PFM Domain GOVERNMENT RESOURCE PLANNING

Good Practice GRP VENDOR GOVERNANCE

Applicable ALL GOVERNMENTS

FreeBalance®

Public Financial Management Good Practices

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what is Information and Communications Technology (ICT) project

governance?

According to analysts, the Gartner Group, project governance involves:

Domains – the "what" of decisions about the project / program

Authority – the "who" responsible for making key decisions Structures and Processes – the "how" of decision making

According to a paper developed for the Australian government:

Project Governance can be seen as a discipline under Corporate Governance. It refers to the design and implementation of processes, structures and communications that need to exist for a successful project

why is project governance so critical for PFM?

All ICT projects are risky. Risk factors include:

Project cost overruns: cost more than anticipated

Project implementation delays: takes longer than expected

Unanticipated long-term costs: high Total Cost of Ownership (TCO)

Lack of benefits realization: poor Return on Investment (ROI) where systems fail

to achieve cost and effectiveness objectives

Lack of agility: inability to adapt ICT systems to meet emerging organizational needs

Abandonment: ICT projects are abandoned where projects are “largely wasted”

Enterprise-class and government-wide ICT projects that are strategic tend to have more risk than simpler projects. Projects of similar scope tend to have higher risk of

failure in government than in the private sector.

how do governments acquire ICT systems for Public Financial Management

(PFM)?

Governments acquire ICT Systems to support PFM needs. These systems include:

Commercial-Off-The-Shelf (COTS), customized COTS, specialized Government Resource Planning (GRP) COTS that are sometimes called Financial Management Information Systems (FMIS) and custom developed software

Implementation, integration, training and support services

Computing infrastructure including middleware, computer equipment and

network communications

Traditional government procurement methods employed by government include:

Standard procurement processes including Requests for Proposals (RFPs)

Procurement lead by Systems Integration (SI) firms

Use of external funding sources and technical assistance

Alternative methods such as sole sourcing and Public Private Partnerships (PPPs)

The purpose of this Good Practice document is to explore alternative GRP procurement methods that reduce risk and improve project governance

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what are the options for GRP software manufacturer governance?

There is an emerging model to reduce risk by including the COTS software manufacturer in project governance:

COTS software manufacturer commits to enhancing products to meet

government customer demands

COTS software manufacturer is part of the implementation steering committee to provide technical advice and to have employees involved “on the ground”

COTS software manufacturer provides a forum to government customers to set

product roadmaps

The traditional method of project governance does not reduce most risk factors:

Most PFM implementations are acquired through SI firms that are certified by COTS software vendors

COTS vendors tend to have no commitment to change software to meet specific

government needs in implementation or support

COTS vendors tend to consider customer enhancement requests in light of the needs from multiple public and private sector users

SI firms typically customize COTS software to meet unique needs where this

customization needs to be maintained through multiple software releases

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what is the success rate for GRP IT projects in

government?

ERP failures and cost overruns in the public sector have resulted in difficulties, contract cancelations and lawsuits:

Africa (national level): Ghana, Malawi, Rwanda, Uganda, Zambia

Asia (national level): Azerbaijan, Kazakhstan, Vietnam

Australia: State government ministry

Canada: non-profit, city

France: federal government & sub-national, city

Ireland: 2 projects within an important ministry

United Kingdom: university, councils (1) (2) (3), government ministries (1) (2) (3)

and central government shared services

United States: non-profit, school district, universities (1) (2) (3) (4) (5) (6), a police department, cities (1) (2) (3) (4), counties (1) (2), state government (1) (2) (3) (4), (5), (6),federal government (1) (2) (3) (4) (5) (6), defense department (1)

(2) (3) (4)

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what are the issues that arise through ineffective manufacturer

governance?

Stakeholder incentives differ in GRP projects:

Analyst Michael Krigsman has pointed out that IT customers can get caught in the "Devil's Triangle". Krigsman suggests that cost overruns for IT implementations come because Systems Integration firms can leverage complexity to generate more services revenue.

Lack of political will among politicians or public servants, the ICT provider or those providing technical assistance

Lack of government commitment because external funds are being used

Technical assistance providers including those who develop

Focus on PFM dogma around “best practices” and the “Washington consensus”

Vendors often lack flexibility as government needs change because they focus in

the terms of the contract and see change requests as risk

Providers of ICT solutions for PFM can lack appropriate expertise:

Consultants may have expertise in the COTS system but not in government

Consultants may have expertise in the public sector in a different country with a different PFM context

Consultants and technical assistance providers change through the course of an

implementation project

Consultants who have the appropriate expertise often do not build public service PFM or ICT capacity

Traditional Enterprise Resource Planning (ERP) software designed for the private

sector introduces risk to government:

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.

