Financial Software: Adding up the Cost of Public Services

Providing a true picture of the cost of government services has long been the holy grail of state and local government finance departments. But while total accountability has yet to be achieved by most city and state governments, experts say it is within the reach of those that can integrate financial operations across all their agencies and departments.

To help in their quest, more state and local agencies are exploring packaged solutions that aim to standardize all financial operations on one platform and keep better track of government operations as a whole. These systems "enable governments to view financial information across agencies and departments [and] gain a far clearer understanding of the total costs of their jurisdictional efforts," said Rishi Sood, practice leader for public-sector research firm G2R Inc.

On a management level, the move to integrated financial software also signals a shift by some state and local finance departments away from providing purely operational support and toward giving more strategic direction to governments. One example: Kansas' Department of Revenue (DOR), which reinvented itself from a slow-moving, paper-based, tax-collecting bureaucracy to a streamlined, financial services institution.

The state's Project 2000 effort, which started in mid-1995, already has reaped improvements in taxpayer services, including telephone-based tax filing, refund information and answers to tax questions. At the same time, the state has been able to reduce its backlog of tax appeals from more than 1,000 to less than 300. And with the money from an improved collection system, Kansas has been able to pay $31 million of the $50 million price tag for the project.

Underlying the new systems is financial software from American Management Systems Inc., Fairfax, Va., which runs on a Sun Microsystems Inc. Solaris-based Unix system and an Oracle Corp. database. More than 700 users are on the AMS system, which takes up about 230G of mirrored storage. DOR's early successes led to the addition of an optical character reader last year, which scans and captures income tax returns and checks, and expedites the processing of refunds.

Now Kansas is installing the Decision Analytic software program from AMS, which examines taxpayer records and gives each a score, telling DOR how great the risk is that a taxpayer will not remit taxes owed. "That way, if we don't receive a sales tax return from a particular company, for example, and we know they are at high risk of nonpayment, we can start trying to reach them sooner to get them to pay sooner," said John LaFaver, secretary of revenue for the DOR in Topeka.

Meanwhile, the majority of taxpayers who usually do pay on time but may be delayed once in a while do not need to be bothered by the state. "We have a limited staff, limited money and limited time, LaFaver said. "This tool allows us to focus on taxpayers who are at highest risk."

Combined with new applications for withholding individual and corporate taxes, the complete integrated tax system will be operational in mid-1999. "Just the idea of putting customers first every time is a foreign concept for most veteran tax-division personnel," LaFaver said. "But Project 2000 will prove you can accomplish that, like a bank or other first-class financial services organization, and still maintain healthy revenue collection."

Mass Migration

With projects ranging in value from $250,000 to more than $50 million, integrated software systems-incorporating integrated financial, accounting, payroll and human resources programs-are expensive but are becoming more widespread in state and local governments, according to G2R's Sood. G2R estimated that the total market for financial software in state and local governments reached $5.8 billion in 1997 and will grow at a rate of 10 percent per year to reach $9.1 billion in 2002.

Consequently, software developers see state and local governments as lucrative markets for integrated financial software packages. "The desire to run more like a private-sector business and to stay current with new technologies are big drivers behind this trend," said Wayne Bobby, director of government financial solutions for Oracle.

PeopleSoft Inc., AMS, Oracle and SAP America Inc. are considered among the leaders in the market for integrated financial software solutions. Each company now claims a growing base of state and local clients. PeopleSoft, for example, announced in May that it won 44 state and local government contracts in 1998.

SAP, which launched SAP America Public Sector Inc in December 1997 to add public-sector functions to R/3, its flagship financial platform, is also making inroads in the state and local market.

In May, Florida chose SAP HR, which is based on R/3 4.0, to deliver "self-service" applications enabling state employees to access human resources, payrol and benefits information. The company has also racked up contracts with Louisiana, the Port Authority of New York and New Jersey, Duke University in North Carolina, and the Rochester, Minn., public utilities system.

"We are positioning our integrated R/3 product among state and local governments," said Milford Sprecher, an industry segment manager for the company. "Most jurisdictions are still at the point at which they are looking for HR, payroll and finance products, and we are responding to those as appropriate."

Some market watchers argue that the push to improve financial operations is being driven in part by the need to meet the Year 2000 challenge. Others warn that the date-change fiasco may fast become an impediment to sales. "State and local governments that are just starting to deal with the Year 2000 problem are really in a panic now, and that has caused a few [financial] software projects to be put on hold," said Steve Shubella, a vice president in charge of the tax and revenue group for AMS.

Oakland's Big Leap

Those who have already migrated to integrated financial software said it helps track spending and reduces the number of stovepiped financial systems that don't interoperate across agencies or departments. Oakland, Calif. recently awarded a five-year, $18 million contract to Oracle to replace a hodgepodge of separate systems developed internally and from little-known third-party suppliers with financial, human resources and payroll applications running on an Oracle database.

With the first applications going live in September, the city expects to provide 2,500 government employees "with an integrated view of city operations for the first time," said Dolores Blanchard, Oakland's assistant city manager.

