January 10, 2013Doug Hadden
- Governments are increasingly adopting Commercial-Off-the-Shelf (COTS) software to replace legacy and custom developed software applications for financial, budget, expenditure, tax, treasury and civil service management.
- A major impetus for recent COTS projects is to replace multiple applications within a government organization with one integrated solution or to support numerous government organizations with a hosted shared service or private government cloud.
- Government organizations can chose to acquire Enterprise Resource Planning (ERP) software from large software firms whose software is used in multiple “vertical” markets or Government Resource Planning (GRP) software designed exclusively for governments.
- FreeBalance, with the FreeBalance Accountability Suite, is a GRP provider. FreeBalance does not build or provide software to the private sector.
- There are high incidents of failure of ERP implementations in government from late delivery, over budgeting to inability to achieve expected benefits. Many ERP implementations, even in the most advanced countries, fail. The purpose of this post is to keep up-to-date with ERP failures in government.
- IT projects, in general, have experienced poorer results in the public sector. The United States Government Accountability Office has “reported and testified that federal IT projects too frequently incur cost overruns and schedule slippages while contributing little to mission-related outcomes.” Complex rules and political considerations in government add to the general reasons for large IT project problems.
Large ERP project failures in developed country governments
A large ERP shared services project in France was estimated to be $200 million over budget by the audit office and more than one year late and resulted in late payments of more than $2.2 billion to defense contractors.
The National Audit Office in the United Kingdom found the use of ERP shared services added expenses rather than reducing costs.
In the United Kingdom, a Cabinet Office analysis found:
- Average cost to deploy a Tier 1 ERP is £160 per employee using the traditional method
- Theoretical cost to deploy via shared services is £93 per employee
- Use of lower cost solutions at £52 per employee
Another analysis from the Cabinet Office in the UK found inconsistent software license pricing in government for the same Tier 1 ERP package where the two leading vendors had “the most inconsistent prices for ERP licence and maintenance support across central government departments.” Meanwhile, the Government of Australia is investigating high ERP costs and the practices of the leading vendors.
A 2012 study in the UK found low satisfaction with ERP in government, over half of the respondents were using Tier 1 ERP software. The survey showed Tier 1 ERP satisfaction is far lower than with alternative solutions. Users of non-Tier 1 ERP solutions were four times more likely to rate their solution as exceeding expectations on any of five dimensions and half as likely to rate their solution as worse than expected.
- 63%: ERP system did not meet expectations in at least one area
- 60%: Would choose a different company to implement the ERP if had to do it over again
- 50%: Tier 1 ERP implementation costs higher than expected
- 45%: Tier 1 ERP implementation took longer than expected
- 43%: Would choose a different software than the ERP implemented if had to do it over again
- 40%: Tier 1 ERP ability to meet government requirements without customization lower than expected
- 39%: Tier 1 ERP system ease of use worse than expected
- 25%:Tier 1 ERP ability to meet government needs after customization lower than expected
- 20%: ERP system had negative impact on organization
- 20%: Would go through a similar ERP implementation again
In the United States, reports by the United States Government Accountability Office (GAO) and the Department of Defense (DoD) Inspector General (IG) found that 11 of 13 ERP projects were over-budget costing American taxpayers billions of dollars with one ERP project resulting in $1 billion “largely wasted” and another project stopped after seven years and $1 billion invested would require an additional $1.1 billion for about a quarter of the original scope while cost estimates for on-going projects are wildly inaccurate.
Major difficulties experienced in ERP implementations in the public sector in developed countries
ERP failures and cost overruns in the public sector have resulted in difficulties, contract cancellations and lawsuits, although lawsuits are rare because vendors would rather do what it takes to make the situation right than face potential public-relations damage from a high-profile legal battle:
- Australia: state governments (1) (2) (3) (4) (5) (6), former government-owned corporation
- Canada: non-profit, city (1) (2), national government payroll system called “Phoenix” where more than 1/4 of public servants have had errors in pay and some have gone months without receiving salaries
- France: city
- Ireland: 2 projects within an important ministry
- New Zealand: education payroll, city
- United Kingdom: university, councils (1) (2) (3) and government ministries (1) (2) (3)
- United States: non-profit, school districts (1) (2), universities (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11), a police department, cities (1) (2) (3) (4) (5), counties (1) (2) (3) (4), state government (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11), federal government (1) (2) (3) (4) (5) (6) (7) (8) (9) (10), (11), (12), public utility
KPMG found in 2011 some ERP in government patterns:
- Budget overruns particularly in implementation where additional software customization was needed: typically six months to a year
- Only 57% of implementation projects stayed on budget
- Many survey participants could not recall the original budget
Panorama Consulting reported in 2014 research shows 78% of public sector ERP implementations are over budget and over schedule and 35% simply fail!
Reviews of top ERP failures in 2010, 2011, 2012 and 2013 for IDG journalist Chris Kanaracus found that slightly over half came from the public sector despite representing only 20% of the market size. The majority of IT disasters involved ERP implementations.
Are major ERP vendors ethical?
There is mounting evidence that major ERP vendors are using unethical means including:
- Bribery and corruption in: India, Costa Rica, Colombia, Chile, Mexico, Panama
- Charging customers who paid for integration for “indirect access” (1) (2)
- Suing customers for failed projects in: Oregon
- Trolling customers for additional revenue through “license audits“
What is the evidence of ERP success in emerging economies?
