requires future changes. Hence, an approach of low-cost progressive activation significantly reduces the Total Cost of Ownership (TCO) – even relative to these ERP work-around techniques.
• For added measure, Version 7 enables upgrading from any version from version 7.0 to any subsequent version with a single step.
• Oh, and we don’t force upgrades and support many more versions than industry standards (kudos to Infor for having a similar policy).

Doug Hadden, VP Products

In an interesting meeting yesterday, a top IT official at the Government of Canada said that “legacy technology is a terrible anchor.”  Meanwhile, Josh Greenbaum of the Enterprise Matters Blog posted an entry that multi-tenancy in cloud computing is a vendor issue. This recieved a lot of comment, particularly from Ray Wang of the Altimeter Group.  Multi-tenancy hosting was one of the benefits described by Workday during their technology summit.

Josh made the important observation that “a customer that looks at multi-tenancy as a key criteria for acquiring a new piece of functionality is basing their decision on factors that are not directly relevant to their TCO.”  This is a critical point for any organization looking at leveraging cloud computing. As I commented: “In the cloud, no one knows what architecture you have.”  Yet, the architecture becomes a super critical issue when governments are hosting multiple government organizations.

Client Benefits: for those government organizations using a hosted shared service

As I described in my comment to the blog entry: ” There has been a lot written about enterprise architectures and vendors are quick to promote architectural advantages. You are right here because the further we get away from TCO & functionality – where the “rubber hits the road” for clients, the more we get into almost metaphysical discussions of “potential” TCO & functionality. Effective architecture is seen as future proofing but it is a third order benefit. (Second order benefit is feature sets you don’t need now, but possibly might need.)”

First order benefit:

Efficiency & effectiveness to meet mission + ease of compliance with government reporting requirements

Less the Total cost to achieve functional needs =

software/chargeback costs, governance costs (participation in the system governance), training & certification costs, upgrade costs + cost of the complete solution meaning the costs to develop applications to fill gaps, manual processes that are not automated, extra oversight over standardized processes that do not fully meet organizational needs + cost to migrate and business re-engineer to go from current systems

Second order benefit:

Leveraging new feature sets and functions not currently in use can improve efficiency & effectiveness to meet mission

Third order benefit:

Architectural benefits of hosted solution that reduces hosting costs that can reduce the cost to client organizations to:

• Future-proof and grow to meet functional needs and scale to user demands
• Change configurations to support on-going govrnment modernization

• Maintain a technical footprint that could be bloated requiring too much hardware and high power consumption

Benefits from Hosting Agency

The third order benefits from the client perspective are critical to hosting agencies. Shared services are intended to reduce costs and provide a better value to citizens. Yet, many contemporary software architectures are not able to achieve the cost reduction. Ironically, the costs to host multiple organizations can be higher than individual on-premesis deployments. Why?

1. Technical architectures that rely on customization tend to be costly to meet multiple organization functional needs
2. The customization approach often makes adapting to new government mandates and process modernization difficult
3. Minimum technical footprints can be large and need to accomodate to peak period-ending activities across multiple organizations where government Service Level Agreements can result in unused over capacity

 Where do Governments go from here?

Virtualization seems to be the blunt approach to optimize technical footprints. Vendors providing products to governments need to address the standardization/uniqueness problem where multiple compliant configurations are possible, as we have described before. And, the burden to adapt to government modernization should not fall on government IT professionals.

by Doug Hadden VP Products

Ray Wang of the Altimeter Group, “the software insider“, can be counted on to provide interesting food for thought. Last week, it was about changes to the Master Data Management (MDM) market: “Focus on Outcomes Drives Push for Value.” According to Wikipedia, MDM includes the “set of processes and tools that consistently defines and manages the non-transactional data entities of an organization (also called reference data).”

Rationalizing data definitions across large organizations has been a difficult problem for many years. An expanding problem thanks to more and more data. Hence the need for more effective methods to manage meta data – the description and logic behind the data being used. MDM is needed to ensure that everyone is reporting on the same concepts.

The core government financial ”master data” in Government Resource Planning (GRP) is located in the Chart of Accounts (COA). The COA holds information about the organization, budget codes, accounting codes, programs, projects, activities, objectives and statistics. MDM in government becomes more challenging with procurement (vendors), revenue (customers), taxation (taxpayers) and civil service (employee) information. The advent of performance management highlights the need to rationalize data across multiple systems: governments need consistent data definitions for reports and dashboards.

I had just returned from a meetup at the International Semantic Web Conference when I read Ray’s piece on MDM. Semantic web is sometimes referred to as “Web 3.0.” (I won’t get into the debate about how “semantic” semantic web is – or whether this is “Web 3.0″.) Semantic technology has moved from the academic to the business world. It can be used to classify both structured and unstructured data. (And, integrate with the “deep web” through databases.)  It occurred to me that this technology represents the future of MDM. 

Photo:

Sir Tim Berners-Lee inspires the crowd about semantic web at the ISWC “meetup of meetups”.

 To expand on my comments on Ray’s blog:

1. Vertical: Semantic technology is ideal in building vertical taxonomies. Machine learning has been most effective when applied to single domains. (This is changing as the technology improves to handle multiple domains.)
2. Structured and Unstructured: designed to leverage both structured and unstructured content. Semantic technologies can pull concepts and identifiers directly from unstructured data. It can also show unexpected patterns with structured data because it is not limited to the explicitly relational database structure.
3. Data in the cloud: Can use web and “linked data” from external systems. Current search technology indexes web pages. Semantic web technologies can pull data from databases. And, there does not need to be a single source of data – this is the advantage of “linked data” that enables multiple servers to expose information.
4. Styles: Semantic technology tends to focus on business concepts rather than the physical layer. (At the same time, supports data rationalization at the physical layer.)  Users need to have information presented as concepts to discover important facts. Otherwise, users need to be database experts.
5. Governance: It might be possible to leverage semantic web technologies for governance – trap improper uses of classifications, identity facts that could change classifications. And, it can reduce the burden to ensure that data is classified in a particular fashion.
6. Social networks: Semantic technology is being used today to analyze customer reaction on social network sites to gauge opinions. Semantic technologies can help determine whether a blog post or series of Tweets refers directly to your organization or not.
7. All data types: Semantic technology extends well into all text-related content. There is also some work in integrating with all media. This technology is helping to break free of the arbitrary containers for data (documents, videos, databases etc.)