Sustainable Public Financial Management

Doug Hadden, VP Products

A study sponsored by ERP vendor Unit 4 by Cindy Jutras is a sobering read.

I winced a few times.

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.

Doug Hadden, VP Products

The evidence mounts – ERP has a high failure rate in government. ERP vendors, whose software is written for multiple industries, suggest that combining multiple ERP instances into a single shared service will result in “economies of scale” savings. And, it has a grain of truthiness, but, as I’ve written before, it is very much the promise of “free beer tomorrow”: this magic point at which ERP provides a better value than using best-of-breed like the FreeBalance Accountability Suite never happens.

KPMG found in 2011 some ERP in government patterns:

• Budget overruns particularly in implementation where additional software customization was needed: typically 6 months to a year
• Only 57% of implementation projects stayed in budget
• Many survey participants could not recall the original budget

A recent article from the UK describing a Cabinet Office analysis found:

• Average cost to deploy a Tier 1 ERP is £160 per employee using the traditional method
• Theoretical cost to deploy via shared services is  £93 per employee
• Use of lower cost solutions at £52 per employee

The Total Cost of Ownership (TCO) should be a critical concern in government technology procurement. Although “portfolio management” is a value proposition presented by ERP companies, our experience shows that up-front costs have little bearing on the total cost. Tier 1 ERP packages generate high costs for customization, maintenance, change and training. It’s not a good business case as I described back in 2009 (and tried my best to explain the value proposition of ERP in government as objectively as I could.)

Doug Hadden, VP Products

We participated in the Financial Management Institute of Canada Professional Development week in Ottawa, November 26 to 30th. The theme of the week was Focus on Value. This is a large and well-run annual event with almost 5,000 people attending. The conference is focused on government financial management – in particular, at the federal government in Canada. As always, there were some high-profile public servants who spoke at the conference.

I don’t want to “bite the hand that feeds”. But, frankly, I think that many of our senior public servants presented some curious, confusing and contradictory messages around information technology directions. There’s no need for the messaging to be so contradictory. Sure, it’s always nice to cover all the “motherhood and apple pie” basics. But not at the expense of clarity. I think that most of the public servants attending FMI are now more confused about IT direction in the Government of Canada.

Standardization and Standardization

There was significant rhetoric about standardizing business processes within the Government of Canada. This has been a standard theme for a decade or more coming from the Treasury Board Secretariat. And, there is value that could be achieved through process standardization.

Yet, there was no talk about IT standards that have far more potential value. No talk of open standards, web services, service-oriented architectures. It seemed as if the Government of Canada may be adopting monolithic proprietary IT standards and will not achieve economies of scale.

Standardization and Transformation

Many of the speakers spoke about process standardization and government transformation in the same breaths. Process transformation is all about new “leapfrog” processes that are “out of the box”. It’s about looking at the role of government in a completely different way. The result of transformation is improved effectiveness.

Process standardization is all about consistency and predictability. Standardization, in many ways, is the enemy of transformation. Transformation is about creating distinct value while standardization is about eliminating distinctiveness. Process standardization often imposes inefficiencies in order to improve manageability.

Legacy Technology and Legacy Technology

The Government of Canada is trying to reduce IT rust – legacy systems that generate high costs to maintain. (And, to reduce the number of systems.) There was a lot of rhetoric about “legacy systems” at FMI from senior public servants. Yet, many of these public servants proposed that the Government of Canada should use legacy Enterprise Resource Planning (ERP) software. It was as if few of the public servants were aware that technology has changed dramatically in the past 10 to 20 years.

I’ve written about the widespread use of proprietary legacy client/server code among ERP vendors. These vendors claim to have web-based software – but, for the most part, they don’t – by any strict definition. And, integration methods are also complex and proprietary. Unlike, the use of open standards.

Innovation?

I am troubled by the rampant use of the word “innovation” to describe systems consolidation in the Government of Canada. Is the use of “shared services” a sign of innovation or is it a return to the mainframe world of chargebacks? Where is the innovation in legacy technologies? How is treating the government as an “enterprise” a new and innovative concept?

