Achieving government transformation through ERP systems.(Enterprise Resource Planning)

Editor's note: This article is adapted from a forthcoming GFOA book entitled Enabling Technologies for Government Transformation: ERP and Beyond. The authors are co-editors of this book.

The public sector has marched steadily toward the adoption of enterprise resource planning systems. ERP systems are software applications that support an organization's finance, human resources, payroll, procurement, and a broad range of other administrative functions. These applications are more advanced than the mainframe-based software that was the backbone of transaction processing in large organizations from the 1960s to the 1990s. The major advantages of modern ERP systems include the consolidation of data from diverse business processes into a single information repository, the incorporation of "best practices" and other features that allow organizations to reengineer their business processes for greater efficiency, and the ability to disseminate information through all levels of an organization. And because ERP systems are "off-the-shelf" rather than custom developed, they are potentially less costly and theoretically "obsolescence proof" if the periodic upgrades keep pace with advances in technology and management practice.

Although there is consensus on what ERP systems are capable of, there is lingering debate about the value that is actually delivered. Early ERP implementations in government were driven by technical objectives (the millennium bug, for example), and "on-time/on-budget" was used as one of the main indicators of a successful project. Governments evaluating projects after an ERP implementation were hard pressed to identify concrete areas of cost savings or examples of better decision making. Although ERP systems have not delivered everything vendors promised, these systems are nevertheless a solid foundation for transforming government into lower cost, higher performing organizations that focus on continuous improvement and customer service. This article takes up the question: How can governments fully realize the value of their ERP investments? We present and discuss five main observations about the state-of-the-art regarding ERP systems. Much of the discussion will focus on how governments are extending capabilities or realigning organization structures to achieve high performance.

ERP ISSUES AND TRENDS

I) Organizations are strategically investing in technology. As a result, ERP investments require a much stronger business case and return on investment analysis than in the past. ERP investments also face greater competition from other technology and non-technology initiatives.

With shrinking IT budgets and legislative bodies wary of projects that turned out to cost more and deliver less than expected, governments are taking a more cautious, strategic approach to technology investments. This is in sharp contrast to organizations that, until recently, purchased the latest technology to maintain the perception that they were on the leading edge. A 2002 Morgan Stanley survey of 300 chief information officers found that some 20 percent had unused ERP licenses. Another survey found that the unused software rate for online analytical processing software averages 39 percent and for some brands is as high as 62 percent. (1) Statistics such as these have led to skeptical governing boards; major IT investments now require a detailed business case that clearly identifies the rationale for the project, the expected benefits to be achieved, investment levels needed in terms of staff and financial resources, sponsorship and governance structures, risks and associated mitigation strategies, and an implementation roadmap. State governments such as Iowa, Virginia, and Washington are leading the way in establishing detailed business cases by which their major future IT initiatives will be judged. (2)

Business cases have also become more sophisticated in recent years due to advances in benchmarking techniques by organizations such as The Hackett Group that specialize in measuring the efficiency and effectiveness of administrative functions. The Hackett Group maintains a performance metrics and best practice database of more than 3,300 commercial and government organizations for finance, human resources, payroll, procurement, and IT. Hackett uses strictly defined question sets along with stakeholder interviews to measure the efficiency and effectiveness of "as is" processes and then compares these performance metrics to both peer group averages and top-quartile ("world class") performance (Exhibit 1). The use of such benchmarking techniques helps establish "value targets" (the gains from implementing new technologies, practices, delivery models, and processes) that help quantify the business case for investment.

Implications: A strong, outcome-focused business case using benchmarking data should be established before beginning a major IT project or business process improvement project such as ERP. The role of the business case should not end when the project is funded; the objectives and target metrics should be used to better focus the ERP implementation on the business objectives to be achieved. Post-implementation evaluations and benchmarking can also help assess whether the return on investment specified in the business case is being realized.

2) Early ERP projects succeeded in business process automation and addressing challenges posed by technology obsolescence. By contrast, modern ERP implementations are relying on a multi-faceted approach to achieve whole-scale government transformation. Because project failures were being widely publicized across the industry, many governments that were pioneers of ERE focused relentlessly on technical success and the on-time/onbudget delivery of the project. This parochial focus led to disappointing results; governments that had invested millions of dollars were left feeling as though they had received a technology upgrade instead of the promised benefits of ERR A few of these early ERP adopters did go on to deploy their systems in a more robust manner by pursuing "optimization" or "value realization" projects, but others lost the confidence of executives and governing boards and resigned themselves to managing "new" legacy systems that are many releases behind the latest version of the software and unsupported by the software vendor.

Many governments considering ERP today are resisting "package slam" implementations and are instead taking an approach whereby ERP serves as the platform for a transformation toward high performance. Transformational ERP moves beyond transaction processing. It considers opportunities to realign the organization to take maximum advantage of ERP software capabilities, invests heavily in change management, emphasizes a performance management orientation, and thereby drives value in terms of cost and quality. Transformational ERP also focuses on process improvement for customers and suppliers in contrast to the primarily internal focus of early ERP system implementations. Transformational ERP can cost more in the short run since it can take additional implementation effort for government staff and consultants, but it can also provide greater long-term value.

Implications: Governments implementing ERP should not settle for "on-time/on-budget" as the definitive measure of project success. Rather, they should identify the outcome-oriented business benefits the project is to achieve. Those organizations that have already implemented ERP can continue to refine processes and examine the benefits of new service delivery models.

3) The choice of the specific top tier ERP software product is less critical to achieving transformation than the emphasis the project places on achieving best practices through system design and implementation activities, as well as ongoing system improvements.

Understandably, the software product and its features/functions receive the most attention in an ERP project. But is this wise? Andrew Pfeffer and Beth Hayes of The Hackett Group argue that "executives tasked with ensuring that the maximum impact is obtained from ERP investments can take heart from the fact that, except for some small differences in features, ERP functionality is now so commoditized that, rather than agonizing over small differences (unless they are critically important to the business), one's focus can instead be on properly implementing best practice processes and organization optimization." (3)

Other research by The Hackett Group shows that there is a roughly even distribution of use of the top tier ERP software packages among organizations identified as "world class" through benchmarking analysis. This result implies that the use of a particular ERP software product does not guarantee superior business performance. (4) Rather, Hackett found that high performers were differentiated by management techniques such as reengineering to eliminate or minimize low-value tasks, using key metrics to monitor and manage business processes, and organizing business functions efficiently (for example, reengineering procurement and payables processes in a unified end-to-end process or adopting shared services).

Researchers have also shown that new technology alone does not deliver a business transformation. For example, Peter Weill and Jeanne Ross describe how technology governance, or the process for "specifying the decision rights and accountability framework to encourage desirable behavior in the use of IT," is associated with achieving greater value from IT investments. (5) According to their research, organizations with superior IT governance structures generate a return on investment up to 40 percent greater than those without. Governance structures must ensure that stakeholders participate in the business and technology decisions that are associated with ERP.

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