Sustainable Public Financial Management

Enterprise Software Success Myth #6

FreeBalance is a medium-sized Independent Software Vendor (ISV) with considerable success competing against very large Enterprise Resource Planning (ERP) vendors. We are sharing 16 lessons learned by bucking conventional wisdom to encourage industry innovation and creativity.

Conventional View

As described in the ”Customization” is increasingly used to meet end-customer needs. This customization is developed by this “channel” that may generate, on average, between 3 and 5 times the software license revenue.

Emerging Trends

• High costs to customize and maintain these customizations across product releases has exposed high Total Cost of Ownership (TCO) in traditional ERP models
• Increasing adoption of cloud computing is driven by a need to manage IT costs more predictably and further reduce TCO.
• Complexity and costs have made customization one of the most “dreaded” term in enterprise software
• The customization approach and use of the channel is logical, but, in enterprise software, what should work often doesn’t.
• Many ERP clients find that customization creates barriers to change and process improvement.
• There is increasing recognition that customization is good for software vendors and implementation partners, but not so good for customers.

Public Financial Management Good Practice GRP TCO by FreeBalanceGRP

FreeBalance Approach

FreeBalance has a different approach to “product” than legacy Enterprise Software companies. For one thing, we’re focused on solutions that meet government requirements. That means that products and methodologies need to be adapted and integrated for the government context. Specialization is a compelling advantage to customers faced with complex and generic ERP options.

• FreeBalance is a fully “configured” solution with no code to add new fields of information, add validations, translate to another language, configure any system entity, determine mandatory fields and change workflow.
• As a specialist that commits to government projects, FreeBalance adds any missing features to the core product to eliminate customization and upgrade costs.
• FreeBalance works closely with channel partners to contribute to customer successes.

Good Practices in Government Resource Planning Vendor Specialization by FreeBalanceGRP

Doug Hadden, VP Products

Do government organizations reduce risk by acquiring Tier 1 ERP solutions rather than alternatives? Many consultants and purchasing decision-makers seem to think that there is less risk when buying from the “Big 2” ERP vendors rather than, for example, a Government Resource Planning (GRP) specialist like FreeBalance. Yet, a 2012 study by Advanced Computer Software in the UK found low satisfaction with ERP in government Over half of the respondents were using Tier 1 ERP software. The survey showed that Tier 1 ERP satisfaction is far lower than with alternative solutions. Users of non-Tier 1 ERP solutions were 4 times more likely to rate their solution as exceeding expectations on any of 5 dimensions and half as likely to rate their solution as worse than expected.

• 63%: ERP system did not meet expectations in at least 1 area
• 60%: Would choose a different company to implement the ERP if had to do it over again
• 50%: Tier 1 ERP implementation costs higher than expected
• 45%: Tier 1ERP implementation took longer than expected
• 43%: Would choose a different software than the ERP implemented if had to do it over again
• 40%: Tier 1 ERP ability to meet government requirements without customization lower than expected
• 39%: Tier 1 ERP system ease of use worse than expected
• 25%:Tier 1 ERP ability to meet government needs after customization lower than expected
• 20%: ERP system had negative impact on organization
• 20%: Would go through a similar ERP implementation again

Where is the Risk?

There are numerous areas of risk identified in The Advanced Computer Software study and elsewhere:

1. Over budget
2. Late
3. Not achieve expected results
4. Difficulty to use
5. High maintenance costs (TCO)
6. Difficult to adapt to changing processes

After reading about yet yet another ERP failure in government , analyst Frank Scavo recommended that governments adopt a risk-based approach His 5 points about risk management in ERP are well worth adopting.

The ERP in Government Open Secret

We’ve been collecting more and more public stories about ERP failure in government by updating one of blog pages. The reaction to these failures from the technology community tends to focus on consulting or customer deficiencies. Rarely is the software itself under question. That might be a result of assuming that software so widely adopted across the public and private sector must be effective. Not to mention the hype coming from the Tier 1 vendors.

There is an observation in the Advanced Computer Software study that Tier 1 ERP was developed for the private sector and is not applicable to the public sector. There seems to be growing realization that Tier 1 ERP is highly risky and overly expensive, in government.

And, ERP is wasting public money in an era of budget austerity.

Why is GRP Less Risky than Tier 1 ERP in Government?