High maintenance costs come from maintaining complex code through problem troubleshooting and difficult upgrades that increases the Total Cost of Ownership (TCO).

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.

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what lessons have been learned in

GRP failures?

Software manufacturers are often isolated from the implementation project so

cannot contribute to success

Many government projects rely on too many vendors including application and middleware software providers, consultants, and equipment providers

Systems integration and consulting can represent almost half the entire cost of

ERP in government

According to KPMG, traditional project governance doesn’t help in government projects

According to ERP specialists, Panorama Consulting, many firms use “canned methodologies” but have not taken the time or care to leverage their learning into their own methodologies

what lessons have been learned in GRP projects from

the World Bank?

A recent survey by World Bank staff identified lessons learned in FMIS/GRP implementations that includes:

The political commitment and ownership of the borrower matter

Success depends on adequate preparation

FMIS priorities and sequencing should be addressed carefully

A focus on developing internal client capacity early in the process is crucial

FMIS implementation is complex enough to deserve a dedicated project

The type of FMIS solution influences implementation

The total number and complexity of procurement influences project duration

FMIS projects disburse late due to large ICT contracts, completed at later stages ICT related risks need to be clearly identified during project preparation.

Many government organizations recognize that there are multiple

points of failure in GRP/FMIS projects.

Government organizations recognize that project

governance and turnkey solutions are required to

reduce risk.

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where are the points of failure in GRP implementations?

GRP software may not meet government requirements well and can be difficult

to adapt to meet unique requirements

Application server, transaction management, database and operating system middleware may be poorly integrated and difficult to maintain across multiple

versions

The server infrastructure may require significant power resources

Management of the infrastructure including network and systems management (performance, reliability, capacity) security (virus protection, intrusion

detection) are complex

Significant Changes in the GRP Market have occurred thanks to the Second Generation of PFM Reform

what trends are increasing the GRP governance burden?

The first generation of PFM automation covered standard financial functions where government organizations adopted ERP and custom-developed software. It was thought that ERP software was more effective and modern than GRP.

Government reform has become critical as governments seek to optimize expenditures and improve value for money. Spending reviews, support for international standards and government transparency became important reform topics especially in wake of the financial crisis.

Government organizations have been challenged to use traditional IT approaches to satisfy this second generation because ERP software must be highly customized to meet these new requirements. ERP and custom-developed solutions hamper reform , change and systems integration.

Government organizations are attempting cross-cutting PFM reform programs that require integration among multiple IT sub-systems.

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Traditional software vendor processes add to government implementation & sustainability risks

why is COTS not the dominant model of

GRP acquisition?

Both COTS and custom-developed methods are used to support GRP needs

Bespoke systems often go over budget and seldom get delivered on time. They require established skill sets in custom software development and—expertise

that is often difficult to find in less developed markets

COTS software includes features provided to support other customers and have commercial quality assurance processes resulting in significant “out of the box” functionality and higher quality that should have a better value proposition than

custom developed code

The evidence shows that government organizations that chose to acquire Enterprise Resource Planning (ERP) COTS software from large software firms whose software is used in multiple “vertical” markets tend to experience similar

risks to acquiring custom developed software

The acquisition of Government Resource Planning (GRP) software designed exclusively for governments includes the COTS benefits with the ability to meet

requirements that are often satisfied through custom-developed software

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what good practices have been developed for GRP project

governance?

Comprehensive, multiple year and holistic approaches to governance required: o Traditional IT governance is not comprehensive enough to accommodate

needs that requires the guidance of architectural blue prints and project portfolio road maps

o Integrated governance is the key to significant and sustainable success o Recognition that implementation efforts may span multiple

administrations and surely will require multiyear investments initially and potentially in the future for upgrades

o Project decision-making is critical so it is important to identify those responsible, accountable, consulted and informed

Capacity building, political will and adaptable change management are connected as part of holistic governance:

o Unwavering support from sponsors required for success because examples of failure in the public sector showed that sponsorship and leadership were lacking

o Developing skills capacity and refining governance processes are critical to sustainability

o The most commonly cited causes for a slipping timeline fall into four categories: lack of adequate preparation, lack of the knowledge and experience needed to ask the right questions, inability to foresee and mitigate potential challenges and an inability to gauge the impact of trade-offs along the way

o Inexperience with large IT projects was a commonly cited root cause for problems and delays

o Change management was cited as a key factor in both project delays and project success. While the majority of respondents (77 %) reported their organization established a change management strategy at some point … more than half indicated some level of failure or weakness

The appropriate software should be selected: o Key difference for ERP and GRP implementations is the increased level of

end-user participation to support applications that span large portions of the enterprise

o The right software fit – Most public sector organizations grasp the value of embracing off-the-shelf software and commit to reengineer business processes to more closely align with the software’s functionality. When asked about the general approach to implementing ERP, 79% of respondents reported their organization attempted to minimize customizing software

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what is the financial sustainability

problem?

