August 1, 2012Doug Hadden
A Study of the Literature
Doug Hadden VP Products
We received some interesting feedback from a recent blog post about cost overruns in ERP projects at the United States Department of Defense. I’ve been vocal about other examples of ERP failure within the public sector. It’s surprising how well major vendors are able to market solutions to government despite this lack of success. Perhaps there is so much marketing noise that it’s difficult for governments to uncover the evidence. Nevertheless, there is a significant amount of public information that supports anecdotal evidence. Some of the studies are dated – but if failure rates have been reduced by 50% in the last 5 years – that still means that 10% to 20% of all ERP implementations are a complete failure.
Let me know if you have evidence to the contrary or lessons learned in the comments section.
Should governments consider ERP or GRP?
- Developed country 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.
There are many large ERP project failures in developed countries
- 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 $1B “largely wasted”
- A large ERP shared services project in France country was estimated to be $200M over budget by the audit office and more than 1 year late and resulted in late payments of over $2.2B to defense contractors.
- National Audit Office in the United Kingdom found that the use of ERP shared services added rather than reduced costs in one case and resulted in a negative net present value in another case
There are major difficulties reported in ERP public sector implementation in developed countries
ERP failures and cost overruns in the public sector have resulted in difficulties, contract cancelations 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 government ministry
- Canada: non-profit, city
- France: city
- Ireland: 2 projects within an important ministry
- United Kingdom: university, councils (1) (2) (3) and government ministries (1) (2) (3)
- United States: non-profit, school district, universities (1) (2) (3) (4) (5), a police department, cities (1) (2) (3) (4), counties (1) (2), State government (1) (2) (3) (4), federal government (1) (2) (3) (4) (5)
Studies show a lack of ERP success across all industries
- 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
- 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
- 20% of survey respondents terminated ERP projects
Studies show significant cost and schedule overruns in ERP implementations across all industries
- 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 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
- Average implementation time from the 2 major ERP vendors are 17 and 18 months with average variance of 2 and 4 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
Why is ERP so unsuccessful in government?
ERP software is designed for the private sector across many industries that rarely provide a good value for money to governments. Large-scale public sector ERP implementations additional time is required during the analysis and design phase to focus on the gap between the commercial process and the required process
- ERP cost overrun and the failure to meet schedule are because ERP software requires significant software complex code customization (BPM scripts, call-outs & software development) to meet government requirements that extends implementation cycles. The ratio of services to software cost in the public sector is estimated to be three time that in the private sector or up to 15 times the cost of software.
- High maintenance costs come from maintaining complex code through problem troubleshooting, and difficult upgrades that increases the Total Cost of Ownership (TCO). For example, the Government of Canada internal support for 15 different customized versions of a major ERP package received an award for saving more than $12M annually in “cost avoidance.” This is hardly a definition of IT success.
- ERP functionality is often complex and hard to use in the private or public sector. 46% of ERP implementers characterized that their organizations were not able to understand how to leverage features to improve the way that they did business.
Why implement FreeBalance Government Resource Planning (GRP) solutions instead?
- GRP software is designed for the government. It is possible to create software for a single “vertical market” that does not require code customization to support needs in most countries across all levels of government.
- Governments can configure GRP software to meet unique requirements thereby reducing lifecycle costs and more likely meeting implementation schedules and optimizing benefits.
- Software designed for government is easy to use in the government context.