The GRP approach addresses the 6 risk elements directly:

1. Budgets: GRP software is unencumbered with private sector functionality and requires less consulting effort and have smaller data centre need than the ERP software bloat
2. Time: GRP software is developed for the government domain with set blueprints to enable more rapid implementations
3. Expectations: GRP vendors, like FreeBalance, set proper expectations and employ PFM experts to help mentor government professionals
4. Ease of Use: GRP software is developed for government usage and is more intuitive for commitment accounting functionality such as handling multiple aggregate budget controls
5. TCO: the use of configuration rather than code customization accelerates implementation and reduces the maintenance burden making the software more financially sustainable
6. Adaptability: configuration also enables change, or what we call progressive activation

In addition, governments deal directly with the GRP manufacturer in our case. That puts us in the governance structure and ensures that we are committed to implementation success. We also take part in all implementations to remove the incentive to drive customization revenue.

How should Governments Protect themselves during Procurement?

Government RFPs for financial management systems include requirements about vendors. This includes a minimum amount for total turnover, numbers of implementations or numbers of users. Many of these requirements do little to reduce risk. Some are irrelevant. Others ensure that the government will take a high risk. Here are some suggested Request for Proposal (RFP) alternative requirement to protect governments from high risk:

• Total amount of revenue from PFM systems (because private sector revenue isn’t relative)
• Do not specify the need for “ERP” or call the project “ERP” (because that’s what you’ll end up with and you will have reduced competition)
• Experience in PFM under similar circumstances (because “success” in more developed countries, different levels of government or in the private sector isn’t relative)
• Willingness of the software manufacturer to commit to feature requests (to reduce or eliminate the high long-term cost of customization)
• Demonstrated success with multiple configuration changes, upgrades and addition of modules (because TCO needs to be measured over time)
• Turnkey costs and 5 year TCO in fixed priced contract (so that the vendor cannot bid low and overwhelm the government with change order costs
• Study tour: go and see the software in action – you’d be surprised that a high number of publicized ERP in Government “success stories” are far from successful

Lessons learned in International PFM to Assist Good Governance Reform in the Global Public Sector

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Ottawa, Canada (January 30, 2013) – FreeBalance, a leading vendor of Government Resource Planning (GRP) software, today released a set of five (5) PFM Good Practice Documents. FreeBalance Good Practice documents collect lessons learned with FreeBalance government customers in 20 countries and research used for product and services development.

• Anti-Corruption – functions of financial management systems that reduce corruption
• Budget Formulation – practices to ensure more credible budgets and improved government performance
• GRP Reform Sequencing – techniques to help determine reform phases tied to PFM goals
• Multiple Year Chart of Accounts (COA) – practices in the design of Budget and accounting classifications and the agility to adapt COA over time to support reform
• Total Cost of Ownership (TCO) – methods to calculate all the potential costs for Commercial Off-the-Shelf (COTS) financial systems for government

FreeBalance has a mission, as a For Profit Social Enterprise (FOPSE), to share lessons learned with the global PFM community. “There are very few ‘best practices’ in government financial management,” said Manuel Pietra, FreeBalance President and CEO. “Yet there are good practices that are ideal for governments based on their context.”

About FreeBalance
FreeBalance helps governments around the world leverage robust Government Resource Planning (GRP) technology to accelerate country growth. FreeBalance is a recognized leader in fast, adaptable and successful GRP implementations. FreeBalance software manages a global civil service workforce of 1,500,000, and a quarter trillion ($US) annual budgets worldwide. FreeBalance provides software solutions for public financial and human resource management, and supports reform and modernization to improve governance, transparency and accountability. Good governance is required to improve development results. For more information, visit www.freebalance.com.

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Background

FreeBalance completed a survey at the Government Technology Exhibition and Conference (GTEC), November 5 to 8 2012 and the Financial Management Institute of Canada (FMI) Professional Development Week, November 27 to 30 2012.Both of these conferences were held in Ottawa.

FreeBalance is based in Ottawa and has been a supplier to the Government of Canada since 1984. FreeBalance is a specialist vendor in Public Financial Management with enterprise-class Government Resource Planning (GRP) implementations in governments around the world. This includes some countries where FreeBalance software runs all transactions at the federal level of government and some countries where FreeBalance software runs all government transactions at every level of government. We do not consider FreeBalance to be an Enterprise Resource Planning (ERP) vendor because FreeBalance does not provide solutions outside of government.

Survey Results

There were 207 respondents to the survey held at FreeBalance exhibits. The majority ofthe respondents were public servants in the Government of Canada. More than half ofthe respondents have had hands-on experience with FreeBalance and ERP software.

Technology Country of Origin

The majority of respondents believe that the Government of Canada should favour the acquisition of technology from Canadian companies or select the best solution regardless of country of origin.

