Time To Change

State and Local Governments Leap To Improve Financial Management Systems

By Steve LeSueur

The surge among state and local governments to install new financial management systems or upgrade current ones shows no sign of abating as officials seek greater cost efficiencies through integration of agencywide software systems, analysts and company officials said.

"We've seen a huge push in the last few years in financial management procurement, some of it fueled by the year 2000," said Caroline Rapking, a vice president in American Management Systems' state and local practice.

While some governments have put technology work on the back burner to make year 2000 software corrections, others have reviewed the issue and opted to improve or replace existing financial management systems, she said.

Wayne Bobby, executive director for Oracle Corp.'s enterprise applications solutions, agrees with this assessment.

"Some people thought that the year 2000 compliance would cause a dip in spending, but we really haven't seen a let up for our financial management products," he said.

To meet the public sector needs, Oracle developed a software package for midsized state and local government agencies that both modernizes financial management systems and addresses year 2000 problems.

Rishi Sood, director of the state and local group at G2R Inc., Mountain View, Calif., said his market research firm predicts annual spending on financial management systems by state and local governments will rise from $400 million in 1998 to $750 million in 2003.

The demand for new financial management systems also has been driven by the aging of existing systems, many of them put into place more than a decade ago.

"For the first time in 10 to 15 years, some of the states are taking a fresh look at the underlying information technology requirements for the financial area," said Thomas Davies, senior vice president with Federal Sources Inc., a market research firm in McLean, Va.

But what's different about the new financial management packages, said Davies and others, is that government officials want these systems integrated with the software systems of other agencies, such as those responsible for human resources or procurement.

"We're definitely interested in an integrated system," said Don Herz, manager of Nebraska's planned project to install a new statewide financial management system.

Nebraska has a payroll system that was developed in the mid-1970s and an accounting system that dates back to 1982. While both systems have been upgraded throughout the years, a recent study recommended Nebraska invest in a new financial management system that could be integrated with human resources.

Another state seeking to integrate financial management with other key administrative systems is Nevada. The state began looking at replacing its 30-year-old accounting, payroll and purchasing systems in 1995, said Diane Jungwirth, the project manager who is overseeing implementation of the new system. But it wasn't just the age of the systems that spurred the change.

"Our legacy systems were not year 2000 compliant," said Jungwirth. "This made our decision more urgent."

Nevada awarded Fairfax, Va.-based AMS a $13 million contract in October 1997 to put in integrated financial management, human resources and procurement systems. The state is slated to begin production of the core accounting system this month, and the entire process is expected to take three to four years, said Jungwirth.

These integrated applications, generally known as enterprise resource planning (ERP) systems, unify and streamline disparate functions within a large business or government enterprise. While common in the private sector, ERP has been slower to catch on in the public sector, in part because commercial ERP software could not be readily adapted to government processes.

"There's a big difference between private and public sector applications," said Pete Julicher, a partner with KPMG Consulting's public services unit. He said software vendors have only recently developed ERP systems that are adequately tailored for public sector needs.

Herz concurs. "The fully integrated ERP systems are just becoming available at the government level," he said. Nebraska officials are drafting a request for proposal for an integrated financial management and human resources system, which he said would cost about $35 million over five years if approved. It would be the state's largest client-server application, he said.

Other state and local governments have begun to take advantage of ERP solutions. Missouri, for example, has a $27.9 million contract with AMS to install integrated financial management, human resources, purchasing and budget preparation systems. Similarly, in mid-November Rhode Island began installing an integrated suite of Oracle's public sector applications, including financial management, human resources and payroll. Detroit is slated to implement Oracle applications in financial management and human resources. Oracle does not reveal the cost of its projects, but analysts estimate the Rhode Island project between $10 million and $20 million.

Among its host of clients, KPMG has installed a financial management system in the city and county of San Francisco, and sometime this year will integrate financial management with human resources, said Julicher. In addition, with KPMG's help, the city of Long Beach, Calif., implemented a financial management system that became operational in July, and it is considering a broader ERP system.

Public officials expect to reap important gains from these integrated systems. A report developed for Nebraska officials by David Griffith Associates, a consulting firm since acquired by Maximus Inc., McLean, Va., identified five major benefits to installing an integrated human resources and financial management information system.

Among them were significant gains in productivity for employees involved in state business processes and providing citizens better access to state business processes. For example, job applicants could go online to check vacancies and the status of their applications, while vendors could quickly determine the status of orders and payments.

While it's difficult to quantify reliably the anticipated savings, Herz said, some consultants believe Nebraska could realize its return on investment within two years of the project's completion. "We expect significant improvements and efficiencies as a result of better business practices," he said.

One of the major complaints about ERP software has been that it's too complex and not suited for the public sector. Julicher, who has helped governments install ERP software developed by a variety of vendors, said that criticism, though valid in the past, is much less true today.

"All the software vendors are dealing with this issue, and the large vendors are putting a substantial investment into fixing this problem," he said.

When state and local governments move beyond financial management packages and into ERP solutions, it can force decision makers to re-evaluate their own particular processes, industry officials said. While some government officials primarily want to adapt the ERP software to their own ways of doing business, others see it as an opportunity to take a hard look at how they operate and to explore changes that could bring about greater efficiency.

"Some of the government processes are 20 to 30 years old," said Julicher. "All of the governments we have worked with have been willing to go through this business improvement process."

One of the newer players in developing financial management systems is SAP America Public Sector Inc., a Washington, D.C., subsidiary of software giant SAP AG. Formed in December 1997, SAP America Public Sector already has garnered contracts with the city of Phoenix, Sacramento County, the California Department of Water Resources and the Port Authority of New York and New Jersey.

"We wanted to get in right away to establish our presence and get a base of customer references," said Bob Salvucci, company president. Many of SAP's government customers are using financial management systems as an entry point for expanding into ERP systems, he said.

Salvucci dismissed as "yesterday's news" criticism that SAP's ERP software is too cumbersome and inflexible.

"Of my public sector customers, I can't think of one that hasn't installed SAP in less than a year," he said, adding that SAP is developing new templates for the public sector software that will reduce the implementation time by 30 percent to 40 percent.

States implementing new financial management packages include Nevada, Rhode Island and Missouri. Some analysts see smaller states as more suited to technology innovation, perhaps because their requirements are less complex and decision making is more centralized.

"It's not surprising to see the small states be the first ones to move," said Davies. "Many of the vendors cut their teeth on the small states."

But others suggest that the leadership of local officials also is an important factor.

"I would agree some of the smaller states can get organized and address problems, but you might also see a large city like Detroit take the lead in technology," said Bobby. "It really depends on the leadership."

Rapking said Illinois, one of the larger states, has purchased a new financial management system. "You need visionaries in the government," she said.

Industry officials see plenty of demand for financial management packages on the horizon. Even though many states and local governments have used the year 2000 software glitch as a springboard to implement new financial management packages, many others have simply tried to patch their legacy systems until after the year 2000.

Those governments, according to industry officials, will be ready to purchase the next wave of financial management software, and likely will be more focused on systems that can be expanded into ERP.

"They usually don't do it all at once," said Julicher, explaining that a government might purchase a new financial management system and then add the human resources or purchasing packages later.

But when they build new systems today, it's with an eye toward integrating them with other large automated systems. These new systems also must have capabilities for things such as data warehousing, electronic commerce and Web applications.

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