A Plan for the Implementation of Enterprise Resource Planning (ERP) for the State of Texas

Exhibit B: Independent Business Case Study Executive Summary

© Salvaggio, Teal & Associates

Section 1. Executive Summary

Background and Purpose of Study

In May of 2007, the 80th Texas Legislature passed House Bill 3106 (HB 3106), which addressed the concept of Enterprise Resource Planning (ERP) for the State of Texas (State). From a practical standpoint, the term ERP for the State refers to an integrated software package that provides functionality similar to that offered in the existing statewide administrative systems (e.g., USAS, SPA, USPS, SPRS), as well as critical functionality currently provided by agency administrative systems.

The Legislation defined the organizational scope to include all State agencies and institutions of higher education, and the functional scope to include the following application areas:

• General Ledger;
• Accounts Payable;
• Accounts Receivable;
• Budgeting;
• Inventory;
• Asset Management;
• Billing;
• Payroll;
• Projects;
• Grants; and
• Human Resources, including administration of performance measures, time spent on tasks and other personnel and labor issues.

Though not included in the Legislation, the following functional areas were added to the Plan scope:

• Procurement. While not specified in HB 3106, the functionality is an integral component of an ERP system and procurement falls within the Comptroller’s authority. Procurement is the functional area that typically obtains the greatest process efficiencies and potential cost savings in the transition to an integrated ERP system.
• Fleet Management. While not specified in HB 3106, the functionality is required in order to address Rider 16 which requires that the Texas Comptroller of Public Accounts (Comptroller or Comptroller’s Office) implement and maintain a State fleet data management system for agencies to report fleet operating expenses and uses, as required by Chapter 2171.101, Government Code. The system must be accessible through a web-based interface, provide forms for efficient entry of data required by the State Vehicle Fleet Management Plan, allow agencies to batch load relevant data from internal legacy systems, provide fiscal and managerial reports for both direct asset management and oversight needs, and be flexible enough to accommodate future agency or legislative needs.
• Data Warehousing. While not specified in HB 3106, it is assumed that a statewide data warehouse is required in order to provide functionality necessary to meet the State’s present and future analysis and reporting requirements, and to address the Comptroller’s new standards for transparency and accountability in State spending.

In November 2007, the Comptroller’s Office developed a survey that was sent to all State agencies and institutions of higher education to capture high-level information regarding their administrative systems and expenditures related to the application scope listed in HB 3106. The purpose of the survey was to determine which systems were in place in the various State agencies and institutions of higher education, and what funding was being spent to deploy, operate and maintain these systems. Additionally, the Comptroller’s Office wanted to identify the amount of expenditures that were planned over a five-year time horizon to replace, upgrade or maintain these systems.

The survey identified the total estimated cost for annual operation and maintenance of the systems across State government at over $88 million, including:

• Annual software maintenance at $17 million;
• Annual hardware maintenance at $9 million; and
• Staffing and labor performing system or application maintenance totaling $62 million and representing approximately 950 FTEs.

Anticipated system upgrades, enhancements and replacements totaled over $144 million over the six-year period, according to the survey results. This amount included the following elements:

• Planned system or application upgrades totaling $27 million; and
• Planned system replacement or implementation costs totaling $117 million.

Based upon a six-year time horizon, the November 2007 survey yielded total system and application costs for the applications included within the scope of HB 3106 to be $672 million or roughly $112 million on an annualized basis.

In late June 2008, the Texas Comptroller of Public Accounts (Comptroller or Comptroller’s Office) initiated a study to develop a comprehensive business case analysis (BCA) and related strategic planning associated with ERP. The purpose of the Study was to perform a series of tasks that will provide the ERP Advisory Council and the State Comptroller with the data and other information necessary for determining whether implementing a statewide ERP system is economically feasible for the State of Texas through the analysis of the following three (3) alternative scenarios:

• Business Case Alternative 1: Status Quo (BCA 1) – The State continues on its current path whereby each agency and institution of higher education continues operating their existing administrative systems as currently planned.
• Business Case Alternative 2: Statewide ERP Platform Deployment (BCA 2) – Replace the existing statewide legacy administrative systems (USAS, USPS, SPA, SPRS, HRIS, TINS) with a new, fully integrated, commercially-available ERP system that would provide all functionality identified in HB 3106. One (1) statewide ERP system for all agencies and all institutions of higher education (HE) would be established and operated by the Comptroller.
• Business Case Alternative 3: Hub Model (BCA 3) – Replace the existing statewide legacy administrative systems (USAS, USPS, SPA, SPRS, HRIS, TINS) with a new, fully integrated, commercially-available ERP system that the Comptroller’s Office would operate as an Application Service Provider (ASP) for all State agencies with the exception of the Health and Human Services (HHS) agencies. The HHS agencies and institutions of higher education would operate under a decentralized processing model as data reporting “Hubs” and would be interfaced into the Statewide Data Warehouse platform and their transactional data would be interfaced into the new ERP system.