Analysis

• No one selected “foreign large technology” as a option
• Survey results from public servants significantly contradicts government policy
• FreeBalance has been highly successful winning GRP contracts in competitive situations against the largest ERP companies, and, therefore, requires only a “level playing field” in Canada

Technology Procurement

The vast majority of respondents believes that any Government of Canada technology procurement made in the 1990s should be re-evaluated.

Analysis

• Survey results from public servants significantly contradicts government policy
• Use of legacy procurement decisions from around 15 years ago adds significant risk to enable the Government of Canada to achieve “value for money” in the procurement and maintenance of financial management systems
• There have been numerous changes in technology platforms in use in financial management systems since the mid 1990s when very few systems were even web-enabled
• It should be noted that, in the most recent versions for financial management software in use by the Government of Canada, only FreeBalance provides a pure web solution

• 1980-2000: The era of Mainframe and Personal Computer – based financial management software
• 1985-2005: The era of Client/Server software operating with different “fat” clients connected to PC and mini-computer servers
• 1995-2015: The era of Hybrid Web through the use of client/server base software that is web-enabled through translation layers and plug-ins or operate a fat clients via web protocols
• 2005-2020: The era of Pure Web financial management software using web infrastructures to support Cloud Computing and Shared Services without the architectural limitations of Client/Server infrastructures

How does the Total Cost of Ownership (TCO) for FreeBalance compare to Leading ERP Vendors?

Over 70% of respondents believe that FreeBalance software has a much lower TCO in government financial management than ERP. Almost 70% suggested that the FreeBalance TCO was between 10 and 50%.

Analysis:

• TCO is a critical calculation to determining the “value for money” in government procurement
• Software with the lowest TCO that is compliant to government needs will reduce costs
• The software license and maintenance costs represent an insignificant factor in TCO when compared to equipment, training, staff retention, software changes and version upgrades
• The assessment of public servants on TCO is similar to our analysis of quoted prices in international bids (where bid prices are publicized) that shows that the average FreeBalance turnkey price is almost, on average, half major ERP vendor prices

How Should FreeBalance react to ERP Government Failures

Two out of every three respondents recommends that FreeBalance publicize failures of ERP software in government. Over 85%  of respondents with an opinion recommended that FreeBalance publicize ERP failure in government.

Analysis

• There are numerous ERP failures, cost overruns, late deliverables and inability to achieve planned benefits in government
• A disturbing number of these ERP failures have become public
• In the interests of transparency, FreeBalance will continue to publicize ERP failures in government and provide analysis

Doug Hadden, VP Products

There is an interesting rant about the implementation of the leading Enterprise Resource Planning (ERP) software for the Government of Zambia. The article alleges corruption in the implementation of this Integrated Financial Management Information System (IFMIS). The author doesn’t mince words. And, there have been corruption allegations in the past.

Frankly, I have no idea whether any of these allegations are true.

Recurrent Pattern: Leading ERP Software in Government – over budget and late

Over-budget ERP projects in government are regular occurrences. With no corruption.

The original budget for the project was $24M. The actual cost is estimated to be over $42M. That’s why we think that governments should select the low risk solution: Government Resource Planning (GRP), like the FreeBalance Accountability Suite.

A report a few years ago, but no longer available on the web, had some of the following all to familiar conclusions on the implementation:

• the complexity of the system, structure and vocabulary alienates and further hampers participation
• concern has been that the system itself might be too advanced and complex
• will become underutilized and that the costs involved won’t pay off
• concerns that budget experts of the consultant implementing the system may not fully have understood the procedures in place

There are numerous sources concluding that the roll-out has been slow. Another source reports that the new public accounting system IFMIS is one of the sub-components that show the slowest progress – it is about two years behind schedule. Another report identified the impact of the  IFMIS implementation on governance in Zambia.

Where do these costs come from?

The report from a few years had the following breakdown:

The total services costs (consultancy, training and maintenance) was estimated to be 4 times the cost for software licenses. It seems likely that the addition $20M is primarily services related. It might be fair to conclude that the total licenses cost is somewhere around $3.5M and services in the $25M range. That’s because ERP software requires significant amounts of customization, business process management and training. Especially in government.

That’s why government organizations must examine the true Total Cost of Ownership (TCO) to understand the real cost impacts.