Here’s the open secret: ERP was not designed for government. ERP architecture is monolithic and does not adapt to a shared service model that requires any flexibility to support regulatory process differences.

Some Advice for the Government of Canada on IT Rhetoric

I am concerned that the Government of Canada is trying to solve 2012 problems with 1990s solutions.

The Treasury Board Secretariat and Public Works and Government Services Canada should either admit that they want to use comfortable legacy technology or decide to transform government. Possibly to try tactical uses of innovation in a mostly legacy environment.

Doug Hadden, VP of Products

It’s the last day of the Financial Management Institute Focus on Value Professional Development week in Ottawa. This is a government conference – check out the #pdweek hash tag in twitter. The use of shared services in the Government of Canada, especially the Shared Services Canada department, has been the subject of numerous speeches and presentations. And, numerous side conversations.

The concept of achieving economies of scale to improve efficiencies has a lot of merit. I was initially surprised when Gartner Group analyst Andrea di Maio expressed concern about the realism of the shared services objectives by the Government of Canada. That was before the new organization was created. I have to say that I’m beginning to understand the severe challenges that the government is facing.

Here are few:

• Data centre consolidation increases communications latency and system resilience increasing the risk a system-wide failure (there a failures in major public cloud services that have far more redundancy than envisioned by the Government of Canada)
• Centralized data centres can increase the impact of security breaches
• Governance issues such as “streamlining governance” that can result in loss of service quality
• The high costs and low service that was part of voluntary shared services prior to 2012 may not be solved by having mandatory shared services
• Back-office consolidation increases possibility that unique legal requirements needed for individual departments cannot be accommodated
• Loss of IT personal to the shared services organization results in departments requiring to outsource to the private sector for what they once did in house
• Managing standards and exceptions to those standards provides orders of magnitude larger governance burden than the status quo
• The use of inflexible legacy systems – “rust” – such as legacy ERP programs that use proprietary client/server languages add significant costs
• Value-for-money oversight when the shared services organization is the financial, technical and security authority for itself

Part 3: Capacity Building

Demographic changes means need to build civil service capacity in Canada

Doug Hadden, VP Products

This is Part 3 of 6 parts detailing the content in my Financial Management Institute of Canada lunch presentation What can we learn about Sustainability from Developing Nation Governments?

Civil service capacity and public financial management sustainability

The lack of civil service “capacity” or the need to improve “capacity” is a consistent theme when diagnosing public financial management problems in developing countries. In a recent post on the International Monetary Fund PFM Blog, Capacity Building and Why Reforms Fail, David Gentry opens with: “Rarely can you find a technical assistance related document that does not refer to the need for capacity building.” Civil servants need the proper skills to implement government programs.

Developing nations are modernizing PFM processes rapidly. Sustainability, in this context, extends beyond implementing and maintaining PFM policies competently. Civil service skills need to improve as more sophisticated processes are introduced.  In 2009, Sailendra Pattanayak, in the IMF PFM Blog, describes the Sustainability in PFM Capacity-Building in Post-Conflict Countries challenges including “general shortage of appropriate financial management and accounting skills” and the over-reliance on advisors. Peter Murphy in 2011, also in the IMF PFM Blog, in Who is “driving” the IFMIS?, describes the “classic public sector problems of retaining specialist ICT staff” and the problems associated with contracting critical Information and Communications Technology (ICT) support. This problem is particularly acute in developing nations with limited human capacity.

Civil service PFM capacity: a problem in Canada?

Canada has a high human development index. The Conference Board of Canada has found that Canadian education is effective. The OECD ranked Canadian education as one of the best in the world. Universitas 21 ranked Canada third in world colleges and universities. Legatum ranks Canada 10^th in the world for education. Where is the civil service capacity problem?

Demographics and the long-term results of public policy.