The new Oracle-based system will enable the city to analyze financial information online, better track the costs of projects as they progress and eliminate paper-based processes, Blanchard explained. The paperwork-reduction effort will entail pulling forms and other published information onto the system where possible and providing managers with the authority to sign-off online to speed processing.

While the cost of the Oracle system is regarded as its biggest drawback so far, Blanchard maintains that was buffered a bit by zero percent financing provided by Oracle during the five-year contract. She also said it would have been more expensive to maintain the older, separate systems in the long run, and processing via the older systems would be also increasingly inefficient.

Texas' Financial Steps

In Texas, the trend toward integrated financial software is catching on. Eight agencies are using or planning to use PeopleSoft Financials, said Bill Monroe, chief of operations for the Texas Education Agency in Austin.

TEA found that the first major benefit of the new financial software "was a risk-free decision to ditch our mainframe," Monroe said.

TEA is now processing financial data on 4 million schoolchildren-about $1 billion worth of accounts per month-through an IBM Corp. RS/6000 running AIX on a Token Ring network. Getting off the mainframe and migrating to PeopleSoft on a client/server platform cost the agency about $4 million, but it also eliminated the agency's Year 2000 worries, Monroe said. Meanwhile, the new system gives the current work force, which was reduced by one-third in 1995, the ability to get more work done from its desktop systems via the workflow and reporting features of the PeopleSoft software. "We've now got the ability to reconcile inventory to assets, for example, electronically rather than accessing disparate systems or searching manually through files," Monroe said.

In time, users hope integrated financial systems will help them achieve a real accounting of government's return on investment. Conversely, jurisdictions that are slow to make such changes will likely face increasingly tough criticism for not providing information on the total-and sometimes hidden-costs of projects. Detroit, for instance, is building a new stadium for the Detroit Tigers baseball franchise. The city plans to use a $50 million financial system provided by IBM and Oracle to help track reports on costs and help gauge how soon it can expect to see a return on both its baseball and new computing investments.

"We call it the 'projectizing' of our government efforts," said Nicole Fontayne-Mack, director of information technology services for the city, which hopes to gain a greater understanding of all costs associated with projects. "When you tie human resources information to financial resources, and expense data on equipment and other elements, you can start to put your arms around the concept of the total cost of a project in ways not possible today-at least not without tedious and labor-intensive processes."

Barbara DePompa Reimers is a free-lance writer based in Germantown, Md. She can be reached at bdepompa@aol.com.

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Serving 'Quirky' Public-Sector Needs

The growing success of packaged financial software in states and municipalities is due, in large part, to software developers' efforts to improve their understanding of the often quirky nature of public-sector operations. "It takes far more than an integrated software program to meet the needs of these highly complex and varied government organizations," said Chris McClain, national sales vice president for public-sector organizations at PeopleSoft Inc.

Instead, it takes a painstaking attention to financial details. In public-sector human resources, for example, "position," or job slot, budgeting is extremely important, McClain said. Governments must keep track of positions because those left open too long may force an organization to lose funding. Private-sector businesses, meanwhile, normally have little need to track positions in that way, he said.

Also, unlike private sector businesses, many public-sector agencies employ fund accounting, which restricts an agency from going over budget. A tracking system ensures money is available to cover the cost of all purchase orders submitted before payments can be made, McClain added.

The current releases from each of the leading developers are powerful and customizable enough to meet individual government needs, users said. "While some users may prefer the features packed into a particular home-grown utility billing program, packaged programs do generally allow users to customize applications to better match their individual business practices," said Phyllis Laderman, director of finance for the city of Escondido, Calif., which has been using PeopleSoft Financials and human resources programs since January 1997.

Users and analysts agree that internally developed or "home-grown" financial software is largely a thing of the past. "The time and effort [to develop our own programs] is far too exhausting, and frankly I'm quite pleased that much of the decision-making involved in program design has already been made for us. It means we don't have to fight about how to build the software," Laderman said.

Also gone are the days of large, expensive legacy systems. The packaged financial software programs run primarily on client/server platforms and offer the kind of robust and mature applications performance to which mainframe shops are accustomed. "The big reason to make this change, because it is so drastic, is to achieve a new level of ease of use and access to data governmentwide, so that regardless of their technical experience, executives at all levels can use that data to be far more on top of their worlds," said John Kost, vice president of TRW Inc.

- Barbara DePompa Reimers

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Financial Software Locator

American Management

Systems Inc.

Fairfax, Va.

(703) 267-8000

www.amsinc.com

FreeBalance Inc.

Rosslyn, Va.

(703) 351-5244

www.freebalance.com

J.D. Edwards World

Solutions Co.

Denver, Colo.

(303) 334-4000, (800) 362-0481

www.jdedwards.com/industries/

government.asp

KPMG Peat Marwick

Arlington, Va.

(703) 469-3200, (888) 467-3571 www.us.kpmg.com

Oracle Corp.

Redwood Shores, Calif.

(650) 506-7000

www.oracle.com

PeopleSoft Inc.

Pleasanton, Calif.

(510) 225-3000

www.peoplesoft.com

SAP America Inc.

Wayne, Pa.

(610) 725-4500, (800) 872-1SAP

www.sapamericapublicsector.com