Lessons for More Developed Countries

I’m currently at the Financial Management Institute of Canada, Professional Development Week – Focus on Value this week. (Follow tweets using #pdweek). I’ve had the opportunity to talk to numerous government financials professionals, mostly at the federal government level in Canada. My somewhat frightening conclusion is that procurement specialization in the Government of Canada obscures the true TCO because the following are all acquired separately:

• Financial management software
• Database and middleware software
• Computer hardware
• Professional services
• Training and certification

Because of budget constraints, many finance professionals I have spoken to have serious concerns about the financial sustainability of ERP software in the Government of Canada. That’s a wake up call.

Consider this: the most financially secure developed country government is unable to handle these costs. Specifically, the very same ERP software that is being implemented in Zambia?

There are almost 5,000 attendees at PDWeek. It’s the premier government financial management conference in Canada.

Where is this ERP vendor? Not at the conference.

Doug Hadden, VP Products

Why is Total Cost of Ownership (TCO) so important?

• Governments implement Government Resource Planning (GRP) or Enterprise Resource Planning (ERP) software to improve fiscal discipline, government efficiency and improve Value for Money (V4M).
• The initial cost for enterprise software may not reflect the overall cost or Total Cost of Ownership (TCO) experienced by government organizations. Governments can show VFM fiscal discipline by analyzing all internal and external GRP acquisition and maintenance costs across multiple years.
• Many government organizations fail to calculate many long-term internal costs required to use, manage and maintain GRP software over many years.
• TCO is critical to financial sustainability because governments are engaged in on-going Public Financial Management (PFM) reform. TCO should consider more than the maintenance of a “steady state.”

Average cost by category for Enterprise Software differs among analysts depending on data completeness, category definitions and duration analyzed. Nevertheless, studies show that consulting for implementation tends to be the highest cost.

Why is TCO Such a Problem in Enterprise Software?

• Moderate to high implementation costs ranging from a 1:1 ratio in the private sector to 3:1 to 15:1 in the public sector with examples where services significantly exceeded other costs.
• Average TCO measured at over $50,000 per user in one analyst study making this cost material to government budgets. Governments are legally “budget-driven” where high TCO and unexpected cost overruns may require supplemental budgets or extracting funds from other priorities.
• High maintenance costs that originate from maintaining complex code and problem troubleshooting, and difficult upgrades that can increase TCO after the initial implementation.
• High upgrade costs increase the TCO where ERP upgrades are estimated to be ½ the value of the original license fee and 20% of the original implementation costs where experts warn that organizations should expect to pay as much as 3 times the original ERP software cost to upgrade to new technology
• Unexpected risk costs were average implementation variance of 2 and 4 months over schedule in one study, average variance for ERP projects was 230% of schedule in another study , and up to 80% of ERP exceed time and budget estimates in a third study.
• Additional sustainability costs for staff retention and certification. Some ERP solutions have expensive functional and technical training course to certify government staff. Government employees can leverage this certification to join private companies. Governments need programs to retain talent and prevent this “brain drain”.

What are the Acquisition Costs for GRP Software?

• Internal personnel costs and consulting fees for needs analysis and the development and maintenance of a request for proposal. Procurement costs including engaging financial and IT experts throughout the process. Government procurement cycles for GRP tend to be lengthy.
• Computing hardware, networking and required bandwidth for the computing infrastructure to support the GRP. This includes disaster recovery sites, testing centre, provisioning of reliable power and long-term telecommunications contracts. This also includes the personnel costs to accept shipments of equipment.
• Middleware software including security, database, load-balancing, operating systems and systems management tools necessary to support the implementation.
• The GRP software license costs are typically based on the number of (named or concurrent) users or size of the government.

What are the GRP Implementation Costs?

• Project management costs including dedicated employees to project, program management office, communications and meetings.
• Installation, provisioning and set up of the GRP software and middleware.
• Internal personnel costs and consultant costs to articulate the current business processes, legal requirements, forms and report requirements.
• Internal personnel costs and consultant costs for any changes to current processes required by the software or good practices. This could include comprehensive business process re-engineering and additional staff training.
• Data conversion costs including quality assurance. This can also include data completeness analysis where information that is not in the current system needs to be uncovered from other sources.
• Internal personnel costs and consultant costs to manage old and new systems in parallel.
• Configuration and customization costs, typically accomplished by external consultants or software vendors. This covers adapting the core software and integration, reports and forms.
• Internal personnel and consultant costs for piloting, analyzing and acceptance testing following quality assurance processes.
• Technical training for middleware, networks, computers and systems management. Functional training for GRP users.
• Development of any special documentation or user guides that describe the government processes and how these are accomplished within the software
• Additional implementation phases may occur such as adding additional software modules, more users or new government entities.

What are the On-Going Costs for GRP?