A 2003 study by the World Bank found a lack of success in government FMIS implementations whether ERP, GRP COTS or Custom developed:
- 43% delivered as specified
- 50% delivered on budget
- 21% delivered on time
- 25% unsustainable
- 69% likely to be sustainable
- 6% highly likely to be sustainable
A 2011 study by the World Bank found that IFMIS implementation sustainability has improved but that 18% remain unsustainable. The lack of capacity and leadership in the public service has been shown to be more critical to failure for IFMIS when compared to general implementations of enterprise software.
Examples of ERP in government implementation problems in emerging economies including Azerbaijan, Cayman Islands, Costa Rica, Ghana, Kazakhstan, Kenya (update), Malawi, Maldives, Russia, Rwanda, Uganda, Zambia (update) and Vietnam.
Large IT Projects are Risky
All large IT projects are risky. A 2013 McKinsey and University of Oxford study “shows that 71% of large IT projects face cost overruns, and 33% of projects are around 50% over budget. On average, large IT projects deliver 56% less value than predicted.” Many of these projects involve ERP.
The implementation of GRP systems in government can be more challenging that typical IT projects. GRP projects combine general IT risks with ERP and reform transformation.
Evidence of limited success rates with ERP implementations across multiple industries
An analysis in 2014 by Price Waterhouse Coopers found no ERP project that achieved all success criteria.
A 2014 survey from Oakton Applications found “most organisations have dug themselves an ERP hole with overstretched teams, complex customizations and a backlog of expensive upgrades.” The survey also found that “customization is strongly driven by ‘improving business processes’ or ‘unique industry requirements’ for more than 80% of organizations.” This points to the fallacy that general purpose ERP packages can effectively support multiple industries.
- 25% indicated that organization had not recovered ERP implementation costs
- Between 20% and 35% of all ERP implementations fail
- 51% of ERP implementers judged their implementation as unsuccessful
- Nearly 70% of large projects were found to be improbable of achieving project success
- 41% of ERP projects achieved all or the majority of benefits
- 60% received 50% or less of anticipated benefits
- 48% of respondents find the range of ERP solutions on offer confusing
- 40% of ERP projects failed to meet business case within 1 year of going live
- Average for ERP projects was 50% of intended benefits
- ERP projects saw the implementation of -59% of intended functionality
- 34% of respondents “very satisfied” with ERP project
- Fewer than 1/3 of decision-makers recommend their ERP vendor
- ERP vendors achieved a D+ in return on investment
- 75% of organizations experienced a productivity dip after implementing ERP
- 79% of finance directors unhappy with ERP projects
- 20% of survey respondents terminated ERP projects
- 92% of finance directors do not find ERP easy to use
- Failure rates of big 3 ERP at 28%, 38% and 33%
- Ability to achieve 50% or more of planned benefits among big 3 ERP at 31%, 17% and 0%
- 80% of organisations do understand licensing models when purchasing their ERP software
- 53% of companies reported budget overruns
- 40% of all ERP projects will exceed estimates by 50% or more
- Average ERP cost variance was 182% of budgets
- Average ERP cost variance was 178% of budgets
- Average ERP implementation cost was 40% over budget
- Average ERP implementation takes 23 months, has a total cost of ownership of $15 million and with an average negative net present value of $1.5 million
- Users of Tier 1 ERP vendors will experience higher Total Cost of Ownership (TCO) than users of Tier 2 vendors
- ERP upgrades cost about ½ the value of the original license fee and 20% of the original implementation costs
- Experts warn that organizations should expect to pay as much as 3 times the original ERP software cost to upgrade to new technology
- Interviews with reference customers of a major ERP vendor found that 57% did not achieve a positive ROI
- Cost overruns of the 2 major ERP packages by 13% and 18%
- Businesses exceed their original budget by 18%
- 61% of projects exceeded timelines
- Project duration averages 17.8 months for first phase
- Average implementation time from the two major ERP vendors are 17 and 18 months with average variance of two and four months over schedule
- Average variance for ERP projects was 230% of schedule
- Up to 80% of ERP exceed time and budget estimates
- 70% of respondents stated their ERP project timeline was inadequate
- Exceeding estimated time by big three ERP software by 47%, 28% and 17%
Need for Customization
Code customization increases implementation, support and upgrade costs. Organizations customize code in order to achieve functionality that is not provided by ERP vendors “out of the box”.
- 47% organisations heavily customise their ERP
- 34% of organisations believe greater customisation is the right way to get more value from their ERP solution
- 11% of organization with no customization, 38% Minor customization (1-10% of code modified), 32% Some customization (11-25%), 12% significant customization (26-50%), 9% Extremely or completely customized
The FreeBalance survey comparing ERP and GRP experience in the Government of Canada
FreeBalance completed a survey at the Government Technology Exhibition and Conference (GTEC), Nov. 5 to 8 2012 and the Financial Management Institute of Canada (FMI) Professional Development Week, Nov. 27 to 30 2012. Both of these conferences were held in Ottawa. We received 207 responses.
Over 70% of respondents believe FreeBalance software has a much lower TCO in government financial management than ERP. Almost 70% suggested that the FreeBalance TCO was between 10 and 50%.
Analysis of GRP vs. ERP 5 Year TCO
FreeBalance competes internationally against major ERP providers. Price quotations are often made public during bid openings in many countries. Most of the international requirements call for all costs over a three or five year period including software licenses, implementation, support, training, middle-ware and hardware. Although some of the proposals were not this five Year TCO, Tier 1 ERP prices average 185% FreeBalance prices where the median price is 225% FreeBalance prices.
Opinions from Social Media
FreeBalance is active on social media. We’ve had some interesting feedback from twitter on the issue of ERP and IT failure in the public sector:
— Mohamed S. Ali (@sahilz79) January 20, 2014
— Mohamed S. Ali (@sahilz79) January 20, 2014
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