Approach and Deliverables

Four groups were identified to provide data and information to support the BCA analysis:

• A subset of 182 State agencies surveyed in November 2007. This group was composed of twenty-four (24) of the State’s largest and most complex agencies as selected by the Comptroller’s Office and represents at least 97% of the State’s total FY 2007 expenditures.
• System stakeholders that represent the existing statewide administrative systems, including:
• Uniform Statewide Accounting System (USAS);
• State Property Accounting (SPA);
• Texas Identification Number System (TINS);
• Uniform Statewide Payroll/Personnel System (USPS);
• Standardized Payroll/Personnel Reporting System (SPRS); and
• Human Resource Information System (HRIS).
• Higher Education System Offices that represent all institutions of higher education except for Stephen F. Austin University, Texas Southern University, Texas Woman’s University, Midwestern State University, and Texas State Technical College.
• Members of the Information Technology Council for Higher Education (ITCHE) that is composed of representatives of:
• The Texas A&M University System;
• The Texas State University System;
• The Texas Tech University System;
• The University of Houston System;
• The University of North Texas System;
• The University of Texas System; and
• Texas Woman’s University.

The deliverables associated with the Study include the following:

• Documentation of the alternative scenarios to be analyzed;
• High-level assessment of existing administrative systems;
• Development of Cost Estimates for the Status Quo, and the alternatives to be evaluated;
• Development of Avoided Costs (costs that would no longer be incurred if a statewide ERP system was implemented) for the alternatives to be evaluated;
• Development of Process-improvement Savings (process efficiency savings that would be achieved if a statewide ERP system was implemented) for the alternatives to be evaluated;
• Development and documentation of the business case to support each alternative to be evaluated;
• Recommendation of a specific alternative to be pursued to address the State’s statewide administrative system needs;
• High-level implementation plan documenting a recommended approach for deploying the recommended solution across State government (and higher education as applicable); and
• Funding plan to support the recommended alternative to be pursued.

Key Findings

As a result of our analysis of survey responses and interviews with key stakeholders within the Comptroller’s Office and across State government, we identified the following key findings:

