Needs assessments and business case analysis for technology investment decisions.

• Author: Miranda, Rowan

As budgets get tighter, elected officials and governing boards are requiring CEOs and CIOs to undertake a rigorous business case analysis to justify technology investment decisions. This article presents a step-by-step methodology that has been developed and used by GFOA in its needs assessment consulting projects.

Concerns about the "millennium bug" led to a frenzy of financial system replacement activity across the state and local government landscape before 2000. Many governments concluded that rewriting and editing programming code for antiquated software packages was a cost that could never be recouped. Instead of "patching" existing systems, many governments took the route of purchasing modern enterprise resource planning (ERP) systems that provided both core financial applications and a broad range of non-financial applications that relied on lower cost client/server (or Web) technology and integrated databases. (1)

Given the two choices--(1) sink more money into the "lemon" that is our current financial system, or (2) invest in a new system that provides information integration and process improvement for a broad range of applications--it is easy to understand why governments chose the replacement route with little in the way of rigorous analysis. Today, tighter budgets are once again forcing elected officials and governing boards to ask public managers to justify new technology investments. CFOs and CIOs now have to answer the question, "What is the business case for investing in new ERP and financial management systems?"

The Government Finance Officers Association has provided consulting services to more than 75 state and local governments in the areas of ERP and financial system procurement. Our clients and members are increasingly interested in approaching the financial system replacement issue as a strategic business investment decision. This article presents the needs assessment methodology GFOA generally uses in its consulting projects. The article contains excerpts from a new GFOA book titled Technology Needs Assessments: Evaluating the Business Case for ERP and Financial Management Systems.

The ERP Challenge

It is not uncommon to read or hear about a government that has spent millions of dollars on a technology initiative, only to halt the project and either abandon it altogether or start over again. Such events are even more commonplace in the private sector. Take the case of a large candy company, which compressed the rollout of a $112 million ERP system to meet the Halloween and Christmas candy rush. Problems with inventory data and new orders led sales to fall by $150 million compared to the previous year. An agricultural cooperative purchased $6 million of ERP software and services, only to file a $20 million lawsuit against the software manufacturer and claim bankruptcy several months later. A large drug distributor filed a $1 billion lawsuit against its software and services firm because of a "bungled" ERP implementation. It also claimed bankruptcy several months later.2 Why have such projects failed when software vendors tout their products as being "off-the-shelf" and expect you to pay the entire license cost up-front, before the product is even proven to work?

There are many reasons for project failure. The software products may have been newly introduced with significant bugs and defects. The implementation services firms may have been inexperienced in their knowledge of a particular industry. Organizations implementing the systems may not have understood the staff commitment required. Or perhaps the software required radical process change that managers were not prepared to make. Then again, contingency resources may not have been budgeted or the technology being implemented had not been adequately tested. And there is always the issue of organizational readiness-although senior executives were convinced that their current system was not meeting executive or end-user needs, they did not carefully evaluate the organization's capacity to install a new system. For all of these reasons and many others, public and private organizations alike periodically conduct a systematic review of existing systems and evaluate the benefits of new technology through a process calle d needs assessment or business case analysis.

Why Needs Assessments?

Needs assessment studies often are desirable because they force a degree of discipline to the technology procurement process. It is tempting for government organizations to do things simply because private sector firms are doing it. Governments, however, cannot spend public money and chalk up project failures as "a cost of doing business" or the "risk of innovation." ERP implementations are especially risky, and governments are generally unprepared for the challenges of installing systems that require them to change processes in order to accommodate new software. This philosophy of "vanilla installations" and "forced process change" that characterizes most ERP implementations is part of the reason why many organizations--public and private--are still skeptical whether a single software vendor can indeed provide all of the modules that constitute an entire administrative system. Should you believe all of the hype in ERP software marketing efforts?

Studies of ERP implementations generally show a mixed track record of success. A recent study of 117 companies by The Conference Board is quite representative of some of the findings regarding ERP that have accumulated over the years. The study found that a majority of users were either "somewhat" or "very" satisfied with their ERP projects. Rates of satisfaction were higher for core finance and accounting functions than for peripheral ones. However, some 40 percent of the respondents "failed to achieve their business case even after being live for a year or longer." (3) Some 75 percent of the companies reported a moderate to severe "productivity dip" that generally lasted up to six months after ERP was installed. About 20 percent halted projects altogether. Companies were on average 25 percent over budget and underestimated ongoing support costs by 20 percent. One of the findings of the study is especially germane to this article:

A quantifiable business case is a prerequisite for a high level of satisfaction. The realization of business value must...