The baby boom in Canada means that there significant numbers of public servants approaching retirement. This “exodus” from the public service has created a knowledge “brain drain”. And, budget cuts are eliminating more jobs. This creates uncertainty among civil servants who seek out private sector positions. And, it means that the public service is no longer an attractive option for university graduates. Yet Public Financial Management is becoming more complex in Canada including initiatives such as:

• Accrual accounting
• Management for results
• Performance management frameworks
• Risk management approaches
• Balanced scorecard
• Increased transparency
• Spending reviews

Cloud computing may be part of the solution

It can be argued that IT capacity in government inhibits automation and innovation. Governments can become stuck with legacy technology, often called “rust”. In 2010, the Auditor General of Canada identified the dangers of “aging information systems”. That’s why the call for cloud computing by former US Government CIO, Vivek Kundra, seemed so attractive: eliminate rust and reduce the IT maintenance footprint.

Governments are reluctant to farm out many back-office functions to the cloud because of privacy and security concerns. So, governments attempt to achieve cloud computing economies of scale through “private clouds” or “shared services.”

Shared services has had mixed results especially in reducing the need for highly skilled personnel.

The capacity to manage an “elastic” fault-tolerant infrastructure requires significant capacity. And, the governance of shared services requires orders of magnitude more capacity than departmental systems. The Gartner Group concluding that “shared services” is on the descent to the trough of disillusionment.

Some governments leverage Enterprise Resource Planning (ERP) software for private clouds. ERP software is complex to use and manage. Code customization is frequently required to achieve government requirements. And, this software was not designed for a cloud deployment. Some economies of scale in IT capacity can be achieved relative to numerous on-premises implementations. However, this approach does not make the ERP software easy to use. And, the customization requirement often means retaining or contracting for expensive staff. The software bloat described in the previous post also adds to complexity: more features to learn and more IT infrastructure to management than is necessary.

IT capacity building

Capacity building is a fundamental to sustainability – the Total Cost of Ownership (TCO).That’s why there is significant attention to capacity building in turnkey Government Resource Planning (GRP) requests for proposal. The intent is to achieve government self-sufficiency regardless of the method for deployment which, in developing nations, is typically a shared service.

Turnkey PFM requirements, described in the last post, for developing nations include the following:

• Implementation of on-site help desk with government personnel that are familiar with the IT systems and the processes in use by the government
• Large training programs designed to keep a cadre of experts even in situations where there is a high turnover in the public service
• Expansion of training programs beyond the software to core PFM and IT training
• Change management focus to ensure that capacity building precedes reform
• Mentoring programs including making knowledge transfer from contractors a condition of employment
• Use of knowledge management, e-learning and adaptable help systems that include all policy manual and courseware information

Capacity in human resource systems

Developing country governments are beginning to use human resource management, or civil service management, software. The key objective for using software for civil service reform is to improve government capacity. Skills are identified and talent management queries are used to discover civil servants poised for career advancement. This can be accomplished across the entire public service. Training programs with schedules are published to self-service portals. This affords “technology leapfrog” opportunities to leverage critical advanced talent management software functions.

FreeBalance approach to capacity building

Many will argue that the software vendor has no place in capacity building. Software vendors build software. Consultants implement these solutions and are responsible for building capacity. Our business methods have been adapted to the PFM domain.

FreeBalance moved from a product-centric to customer centric company. Or, more accurately, continues the customer centric journey. The motivation came from realizing that there was an unmet need in making GRP software sustainable. The disjointed nature of what software vendors, systems integrators and training companies deliver meant there was a sustainability gap. New processes were required to overcome this gap. As a for profit social enterprise, we realized that someone had to be responsible for customer sustainability. No one else seemed to accepting the challenge. This “thinking outside the box” or traditional business methods is part of the maturing of Corporate Social Responsibility (CSR) where CSR is the core company mandate.

My sense is that governments in more developed countries can also make use of the capacity-building product features such as adaptable help and talent management. And, the training and mentoring that is part of our Integrated, Iterative, Implementation and Quality Methodology (i³+qM).

