Fed Gives ERP A Shot In The Arm

Event Summary 

As reported on May 31 in Government Executive, a monthly business magazine published by the National Journal Group, Inc, the federal market for enterprise resource planning (ERP) systems will grow to nearly $1.8 billion per year by 2005, according to a study recently released by Input, a Chantilly, VA, market research firm. On the other hand, in its article from June 2, Washington Technology, a semi-monthly published magazine, cites the federal government spends more than $3 billion on ERP and CRM software and related services, according to the market research firm Federal Sources Inc. of McLean, VA.

Input's study, "Federal ERP MarketView", predicts that ERP purchases will amount to approximately 4% of all federal IT spending by 2005. "ERP is very much alive and well in the federal government," said Ellen Zidar, Input's manager for e-government and government consulting. "There are many back office-type administrative systems still being overhauled and replaced with ERP systems. Although the market hype all centers around e-business and e-government, there is still a need to implement back office systems as backbones for the customer who is facing processes that will come in the future."

ERP customers in the federal market include the U.S. Mint, the U.S. Postal Service, Federal Prison Industries, the Smithsonian Institution and the Bonneville Power Administration to name but a few. The past year has also seen a number of large-scale ERP projects get under way (for some major ERP federal contract wins in 2000, see Big ERP Players Courting Government Agencies).

Zidar says that cost cutting is one of the most important reasons that agencies are implementing ERP systems. "Cost-cutting is important in every business," Zidar said, but "the federal government is more willing to be upfront about it." Since ERP implementations are expensive and difficult, Input also noticed "most projects focus on specific functional areas, such as finance or human resources, rather than integrated enterprise solutions." The study said "organizational streamlining and real-time data access" are the two major reasons why agencies are contemplating ERP systems. Zidar said software costs represent a fraction of the true cost of an ERP system. According to the study, more than 50% of ERP spending "relates to professional services."

Now that the federal ERP market is becoming sound, greater penetration of the midsize market is necessary if e-government data-sharing initiatives are to gather momentum. After all, federal agencies regularly contract with small or disadvantaged businesses and rely on state and local government for much of their information and program implementation. Consequently, for vendors to fully implement ERP and e-government systems at the highest levels, they will have to offer compatible products for smaller entities. Fortunately, states are another sector where ERP is experiencing significant growth.

"Taxpayers are demanding the same rich functionality and streamlined performance that for-profit, e-commerce sites provide from their own state and local government," said Caroline Rapking, a vice president in the state and local government group of American Management Systems Inc. of Fairfax, VA. "This demand is crucial in driving ERP needs, as ERP often provides the foundation for the customer-facing service delivery systems." Rapking predicts a 15% surge in ERP adoption at state and local government levels over the next two years.

Market Impact 

While not exactly in its prime, ERP bears its middle age well. Having experienced a rude awakening from an extreme enamor with dot-com's and owing to a backpedaled growth of yesterday's hot items like customer relationship management (CRM), supply chain management (SCM) or e-procurement, many experts have suddenly had an epiphany about the importance of solid back office transactional systems. The experts have even reverted to predicting moderate growth for the ERP market despite unfavorable economic conditions. TEC has long purported the general necessity of ERP systems even though it might have sounded too archaic or even heretic at that time (see Will That Wretched ERP Finally Die? Possibly, But Only the Acronym!, ERP Getting a New Breath of Fresh Air in Europe, and Wrong ERP Demise Predictions Have (Only Partly) Created Skills Shortage).

The federal market opportunity comes as no surprise either given that it has long been the segment with a low penetration of off-the-shelf integrated applications. During the salad days of economic boom and federal surplus, agencies, contrary to their private sector counterparts, have not had many qualms about devising large-scale fragmented, homegrown, maintenance-intensive informational systems from scratch. The times have drastically changed almost overnight. The new administration, pursuant to its campaign promises, is demanding more streamlined government that "meets the needs of the American people". To accomplish this, the government agencies have increasingly turned to readily available integrated ERP systems. Furthermore, with the General Accounting Office's assessment that a third of all federal employees will retire over the next four years, upgraded ERP applications appear to be a convenient way to prevent civic paralysis.

Even as the shortage of technical personnel is alleviated, the inefficiencies and liabilities of legacy islands of information need to be replaced by vendor-supported applications packages. The result of replacing obsolescent systems will be significant savings in system support cost.

With commercially available business applications, the product development costs are spread among a large population of users. This large installed base also allows for a greater aggregated vendors' experience, resulting thereby in higher-quality tried-and-true products.

Federal agencies, having the privilege of relying on always certain taxpayers money, will likely much more easily opt for acquiring a new ERP system, as opposed to making virtue out of necessity and finding reasons to stick with a piece of an outdated technology as is the case with many private sector companies (see The "Old ERP Dilemma: Replace or Add-on).

There are the other reasons why ERP has recently become a far more attractive option for the federal market. This market has benefited by vicariously learning from mistakes and failed ERP implementations in many commercial companies in the past. Additionally, many ERP systems are now componentized, which provides phased implementations in more manageable chunks (instead of a traditional 'big bang' approach) in addition to vendors' developed implementation methodologies that are based on bypassing the usual traps of past failures.