• Maintenance costs for all hardware and software purchase, which includes vendor customer support. This is typically an annual contract.
• 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 and customization of reports or forms accomplished by internal staff or consultants.
• Bandwidth, telecommunication, electricity and rental/lease/space costs.
• New fiscal year processing including carry-over of previous year funds accomplished by internal staff or consultants
• Upgrade costs associated with moving to newer software versions. This includes change management to ensure that any customization accomplished in the previous version is added to the next, testing and acceptance.

What are the Hidden Costs in GRP?

Total costs change through the lifecycle of GRP usage where implementation costs are higher that additional year steady state. Additional per year costs can mount because of software upgrades, government modernization and unexpected costs.

• Lost productivity as systems are run in parallel and the employee learning curve.
• Reduced efficiency by adding so-called “best-practices” that adds complexity to existing processes.
• Change management costs for new government regulations and training on processes within the software.
• Disaster, lost data, business disruption through late implementation or system failures including audit and reporting disruption.
• User conference and training travel and expenses charges to keep up-to-date on software changes.
• License audits where vendor demands additional payments
• Maintenance options may require additional payment to achieve necessary service to overcome problems.
• Unexpected add-ons when product portfolio does not meet entire requirement.
• Middleware changes such as operating system or databases outside the GRP system upgrade period.

What TCO Factors are more Important in Government than the Private Sector?

• Adapting a private sector financial system for government often increases customization work to support legal processes and public sector financial standards. Software designed for the private sector tends to require significant upfront customization costs.
• Larger technical footprint of ERP systems means requiring multiple computers and application servers and consuming large amounts of disk space that 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 technical capacity in the public service in some countries can increase TCO. Some ERP applications require significant technical knowledge to implement and support, including systems management and database tuning, often requiring permanently contracted external consultants.
• Lower accounting functional capacity of the public service in some countries 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.

Software designed for Government, GRP, tends to have a lower TCO that software designed for the private sector, ERP. Based on analysis of turnkey TCO proposals, FreeBalance compared to Tier 1 ERP Vendors.

How does the Choice of GRP or ERP software affect TCO?

• Adaptability: code customization (including software code, call-outs, scripting) costs more than configuration for implementation and significantly more for software upgrades because customized code has to be maintained.
• Footprint: hardware and bandwidth footprint including replication services can add significantly to space, equipment and electricity costs.
• Leverage: importance of the government market to the software manufacturer is critical to ensuring that product upgrades meet emerging needs otherwise customization costs increase year over year.
• Governance: many GRP projects create governance structures with Systems Integration firms but not the software manufacturer. This reduces commitment to meeting government needs over time.

What is a Risk Management Approach to GRP TCO?

• A risk management approach identifies risk factors, risk appetite and risk mitigation strategies. Example of risk factors include: organizational capacity, vendor success ratio, extent of expected customization.
• Risk factors can be used to calculate an expected budget overage. Risk mitigation strategies add costs. Both factors can be used when determining the potential TCO for any software acquisition.

What are some TCO in GRP Good Practices?

1. A risk management approach based on industry experience in similar projects, the extent of required customization and the level of commitment by the software manufacturer to the government market and to the government customer can be used to calculate expected budget overages. Some hidden costs can be estimated. Governance structures and leverage with the software manufacturer should be included in the risk calculation.
2. A long-term project approach should identify increased per-year costs by vendor version upgrade path and upgrade policies. The multiple-year project plan should act as input into the IT budget.
3. Government experience with software vendors should be modelled to determine expected implementation and maintenance costs.
4. A “turnkey” approach should be used by committing a single provider or consortium to assume a fixed-price schedule.
5. Internal costs should be modelled as part of the TCO calculation. This includes the expected costs for additional training and certification. (Prices for courses are publicly available.) Employee retention and turnover should be analyzed.
6. Customization costs for the initial implementation should be used as an anchor to calculate future software upgrade and customization changes. Industry figures for average duration of upgrades should be used.

A Study of the Literature

Doug Hadden VP Products

We received some interesting feedback from a recent blog post about cost overruns in ERP projects at the United States Department of Defense. I’ve been vocal about other examples of ERP failure within the public sector. It’s surprising how well major vendors are able to market solutions to government despite this lack of success. Perhaps there is so much marketing noise that it’s difficult for governments to uncover the evidence. Nevertheless, there is a significant amount of public information that supports anecdotal evidence. Some of the studies are dated – but if failure rates have been reduced by 50% in the last 5 years – that still means that 10% to 20% of all ERP implementations are a complete failure.