Moderate to high implementation costs add 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 creates a high Total Cost of Ownership (TCO)

Average TCO measured at over $50,000 per user in one analyst study making this a material cost 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 with average ERP implementation variance of 2 and 4 months over schedule in one study, 230% of schedule in another study , where 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 courses required 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 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 can be calculated to determine the potential TCO for any software acquisition

Adaptable change management means focusing on the statement of objectives as much or more than statement of work

Vendors with experience in similar circumstances with global PFM knowledge helps reduce risk of failure while providing effective advice to achieve political will and increase capacity

Vendors with methodologies adapted to the context of delivering PFM reform and government systems reduces risk

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Information Week 2012 Enterprise Applications Survey found upgrading, optimizing & changing processes

to be significant barriers to success and very time consuming in ERP because of code customization

what has been the FreeBalance experience with

GRP success?

FreeBalance is unique among the three leading COTS FMIS vendors to government because of a 100% GRP focus with successful implementations in

countries with low to high human development.

FreeBalance implementations have been described as successful under difficult circumstances including Afghanistan, Kosovo, Sierra Leone and Timor-Leste.

This is an indication of software flexibility and fast time to results.

FreeBalance has brought advanced GRP functionality to countries around the world that has enabled governments to achieve better Public Expenditure and Financial Accountability (PEFA) than more advanced countries, particularly in

“Accounting, Recording and Reporting.”

FreeBalance has enabled the governments of Timor-Leste to leapfrog more advanced countries for transparency and performance management, Antigua and Barbuda to achieve PFM reform objectives despite tight budgets, Kosovo to achieve reform and Suriname to accelerate reform through sole sourcing and Uganda to achieve change management results.

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what has been the FreeBalance experience with

GRP success?

It is very difficult to hide failure in the GRP world. Many government audits are made public. FreeBalance tracks success rates for FreeBalance and ERP companies in developing nation governments. This includes implementations that have been publicly mentioned in the press, audit reports or at conferences as having significant problems.

There is an especially high risk in developing countries yet the FreeBalance success rates are much higher than Tier 1 or Tier 2 ERP vendors.

The secret to the FreeBalance success is designing software and methodology to meet the needs of government customers and the choice of customer-centricity.

FreeBalance government customers enjoy higher success rates than those who selected ERP

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FreeBalance has brought advanced PFM features such as e-procurement, budget transparency and

performance results enabling “technology leapfrog.”

what is customer-centricity?

Customer-Centric companies use a holistic approach: o Shared objectives for PFM reform with additional governance structures

like the FreeBalance International Steering Committee align vendors with government customers

o Processes to integrate product development directly with support and implementation enables customer-centric product development with sustainable solutions rather than the traditional product-centric strategy

o The customer-centric company organization structure eliminate barriers between support, services and product development groups

o Corporate marketing focuses on understanding the GRP domain to develop unique tools to align with government needs and engage with the PFM community at conferences

Customer-centric companies reduce implementation risks: o Customer-centric software manufactures play an active role in

implementations to reduce customer risk o Implementation Services are directly aligned to product and support o Professional services processes are adapted beyond simple Project

Management 101 and product expertise to provide holistic solutions. o Customer-centric companies selecting partners based on government

experience, skills and commitment to sustainability

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Customer support is a distinctive competence in customer-centric companies. o Customer support is more than an empowered customer support

organization including escalating critical problems to company executives and cross functional SWAT teams

o Use of customer engagement strategies like customer steering committees rather than user groups

o Focus on training, mentoring for capacity building o Customer sustainability performance management where the company

performance structure is aligned to customer satisfaction

what is customer-centric product development?

There are many implications for software and technology manufacturers that wish

to become customer intimate.

Product complexity needs to be reduced to make implementations more sustainable:

o It is rare to find a technical assistance related document that does not refer to the need for capacity building in developing countries

o The retirement of the baby boom generation in more developed countries has created a capacity gap

o Software designed for GRP needs to be intuitive and designed for PFM. o The systems administration burden to manage change and troubleshoot

should be reduced. Methods to reduce errors and help users should be added.

