The rise of ERP technology in the public sector.

• Author: Miranda, Rowan
• Position: Enterprise resource planning

It is a bit of an overdramatization to borrow from Karl Marx and state that "a specter is haunting state and local government - the specter of enterprise computing." Nevertheless, in its own way the replacement of hardware and software applications in the quest to remain competitive is a quiet revolution taking place in an increasing number of state and local governments. Although Y2K is a factor, many such changes continue to be motivated by the availability of a new generation of client/server-based technology and the desire for improved functionality in an increasingly digital economy.

Client/server architecture is associated with a number of features that improve the effectiveness and lower the cost of information technology investments. The improved functionality from newer software stems from 1) the elimination of a legion of manual logs and computerized databases that have been variously described as "standalone," "shadow," "stovepipe," or "independent" systems; and 2) process improvement opportunities permitted by single point of data entry, electronic work flow, and Web-based technologies. While the value of information integration and process improvement are widely recognized, significant challenges and risks lead governments to question whether the road to integrated enterprise software is a worthwhile one to pursue.

This article examines the current and future role of enterprise resource planning (ERP) systems in the public sector. The main objective of this article is to concisely describe features of ERP software that differentiate it from other products and from the legacy systems it seeks to replace. While systematic knowledge about ERP success factors continues to grow, so too does the overall level of confusion about the practicality of ERP because success stories are matched or exceeded by incidents of failure. A recent study of ERP implementations supports why "caveat emptor" is warranted in this marketplace. In companies with more than $500 million in revenues that had implemented ERP, the average cost overrun was 178 percent and the average schedule overrun was 230 percent.(1)

This article is based on the experiences of GFOA's consulting practice in advising more than a dozen ERP clients in city, county, and special district governments over the past two years and in communications with many GFOA members involved in systems projects. The foregoing discussion focuses on the following questions.

* What is ERP?

* What is the current market structure and demand for ERP in the public sector?

* What characteristics differentiate ERP software from other products on the market?

* What are the implications of adopting "best business practices" in conjunction with ERP?

* Is the ERP concept relevant to governments of all types and sizes?

* What are some of the obstacles to implementing ERP in the public sector?

* Do future trends show the presence of ERP improving in the public sector?

Defining ERP

ERP is a relatively new term to the technology industry; it is also perplexing to many people. The E for enterprise connotes that the core functionality consists of software applications that have an organization-wide impact. The R for resource suggests that the applications concern the management of both financial and non-financial resources. Finally, the P for planning implies that the system focuses on improving strategic (i.e., future-oriented) decision making for the organization as a whole. The origin of P stems from the ascent of ERP systems in the manufacturing industry where inventory control and production is the main focus. For all it encompasses, the term ERP remains somewhat limiting to what these systems actually do, which causes some of the confusion.

Exhibit i describes the functionality and technology of an ERP system. ERP systems do encompass the "enterprise" and focus on "resources." But they also facilitate tasks beyond "planning." These include financial control, operational management, analysis and reporting, and routine decision support. Furthermore, although the term "financial" is nowhere represented in ERP, the general ledger module remains the foundation for most systems. ERP systems also empower the top, middle, and bottom of the organizational hierarchy. Since the term ERP is widely used in the technology industry, it is used here with the intention that finance officers become more accustomed to it.

ERP systems consist of software applications that provide organizations with the knowledge to manage their core business processes. These systems differ from a previous generation of accounting software primarily because ERP relies on a common database (the same platform) for both financial and non-financial applications that is accessible on a real-time basis. In addition, ERP software consists of a "process" view of the enterprise (not a "functional" view) which enables organizations to adopt "best business practices" and redesign existing processes as they implement new software. Sociologists studying organizations long ago discovered that information is power; ERP systems implicitly recognize that consistent, reliable, and timely information is "power squared."

The Public-sector ERP Market

The worldwide market demand for ERP is estimated to be approximately $30 billion annually in 1999, consisting of $10 billion for software revenues, $14 billion for implementation services, and $6 billion for other related revenues. Throughout 1999, ERP vendors have reported a slowdown in software sales. Much of the recent slowdown is being attributed to organizations wanting to wait until the threat of the millennium bug passes before new technology initiatives are undertaken. Even with the current slowdown, one of the consequences of Y2K in recent years is the pressure it has placed on governments to replace antiquated financial management systems. To prepare for Y2K, many governments adopted the relatively lower risk strategy of patching (i.e., rewriting code) existing systems rather than purchasing newer ones. It is likely that a desire to keep pace with the Internet Age will lead many to reexamine the feasibility of ERP after the threats of Y2K have subsided. A number of questions remain: How competitive is the ERP industry? How important is the state and local government sector to this industry? Are governments of all sizes well served by the ERP industry?

A closer look at the numbers shows a concentrated industry structure. In 1998, the top 10 application software companies captured approximately 72 percent of the worldwide software licensing revenues. The top five companies alone captured 61 percent of the revenues. A leading market research firm estimated that approximately 3.7 percent of the total software licensing revenues could be attributed to the public sector in 1998.(2)

GFOA requested an informal assessment, or guesstimate, from industry analysts at one of the major software companies for their evaluation of the market in 2000. According to the information provided, software-licensing revenues from state and local governments are expected to reach $200 million with implementation revenues at $600 million. These figures are not precise enough to facilitate corporate strategy for software companies but support the notion that governments constitute a small portion of overall ERP industry revenues today. However, the public sector reaching the $1 billion mark is certainly significant.

In the automobile industry, gradients of cost and performance enable the matching of automobiles to broad groups of consumers with different tastes, preferences, and needs. For each $1,000 extra consumers want to spend, different automobiles are available that can better match their preferences. By contrast, the public-sector ERP offerings do not currently offer such a broad range of choices. Indeed, GFOA consultants have found clients and members are faced with three levels of software products: Tier I (industry leaders), Tier II (climbers) and Tier III (pretenders).

Tier I - The Industry Leaders. If the vision of an ERP system is to provide software capabilities that permit seamless integration of major processes and functions across the enterprise, no more than a half-dozen firms (the Tier I firms) in the industry today provide solutions for the public sector that fit this vision. The advantage of the Tier I firms is performance and a vision focused on utilizing leading-edge technology. Tier I companies dedicate a considerable portion of revenues to research and development (15 percent to 20 percent). The main disadvantages relate to cost, corporate instability, and implementation risk. In 1999, many of the Tier I companies have witnessed a significant drop in stock price as the market slowed to brace Y2K. Nearly all the companies are expecting a rebound in 2000.

Tier II - The Climbers. Tier II firms are those that are quickly working to catch up to the Tier I firms by adopting some of the features of ERP in new software releases (e.g., client/server architecture or Web enablement). The experience of GFOA's consulting practice is that no more than four companies serving the public sector fit the Tier II profile. Some of the Tier II firms fell behind the times over the past decade when the demand for Y2K compliance (i.e., editing software code) occupied much of their focus. For Tier II firms, the long-term cost of short-term Y2K-driven profits was poor functionality and adherence to aging technology standards. The advantages of the Tier II firms is that many have had a longer presence in the public sector, are more stable overall in the marketplace, and have a reputation for cost effectiveness. Another feature that makes Tier II companies attractive is that they provide implementation services directly. The main disadvantages relate to narrower product offerings and a lag in technology in comparison to Tier I firms.

Tier III - The Pretenders. Although the label for Tier III...