Let me know if you have evidence to the contrary or lessons learned in the comments section.

Should governments consider ERP or GRP?

• Developed country governments are increasingly adopting Commercial-Off-the-Shelf (COTS) software to replace legacy and custom developed software applications for financial, budget, expenditure, tax, treasury and civil service management.
• A major impetus for recent COTS projects is to replace multiple applications within a government organization with one integrated solution or to support numerous government organizations with a hosted shared service or private government cloud.
• Government organizations can chose to acquire Enterprise Resource Planning (ERP) software from large software firms whose software is used in multiple “vertical” markets or Government Resource Planning (GRP) software designed exclusively for governments.

There are many large ERP project failures in developed countries

• Reports by the United States Government Accountability Office (GAO) and the Department of Defense (DoD) Inspector General (IG) found that 11 of 13 ERP projects were over-budget costing American taxpayers Billions of Dollars with one ERP project resulting in $1B “largely wasted”
• A large ERP shared services project in France country was estimated to be $200M over budget by the audit office and more than 1 year late and resulted in late payments of over $2.2B to defense contractors.
• National Audit Office in the United Kingdom found that the use of ERP shared services added rather than reduced costs in one case and resulted in a negative net present value in another case

There are major difficulties reported in ERP public sector implementation in developed countries

ERP failures and cost overruns in the public sector have resulted in difficulties, contract cancelations and lawsuits, although lawsuits “are rare because vendors would rather do what it takes to make the situation right than face potential public-relations damage from a high-profile legal battle”:

• Australia: State government ministry
• Canada: non-profit, city
• France: city
• Ireland: 2 projects within an important ministry
• United Kingdom: university, councils (1) (2) (3) and government ministries (1) (2) (3)
• United States: non-profit, school district, universities (1) (2) (3) (4) (5),  a police department, cities (1) (2) (3) (4), counties (1) (2),  State government (1) (2) (3) (4), federal government (1) (2) (3) (4) (5)

Studies show a lack of ERP success across all industries

• Between 20% and 35% of all ERP implementations fail
• 51% of ERP implementers judged their implementation as unsuccessful
• Nearly 70% of large projects were found to be improbable of achieving project success
• 41% of ERP projects achieved all or the majority of benefits
• 40% of ERP projects failed to meet business case within 1 year of going live
• Average for ERP projects was 50% of intended benefits
• ERP projects saw the implementation of -59% of intended functionality
• 34% of respondents “very satisfied” with ERP project
• Fewer than 1/3 of decision-makers recommend their ERP vendor
• ERP vendors achieved a D+ in return on investment
• 75% of organizations experienced a productivity dip after implementing ERP
• 20% of survey respondents terminated ERP projects

Studies show significant cost and schedule overruns in ERP implementations across all industries

Costs

• 40% of all ERP projects will exceed estimates by 50% or more
• Average ERP cost variance was 182% of budgets
• Average ERP cost variance was 178% of budgets
• Average ERP implementation cost was 40% over budget
• Average ERP implementation takes 23 months, has a total cost of ownership of $15 million and with an average negative net present value of $1.5 million
• Users of Tier 1 ERP vendors will experience higher TCO than users of Tier 2 vendors
• ERP upgrades cost about ½ the value of the original license fee and 20% of the original implementation costs
• Experts warn that organizations should expect to pay as much as 3 times the original ERP software cost to upgrade to new technology
• Interviews with reference customers of a major ERP vendor found that 57% did not achieve a positive ROI

On-time Delivery

• Average implementation time from the 2 major ERP vendors are 17 and 18 months with average variance of 2 and 4 months over schedule
• Average variance for ERP projects was 230% of schedule
• Up to 80% of ERP exceed time and budget estimates
• 70%  of respondents stated their ERP project timeline was inadequate

Why is ERP so unsuccessful in government?

ERP software is designed for the private sector across many industries that rarely provide a good value for money to governments. Large-scale public sector ERP implementations additional time is required during the analysis and design phase to focus on the gap between the commercial process and the required process

1. ERP cost overrun and the failure to meet schedule are because ERP software requires significant software complex code customization (BPM scripts, call-outs & software development) to meet government requirements that extends implementation cycles. The ratio of services to software cost in the public sector is estimated to be three time that in the private sector or up to 15 times the cost of software.
2. High maintenance costs come from maintaining complex code through problem troubleshooting, and difficult upgrades that increases the Total Cost of Ownership (TCO). For example, the Government of Canada internal support for 15 different customized versions of a major ERP package received an award for saving more than $12M annually in “cost avoidance.” This is hardly a definition of IT success.
3. ERP functionality is often complex and hard to use in the private or public sector. 46% of ERP implementers characterized that their organizations were not able to understand how to leverage features to improve the way that they did business.