Capacity and self-reliance

It may be curious that FreeBalance measures self-reliance as part of our balanced scorecard. In other way of looking at this, we count score our ability to reduce our long term services revenue opportunity from customers. Some of the measurements we use are:

• Customer satisfaction rating includes important questions on whether customer thinks implementation is sustainable – it doesn’t matter how happy a customer is with FreeBalance, if the implementation isn’t sustainable, we’re not happy
• Number of Customer Exchange members, an invitation-only social network, to enable interaction among customers
• Targeted percent of services work by local or regional staff rather than from other regions. The need to bring in FreeBalance consultants from different regions means that we are not building FreeBalance capacity close to our customers.
• Number of FreeBalance SWAT teams required to overcome customer mistakes with our software. SWAT teams are formed whenever there is a significant customer problem. The team is cross-functional and includes executives to ensure the highest priority. Sometimes the problem is generated by improper knowledge of the software or underlying IT infrastructure. If so, we’re not building customer capacity.
• Targeted number of training days per country. This measure is to ensure that capacity is maintained in governments because there can be high civil service turnover.

Doug Hadden, VP Products

I had a chance to speak at the Financial Management Institute of Canada Public Sector Management Workshop  ”Sustainability in the Public Sector – Securing the Future” in Fredericton New Brunswick last week.

There were some interesting comments and discussions:

• Deficit reduction in government requires much higher upfront costs than usually expected. There can be ramifications to cutting like severance packages, sub-leasing space, environmental studies, training etc.
• The use of IT shared services to reduce overall costs in the Government of Canada has had some unanticipated costs for departments and agencies.
• Departments and agencies in the Government of Canada need plans for cutting 20% to 30% of expenses to achieve the 10% target. Many budget cut proposals are not accepted.
• Internal audit improvements in the Government of Canada is progressing slower than expected.
• The demographic shift and migration means that the Province of New Brunswick is aging faster than any other province in Canada. This has motivated a focus to improve public financial management and introduce performance management in the province.

Looking back 5 years, looking ahead 5 Years

Doug Hadden, VP Products

While getting ready for my presentation next Monday at the International Consortium on Governmental Financial Management (ICGFM) conference in Miami, I had time to reflect on my predictions for 2007. The presentation Monday is on the Social Future of Public Financial Management. 5 Years ago, it was “New Technologies for Public Financial Management.”

Doug Hadden, VP Products

Government “shared services” are meant to save money and improve agility. One option is to share a data centre running Enterprise Resource Planning (ERP) software. The UK National Audit Office  survey (Efficiency and reform in government corporate functions through shared service centres) of 5 ERP shared services in the UK government shows that this approach increases costs:

• £1.4bn spent to date on five shared service centres
• £159m of planned savings by end 2010-11
• £255m is the actual net cost of those shared service centres tracking benefits

ERP or GRP?

FreeBalance is a provider of Government Resource Planning software. No private sector “enterprise” software. There is mounting evidence of the lack of ERP success even in the private sector. More so in the public sector because the software was originally designed for the private sector in mind.

Most critiques of ERP failure in government point to project management causes. My sense is that Project Management 101 will not solve these problems, although there is a governance problem.

There is something fundamentally wrong about with ERP in government

The 5 ERP systems were from the big two providers. The primary problems with ERP are:

• Inappropriateness of these solutions in government increases complexity because of needed customization: “The software systems used in the Centres have added complexity and cost. All the Centres we visited use Enterprise Resource Planning (ERP) software systems. These are complex and have proven to be expensive.”
• High cost of implementation and  maintenance: “, the cost to establish, maintain and upgrade these systems is high.”
• Lack of agility to handle changing legal reform and government mandates: “these ERP systems are complex and it is not easy to modify them when needs change, such as when an organisation is restructured or processes are redesigned.”
• Unnecessary system footprint: “we found the Centres are only using a small part of the capability their ERP systems provide.”

In my opinion, this notion that ERP fails to achieve expectations in government because systems are ”overly tailored” is a crock. Government organizations have unique mandates. There are far more ‘lines of business’ in government than a private sector conglomerate. The inability to easily adapt to meet government needs is a weakness of private sector ERP applications.