The GRP sustainability challenges, particularly in developing countries, necessitate different product designs:

o Connectivity is limited so large bandwidth computer applications do not translate well to the developing nation context.

o Access to electricity is also a serious problem, so there is a focus on low power solutions to make ICT sustainable.

o The environmental impact to generate electricity exacerbates climate change in fragile ecosystems. Inefficient software design draws hardware resources, power and bandwidth. This is known as software bloat that includes squeezing more unneeded features into software

o Ability to progressively activate new features as capacity increases is critical to support PFM reform

Customer engagement for product enhancement is critical: o Companies must support multiple touch points for communications such

as local hiring and multiple channel enhancement requests o Software manufacturers must enable customers to adapt product

roadmaps and release functionality when it is convenient to customers

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how is the FreeBalance GRP approach different from the traditional

model?

The i3+qM customer-centric process used by FreeBalance has ensured that the company has adapted methodology to ensure customer success and rolled lessons learned from customers into the software. This methodology differs from traditional

software manufacturer and systems integrator processes by:

o Integration of product development, implementation and support processes o Multiple customer and PFM feedback options including participation in

conferences to share and learn good practices o Rigorous method of selecting implementation partners o Use of the FreeBalance International Steering Committee, SWAT teams and

local hiring to better understand government needs

o Enabling customers to change the FreeBalance product roadmap

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what does the i3+qM methodology project governance look like?

The i3+qM methodology supports governance throughout planning, implementation and sustainability

FreeBalance executives are directly involved in the project and program governance

Knowledge by FreeBalance staff in similar government circumstances insures focus on good practices, blueprints, change and communications management

FreeBalance ensures that software is compliant to government requirements rather than relying on software code customization

why do software manufacturers

avoid governance?

Very few software manufacturers are directly involved in the implementation of GRP systems

The hands-off approach used by COTS software vendors enables deniability should projects go awry

COTS vendors are often involved in too many “vertical markets” to commit to important features needed in the public sector

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how does the i3+qM enable financial

sustainability?

The project governance structure sets product development priorities to ensure that software adapts to meet government requirements to optimize costs

Sustainability processes are included in governance structures

what are the advantages of direct software manufacturer

contracting?

Technology infrastructures can be tuned to meet government requirements when designed by the COTS vendor

Development of requirements and selection of vendors can be lengthy resulting is systems that have fallen out of date with government needs

Winning RFP vendors become reluctant to consider change requests or charge significant change request fees

Consulting organizations and technical assistance providers for GRP proposals can have personal preferences that may not suit government needs

Long-term commitments between ensures political will for governments and vendors and vendors with a direct relationship with governments are more likely to invest locally

Reform momentum can slow when the initial GRP project has been completed while a direct relationship can maintain momentum and address important government needs

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how are non-ICT issues addressed through a customer-centric

model?

Political will is enhanced through small wins and sequencing based on good practices

Capacity building is provided holistically including GRP knowledge, PFM good practices, project management and systems management

Performance management methods track service level agreements, capacity improvements, international assessments

Good practices in accounting procedures and International standards support are enabled

Change management responsiveness is enhanced

Direct relationships between Governments and COTS vendors can help address holistic needs

why should governments consider a Social Enterprise, like FreeBalance, as a GRP partner?

Social Enterprises understand the linkage between environmental and financial sustainability where IT solutions should have a green footprint while enabling growth and change

FreeBalance shares similar objectives to governments in capacity building, transparency and country growth

Studies show that there are high failure rates with ERP implementations in the private sector and in government while FreeBalance is a global GRP practice leader

FreeBalance has a much better success rate than competitors. Some of this can be attributed to software and some to process

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how can direct GRP software manufacturer governance improve opportunities for success?

Conclusions 1. Traditional methods of GRP procurement often increases risks of failure 2. Shared objectives and customer-centric processes increases the chance for

implementation success and financial sustainable solutions 3. Governments can leverage all vendor capabilities to improve governance through

long-term procurement methods 4. Governments drive product functionality via customer-centric GRP vendors 5. Governments can benefit from timely implementations and agile progressive

activation through partnerships with GRP vendors

There are very few “best practices” but many “good practices” in Public Financial Management.

FreeBalance, a global provider of Government Resource Planning (GRP) software and services shares good practices from experience with developed and developing country governments

around the world.

www.freebalance.com