Why implement FreeBalance Government Resource Planning (GRP) solutions instead?

1. GRP software is designed for the government. It is possible to create software for a single “vertical market” that does not require code customization to support needs in most countries across all levels of government.
2. Governments can configure GRP software to meet unique requirements thereby reducing lifecycle costs and more likely meeting implementation schedules and optimizing benefits.
3. Software designed for government is easy to use in the government context.

Part 2: ICT4D

Impact of IT innovation and focus on IT TCO

Doug Hadden, VP Products

This is Part 2 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?

Impact of ICT4D

ICT4D is the concept of using information and communications technology to improve country development. This is applied to general economic improvement such as improving communications to foster business, sectors like education and health and to improve governance and reduce corruption. Studies suggest that there is a more significant positive impact to ICT in low and middle income countries than high income countries. Technology impact can be transformational in improving market efficiency, reducing financial transaction costs, and optimizing productivity.

ICT Leapfrog

Developing countries often lack legacy ICT systems. This “latecomer” advantage enables countries to “leapfrog” to use technology in more innovative ways. These countries can bypass older technology in use in more developed countries. Developing countries are leveraging the convergence of Internet and mobile technology to overcome the “digital divide”. The technology is adapted to the local context – typically at lower costs than legacy technology.

The Government of Estonia is a leader in the use of digital technology. Estonia has e-government, e-police, e-elections: e-everything. It’s an e-country. According to the President of Estonia: “98% of Estonians under 35 use the internet regularly and systematically”… Estonians are “e-believers.”

Sustainability challenges

Following my previous post, the sustainability challenges in developing countries necessitate innovation. Connectivity is limited so large bandwidth computer applications do not translate well to the developing nation context. Access to electricity is also a serious problem, so there is a focus on low power solutions to make ICT sustainable. The environmental impact to generate electricity exacerbates climate change in fragile ecosystems.

Hidden underbelly of the software industry: bloat

Inefficient software design draws hardware resources, power and bandwidth. This is known as software bloat: wasting power in smart phones to Enterprise Resource Planning (ERP) software. It’s also comes from squeezing more and more features into software – most are unneeded.

The FMI presentation was vendor neutral – a constraint that I don’t have in this blog. Software bloat is endemic in ERP software. This is particularly ironic because so many of these ERP companies now provide tools to measure power consumption and carbon footprints. These companies produce slick sustainability reports and yet do little to reduce the technical footprint of their software packages. This includes the unnecessary features that also require additional database storage operating on legacy code that isn’t efficient. It generates the need for an additional translation layer from client/server to web. The designs are monolithic meaning that you can’t package just the features that you want and there is a large minimal footprint just to run basic features. And, these companies have proprietary middleware for scaling, transaction processing, database connectivity, operating system porting etc. that is not efficient. My sense is that putting all of this into hardware appliances is not going to solve the power consumption problem. Not mentioning any names.

Developing nation governments do not have the luxury of NOT considering Green IT. The environmental impact has financial consequences.

Turnkey approaches

Turnkey IT projects are rare in developed nation governments for public financial management. Hardware, software and services are often acquired on different purchasing vehicles and assembled. I guess the thought is that once you’ve seen one General Ledger, you’ve seen them all. This approach is thought drive costs down. At the cost of visibility. Software A may be less expensive than Software B. But Software A may require more services and more rigorous training. The impact of these two elements ranges around 60% for total cost across 3 years and the vast majority of total costs for the life of the software. A small difference in carrying costs for Software A could be material for the total cost of ownership (TCO).

Developing nation governments tend to acquire based on a 5 year TCO calculation. And, there is recognition that consultants, certification and future upgrades can make systems financially unsustainable. Therefore, developing nation governments attempt to become self-sufficient: ability to handle day-to-day operations, typical troubleshooting and system upgrades with no or little support from vendors.

FreeBalance and financial sustainability

Many international competitive tenders are opened to reveal prices. This enables us to track our turnkey price with competitors. The business case for ERP in government, when all price factors are considered, is quite weak. The typically 5 year TCO price for the two “top tier” ERP vendors averages 191% the FreeBalance price. (And, there is good evidence that the total price is more likely to increase beyond the original quotation. And, the upgrade costs are significantly higher.