Many ERP systems have meanwhile also been Internet-enabled, which also allows for a quicker and simpler implementation, because client machines do not have to be configured time and again. Consequently, an agency also has a choice of either installing software on its own intranet or renting it via an application service provider (ASP). Further, the leading ERP vendors have incorporated CRM, SCM, e-procurement and business intelligence (analytic) modules by developing them in-house, by acquisition or through strategic partnerships with the best-of-breed vendors. Therefore, agencies should benefit from aligning back-office systems with CRM, e-government, business intelligence and Internet technologies as part of the overall plan, instead of managing it as multiple separate projects, with all subsequent integration ramifications. E-government initiative, with its need to extract usable data real-time across several agencies and to provide it to constituents too, is also driving the adoption rate of ERP systems that can provide a unified picture of their data.

Those who can deliver comprehensive solutions that satisfy the exacting, stringent requirements of federal agencies are in the driver's seat to capture that market segment. Increased federal adoption of ERP systems may imply that these have been increasingly offering a government endemic functionality. As an example, leading ERP vendors provide procurement software that works with General Services Administration (GSA) and Federal Supply Schedules (FSS), human resource (HR) systems that align with military or general schedule pay rates, and financial systems that comply with Joint Financial Management Improvement Program practices for government financial systems.

Further, the Tax and Revenue Management module within some ERP suites provides federal, state, and local government agencies tools to automate the tax collection process by enabling constituents to conduct and view financial transactions. The Records Management module provides these agencies, as well as colleges and universities, school districts, and healthcare providers, with the ability to define records and cases, workflow execution and monitoring, and electronic signature and information retrieval capability.

SAP, Oracle, PeopleSoft, SCT Corporation, and, to a degree, Lawson Software, J.D. Edwards, Geac, Computer Associates, Microsoft Great Plains, Siebel Systems, i2 Technologies and others all have been busy delivering or have already delivered similar capabilities. Provision of CRM and additional analytic and reporting requirements are other crucial issues. Each of these players will have to bet on creating an offering addressing e-government with a strong backbone ERP component (or, at least, an easy integration to major ERP systems in case of niche vendors). Meeting the public sector's needs will also require vendors to improve ease of installation, ROI, interoperability, and service & support networks. Moreover, cutthroat competition in the market during an economic downturn will definitely make price discounting a significant bargaining chip.

What an ERP system does for a business is as important nowadays as it has always been, despite the fact that the term ERP may have fallen out of favor. It sets the infrastructure an organization needs to do business and to communicate with internal and external users and other organizations. To this end, the public sector has realized the compelling need to modernize its back-office systems under the umbrella of e-government, namely, to provide constituents access via the Internet to internal public agencies, processes, and systems. This combination does not obsolete ERP systems. Quite the contrary, ERP functionality remains as critical as ever. Any business needs good inventory control, planning, purchasing, financial accounting and all the rest of nitty-gritty's. Therefore, based on the experiences of earlier e-commerce and e-government initiatives, CRM and SCM will only function well when backed up by the solid internal transactional system that ERP provides.

User Recommendations 

The moral of this story is that, while users in the public sector are in the driver's seat owing to vendors' unfavorable position in a slow economy, the task of selecting the right provider is nonetheless grueling. There is a cutthroat competition amongst well-known viable brand names with no clear market winner in the offing. Since government agencies need a reliable back-office system in place in order to conduct their e-government business or client relationship management, we encourage them to actively inform themselves about vendors' latest product offerings and vigorously negotiate contract terms. Pay close attention to vendors' natively provided extended-ERP modules and discern hype from reality.

The importance of a thorough, well-structured software selection process is of utmost importance given the fact that mere nuances will determine a winner. Overlooking any of crucial business applications evaluation criteria (e.g., Product Functionality, Product Technology, Product Cost, Corporate Service and Support, Corporate Viability, Corporate Strategy, etc.) may result in a selection with disastrous consequences. The use of statistically valid decision-making tool and for careful determination of importance (weight) factors for all selection criteria will be of paramount importance (see Knowledge Based Selections and A Case Study and Tutorial in Using IT Knowledge Based Tools Part 1: Decision Support Discussion). When more than one vendor ranks well within a given set of areas (as is very likely in the case of leading ERP vendors in terms of e.g., HR/payroll and financials functionality), the decision hierarchy provides the supporting material required to justify further investigations before the final decision. These include, inter alia, scripted scenario demonstrations and prodding client reference visits/conference calls. Furthermore, being more regimented than most of their commercial counterparts, and having to justify the rational spending of taxpayers' money, the need to document the selection rationale is also of the utmost importance for federal agencies. This leads us again to the benefit of using knowledge based Decision Support System (DSS), ERGO being one (see ERGO 2001 IT Evaluation Tool).

Agencies should therefore seek assistance in the selection process from unbiased service providers, preferably with experience in public sector or similar industries, and base their decisions only on existing functionality that the vendors are able to demonstrate during scripted scenario sessions. Put vendors' software through its paces during "scripted scenario" demonstrations (detailed sequences of near real-life business processes), in order to further distinguish between the vendors who made the short list (see Demonstration Post-Mortem: Why Vendors Lose Deals). Best-of-breed strategy may not necessarily be a bad option. However, 'bolt-ons' should be selected only from certified official business partners of the primary ERP vendor. The 64,000-dollar question is how functionality rich these new 'e-gov' modules are, and how seamlessly they have been integrated with the back-office. Alternatively, how feasible would the integration with third-party products be?