• A total of 1,220 administrative system functional modules (General Ledger, Accounts Payable, etc.) are currently utilized to address the functional areas addressed in HB 3106. More than twenty (20) human resources/payroll systems are in operation across the State and three (3) statewide payroll and personnel reporting systems are in existence for validation and reporting (USPS, SPRS, HRIS). There are significant redundancies in functionality and capabilities of the three systems that could be consolidated to reduce the complexity of the reporting function and significantly reduce the cost of operating and maintaining the platforms.
• Of the total number of functional systems in operation across the State, roughly one-third (1/3) are custom developed solutions and roughly one-quarter (1/4) are statewide systems. The remaining systems are a mixture of various commercial off-the-shelf systems (COTS) and somewhat evenly spread across PeopleSoft, SunGard and MIP with the “Other” leading all categories at 13%.
• Each agency and institution (except those utilizing the USAS and USPS platforms as their processing system) must interface their systems into the existing Statewide systems resulting in more than 250 interfaces in operation that must be managed, maintained, and reconciled across the State at both the statewide and agency/institutional levels.
• Data is fragmented across a wide array of systems and platforms, which makes it difficult to generate management information on a timely and accurate basis due to differences in formats, cycle times, and controls across all systems, which leads to complications in preparing enterprise (statewide) reports. This results in a lack of confidence by the State’s citizens and their elected leaders.
• Each of these systems has its own ongoing operating and maintenance costs for hardware, software and infrastructure which, in the aggregate, could represent significant savings through consolidation and standardization.
• In order to roll-up the fragmented data to a statewide level, manual, labor intensive processes must be performed to reconcile, update and adjust the data across the various systems and interfaces. This effort represents a significant cost to the State and dramatically reduces the efficiency and effectiveness of the State’s business processes.
• Because the current statewide administrative systems do not meet many of the State’s business needs, the State’s administrative business processes are less efficient and effective than they could be. As an example, the State is unable to track method of finance for all transactions, resulting in a significant information gap regarding what money was used and in what ways, which is especially critical in times of budget constraints. To address critical unmet needs, agencies have expended significant amounts of money on their own ERP and/or “best-ofbreed” systems. Instead, these funds could be spent toward the implementation of a single, statewide ERP system that would benefit all agencies.
• The State does not utilize a statewide procurement system at this time, which causes the following deficiencies:
  • Other than the agencies that already use ERP systems, the majority of other agencies follow manually-intensive business processes or maintain “stand-alone” systems or spreadsheets to address their procurement needs. Manually-intensive processes and redundant data entry tend to be slow, error-prone, and costly;
  • Lack of integration of procurement function with financial accounting and other administrative systems;
  • Most purchasing organizations lack the transaction data (at the proper commodity code level) required to effectively negotiate with suppliers; and
  • Most procurement managers spend much of their time “chasing paperwork” rather than managing their supplier base or negotiating better prices.
• The existing statewide administrative systems were developed and implemented based on user and State business requirements that are now more than fifteen (15) years old. As new requirements have emerged, the State continues to patch or rewrite the systems to meet or comply with the new, point-in-time requirements. The cost of maintaining these systems continues to escalate due to the difficulty of locating skilled personnel to make the changes as well as the overall limitations of the original system architecture (e.g., often changes must be made to the actual computer code instead of simply changing data table entries to make the changes).
• The State Property Accounting System is 15 years old. It does not support accounting standards enacted in recent years. Therefore, inefficient manual reconciliation and rework is required. Insufficient internal system controls necessary to maintain the integrity of transaction data have caused State audit concerns.
• TINS lacks the ability to ensure that funds are not paid to individuals indebted to the State. Instead of netting all payments against amounts owed, the State pays some individuals in full and, therefore, misses an opportunity to recoup funds owed.
• The existing statewide systems are not providing adequate protection for confidential state employee information and are not in compliance with the information security, data privacy and accessibility regulations, exposing the State to possible lawsuits and public relations risks.

Business Case Analysis Results

The State spends approximately $9 million per year to maintain and operate the existing statewide administrative systems such as USAS, TINS, SPA, etc. Additionally, the Comptroller and the State agencies/institutions need to spend approximately $121 million combined to “rewrite” the statewide administrative systems and deploy these new systems across Texas government over the next few years. These rewrites are intended to address major system deficiencies, eliminate the need for HRIS, address risks associated with the current use of Social Security Number, and lack of compliance with Section 508 of the Americans with Disabilities Act regarding accessibility.

From a financial-analytical perspective, Alternative 3 is by far the best of the three (3) alternatives evaluated in this BCA. Under Alternative 3, all but approximately $35.4 million of the estimated $335.2 million 11-year cost to implement and operate a new statewide ERP system would be offset by systems costs that would likely be spent by the State on systems that provide functionality relatively comparable to that provided by a new ERP system (i.e., Avoided System Costs), but without achieving the process-improvement benefits that could potentially be realized by implementing an integrated statewide system (i.e., Value Pocket benefits). The estimated $128.3 million in process-improvement benefits would exceed this $35.4 million shortfall by $92.9 million during the 11-year planning timeframe, and at a discount rate of 5% per annum, that $92.9 million would provide a Net Present Value (NPV) for Alternative 3 of $60.5 million and reach breakeven/payback in Year 8 of the initiative (see table below).

Note that of the estimated $335.2 million 11-year cost to implement and operate a new statewide ERP system, approximately $248.5 million would be spent over a 7-year implementation period (Yr 0 through Yr 6) on the ERP implementation, and the remaining $86.7 million would be spent on operating and maintaining the new ERP system. The $248 million would be spent as described below:

p>Alternative 2 is much less attractive than Alternative 3 from a financial-analytical perspective. We estimated that it would cost $930.3 million to implement and operate a new ERP system under Alternative 2 over the 11-year planning timeframe of this BCA. As illustrated below, the Net Present Value (NPV) for Alternative 2 is – $295.9 million, assuming a discount rate of 5% per annum, or – $266.4 million, assuming a discount rate of 8% per annum. The investment would be far from breaking even during the 11-year analysis period of the BCA (-$352.8 million – see the “Cumulative Net after Process-Improvement Benefits” row in the table below).

Please note that the totals in the schedule above may reflect variances due to rounding.