That’s why we believe that software designed for the government context: Government Resource Planning (GRP) is more sustainable. Don’t let the promise of ERP “enterprise licenses” fool you: there are countless millions of dollars spent on ERP consultants in the Government of Canada. It’s a sad waste of public resources.

How is the GRP approach used by FreeBalance more financial sustainable for any government than ERP?

• Technical footprint is optimized for government with no wasted functions, no extra database tables
• Pure web design without a client/server to web translation layer
• Ease of use and ease of administration enable self-sufficiency
• No code customization that is expensive to implement and even more expensive to maintain
• Progressive activation to enable adding features and modernizing without changing the software
• No vendor-forced upgrades and 1 step upgrade from any version to any subsequent version of software
• Customer-centric approach where the FreeBalance adapts software to meet government needs, not the other way around

The Afghanistan case

The Government of Afghanistan was able to roll out FreeBalance software without our assistance to all regions. This is an important success story that demonstrates how powerful self-sufficiency is. Consider the huge cost overruns in developed nation governments for ERP.[And here, and here.]

Doug Hadden, VP Products

November 2009: I was asked to step in at the last moment to present at the Financial Management Institute of Canada.

Topic: The Business Case for ERP in Government.

Problem: I’m fundamentally against the notion of using ERP for public financial management. Nevertheless, I made a stab at explaining the argument for ERP in government [see embedded presentation]. Evidence continues to mount about high costs and high failure rates for ERP in government. The business case for ERP in government remains weak.

Strength of the ERP in Government Business Case

1. ERP improves efficiency and productivity: Automated processes are more efficient than manual processes. Yet, ERP systems often introduce unneeded complexities. And, many government ERP users report that systems are unable to fully automate all processes. Many studies suggest that companies do not gain benefits from ERP until the final phase of implementation.
2. Single ERP has a better value than many Best-of-Breed: The “portfolio management” viewpoint suggests that the cost to support a single ERP instance is far lower than multiple applications. Even though the applications may provide more value than ERP, the management costs are far higher. That’s the premise. ERP systems are highly complex to manage. And frequently need additional best-of-breed anyway.
3. Government transformation: Software vendors suggest that ERP can help government transform. Yet, ERP systems leverage customization (call-outs, scripting, BPM tools, code etc.) to adapt to changing needs. There is a significant cost to continuously adapting software that uses the customization approach.

The TCO Problem

ERP software has a high Total Cost of Ownership (TCO). Studies of ERP costs suggest that internal costs such as training, employee retention, and IT management is as high as the cost for software across multiple private and public sector markets. Consulting costs can be twice the cost for software. Evidence suggests that consulting costs are much higher in government in the private sector.

Many people ask me how much the FreeBalance Accountability Suite costs. The software cost is often the least relevant cost to governments. Our analysis of 5-year TCO proposals shows that the leading ERP vendor total cost is roughly twice that of FreeBalance. And, that doesn’t include internal cost differences. Or upgrade costs. Or future customization costs.

2009 11 Business Case For ‘Erp’ In Government

Doug Hadden, VP Products

Does Enterprise Resource Planning (ERP) software have economies of scale that results in lower total costs to government? I suggested in a previous posts why ERP vendors do not have economies of scale. Is this true or just “truthiness”?

The move to shared services for financial, budget and civil service management in government has had mixed results. Does FreeBalance or top tier ERP have a lower TCO? Which solutions have better value?

International Market Results

FreeBalance competes internationally. Most international governments release tenders for turnkey solutions with a 5 year total cost of ownership. These are fixed prices that includes most of what would be considered in a TCO calculation:

• Software licenses
• Implementation and training costs
• Support costs
• Equipment (usually all computers and networking, but not always)

These systems are typically “whole of government” – what we call “shared services” in other countries. Many countries release the prices when bids are opened. I have tracked these prices since 2006. The chart below compares the price for bids that included the 2 top tier ERP manufacturers compared to FreeBalance.

Analysis

• The average top tier ERP TCO is 191.97% of the FreeBalance price.
• There have only been 3 times in which the bid price from a top tier ERP bid was less than FreeBalance. One of those did not include the 5 year calculation.
• FreeBalance has consistently been evaluated as having a higher value based on different formulas used by governments

Lessons for Shared Services

• Software prices represent a minimal cost relative to implementation and service
• ERP software often requires more hardware to operate
• Complex software is more expensive to maintain and adapt
• Not included in the TCO calculation is upgrading – this is where our customers see a significant difference because of our ability to progressively activate
• Shared services governance must include vendors who should commit to features and improvements, otherwise governments are required to customize – effectively becoming software development organizations