The Governance factor

Governance is a critical factor. The report states: ”most shared service customers do not have adequate information on costs, performance and benefits to make informed decisions.” The NAO analyze some of the factors such as: “smaller departments and agencies have been reluctant to share services with a large department as they feel they will not get the same attention as the primary parent customer.”

My view is that improving the governance structure and providing the voice of the users is important, but not critical to success. What the NAO seems to miss – and pretty much anyone who analyzes ERP failure in government - is that the most important stakeholder to ensure shared services success is at arms’ length – the software vendor. That’s right – governments are expected to consolidate, customize and maintain highly complex ERP software without manufacturer commitment to support government needs. Manufacturers should be contractually obligated to meet government needs – no customization by the customer. Where code developed by the manufacturer is fully supported by the manufacturer.

Simpler Solutions?

I often get the reaction from those people who have used FreeBalance and one of the big ERPs: “FreeBalance is simpler and easier to use.”  The NAO suggest that government organizations consider “smaller, simpler software solutions.”

It doesn’t always sound like “simple” and “small” are necessarily good characteristics. It implies that there is something missing. “Optimal” might be a better term. Optimal as in:

• No private sector functionality increasing the technical footprint (amount of code, number of tables)
• Designed for government use so is intuitive to government users
• Use of modern computing architecture, so no client/server base code to reduce performance

Doug Hadden, VP Products

It’s not about “fun” any more. Government Resource Planning shared services discussions rarely cover the functions of GRP. It’s all about the non-functional (what we call “non fun” in the product management world) aspects.

That’s a bit disturbing: the assumption that functions that government needs are less important than technology. There’s a reason for this: much of the current technology to support GRP or ERP needs are unsuited for the task of shared services or cloud computing.

Software manufacturers seem to be battling about what is a “true cloud” by offering “multi-tenancy”. The largest enterprise software manufacturers offer cloud and shared services solutions – claim that these are the best – then acquire pure play cloud providers.

Perhaps “cloud computing” really means “fuzzy, dark, opaque, dangerous.” Governments looking to implement shared services or “private clouds” are hitting technology constraints.

That’s not fun at all. Technology is meant to be an enabler.

What are the non-functional problems with the state-of-the-art? It’s the underlying technology that is often:

1. Completely different in the cloud vs. on-premises versions. Non-functional problems:

• compatibility [compatible with previous software]
• migration [from the previous version]
• manageability [different skills and tools]

2. Based on proprietary client/server software. Non-functional problems:

• security [data leakage, failure to support standards]
• performance [client/server to web translation overhead]
• manageability [support proprietary standards]
• compatibility [with other applications]

3. Designed to adapt via code customization. Non-functional problems:

• manageability [need to manage proprietary code]
• upgradeability [need for complex change management to handle version upgrades]

4. Based on private sector needs. Non-functional problems:

• green IT [requires more code, more tables, more hardware to perform task]
• manageability [to adapt software to meet government requirements and changing government requirements]

Market Shift

We are seeing the following shift in shared services thinking:

1. Computing platforms are shifting to identical cloud, shared services and on-premises pure-web
2. Adaptability is shifting from highly customized on-premises systems with limited configuration in the cloud to highly adaptable cloud configurations
3. Product footprints are being optimized to use less technology resources (hence more green) with improving the ease of management

On November 22, 2011, Doug Hadden, VP Products at FreeBalance delivered the  ‘Seizing the Shared Services Opportunity’ presentation during fmi*igf PD Week in Ottawa. Here’s an overview of his presentation:

“The mandate of shared services is to streamline information technology costs and provide hundreds of millions of dollars in savings on an annual basis. Many experts and government officials suggest it will take many years to provide any savings, and even more time to generate the type of savings that forms the mission of Shared Services Canada. The Seizing the Shared Services Opportunity presentation details a risk-averse approach to shared services that provides an acceleration of speed to savings.”