Calculating the Return on Investment of Implementing a Statewide ERP System

1
Calculating the Return on Investment
of Implementing a Statewide ERP System The
Tennessee Experience NASACT Presentation Novembe
r 15, 2004
SALVAGGIO, TEAL ASSOCIATES
SALVAGGIO ASSOCIATES
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Discussion Topics

• Introductions
• Why Conduct an ROI Analysis?
• Project Scope
• Project Participation
• Tennessee Approach
• Challenges
• Study Results
• Questions?

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Introductions

• Jan Sylvis
• Chief of Accounting
• Phone [phone]
• eMail jan.sylvis_at_state.tn.us
• Kirk Teal
• Salvaggio, Teal Associates
• Phone [phone]
• eMail kirk.teal_at_staconsulting.net

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Why Conduct an ROI Analysis?

• To determine if a compelling business case exists
  for implementing a statewide ERP system in the
  State of Tennessee.
• To obtain buy-in and support from executive
  stakeholders
• To justify funding request(s) that will be needed
  in order for the project to be green lighted
• Because project sponsor approval will be based on
  the expectation that an estimated return on
  investment (ROI) will be achieved

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Project Scope

• Documented major As Is administrative business
  processes
• Financial management
• Procurement
• Inventory control
• Human resources
• Payroll
• Benefits administration
• Budget
• Developed interfacing system model
• Developed to be system requirements for new ERP
  system

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Project Scope

• Performed fit/gap analysis to determine how well
  a new ERP system could meet the States
  administrative business needs
• Completed ROI Analysis
• Developed procurement strategy for acquiring new
  ERP software and associated implementation
  services
• Recommended a deployment strategy for
  implementing new ERP system

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Project Participation

• Study conducted over an eight-month period
  (August 2002 through March 2003)
• More than 150 meetings were conducted, involving
  approximately 750 attendees (265 individuals)
  from a wide cross-section of state government (54
  agencies)
• Developed more than 2,500 best business
  practice system requirements in twenty (20)
  functional areas
• Information was also collected from sixteen (16)
  other states that have implemented, or are in the
  process of implementing, ERP systems, and from
  the University of Tennessee, which has recently
  implemented an ERP system

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The Tennessee Approach Identify Analyze
Costs, Benefits Risks (cont.)

• Cost of New System
• Software
• Hardware
• Implementation
• Upgrades
• Ongoing Maint. Mgmt.
• Training

• Benefits/Avoided Costs
• System Savings
• Replacing current systems
• Not implementing planned systems
• Process Improvement Benefits
• Value Pocket benefits

2
1
vs.
3
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The Tennessee Approach Identify Analyze
Costs, Benefits Risks (cont.)
Information Needed
Data-gathering Approach

• Information provided by system vendor
• Subject Matter Expert (SME) experience

Cost of New System Estimated costs of
implementing, maintaining, and upgrading to a new
system
1
vs.

• System surveys
• Interviews with key staff

• System Savings Estimated savings from
• Eliminating operation, maint. and enhancement
  costs by replacing existing central
  dept./agency-specific systems
• Not implementing planned/anticipated systems

2

• Value Pocket surveys
• Interviews with appropriate process and
  functional SMEs

Process Improvement Benefits Estimated cost
savings and other benefits that a new system
would likely enable/yield
3
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The Tennessee Approach Identify Analyze
Costs, Benefits Risks (cont.)

• What Are Value Pockets?
• Value Pockets are the most likely sources of
  value (i.e., cost savings and other benefits) to
  be found in each process/functional area within
  the scope of a new system implementation.

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The Tennessee Approach Identify Analyze
Costs, Benefits Risks (cont.)

• Data Categories for Value Pockets
• Dollar-quantifiable benefits/cost savings likely
  to result from implementing a new system
  (tangible items)
• Improved process results/outcomes, for example
• Decreased price paid for goods and services
• Decreased inventory carrying costs
• Reduced/reassigned headcount (FTEs)
• Decreased data entry through self-service
  applications
• Results in reduced process-execution costs in
  many areas
• Non-dollar-quantifiable benefits/cost savings
  likely to result from implementing a new system
  (intangible items)
• In support of strategic initiative
• Compliance with a mandate
• Reduced cycle times
• Reduced risk of system failure
• Increased accuracy
• Improved usefulness

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The Tennessee Approach Identify Analyze
Costs, Benefits Risks (cont.)
Identified Value Pockets for Each Functional Area
within the Scope of the Project

• ACQUISITIONS
• Procurement
• Warehousing
• External Services

• FINANCIAL MGMT.
• General Ledger
• Budgetary Control
• Accounts Payable Accounts Receivable Cash
  Receipts
• Cash Management
• Cost Accounting
• Grant Accounting
• Project Accounting
• Cost Allocation
• Asset Management
• Travel
• CAFR

• HR / PAYROLL
• Position Control
• Basic Employee Data
• Personnel Management
• Training
• Payroll
• Employee Relations Performance Appraisal
• Recruitment Applicant Tracking
• Benefits Administration
• Compensation
• Time Reporting
• Leave Accounting
• Employee Self Service

• FINANCIAL MGMT. VALUE POCKETS
• Reduce time maintaining vendor information
• Reduce time maintaining the chart of accounts
• Reduce time responding to vendor inquiries
• Reduce mailing costs
• Increase collection of receivables

Common Database

• BUDGET DEVELOPMENT
• Appropriation Budget
• Operating Budget
• Performance Based Budget

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Our Approach Identify Analyze Costs, Benefits
Risks (cont.)
Value Pocket Components For each identified Value
Pocket in each process/functional area, we
collected

• Specific Nature and Source of the Value
• System Enabler
• Formula for Calculating the Value (i.e., Benefit
  or Cost Savings), if applicable
• Source of Value for Each Variable in the Formula

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The Tennessee Approach Identify Analyze
Costs, Benefits Risks (cont.)
Process/Functional Area Accounts Payable
Reduce the number of FTEs (and associated
compensation) spent responding to vendor
inquiries regarding payment status
Source of Value
Vendor Self-service
Enabler
of Hours Spent Responding to Vendor Inquires
Regarding Payment Status x Salary x (1
Benefits Factor) x Estimated Reduction in
Effort
Survey Interviews
Formula Source of Variables
HR
Experience of Other Organizations and STA
Estimates
FTE Full-time Equivalent
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The Tennessee Approach Prepare ROI Analysis
Report

• Develop the business case in the ROI Analysis
  Report
• Executive Summary
• Project Background and Objectives
• Key Assumptions
• Business Case Analysis Scope and Approach
• Business Case Analysis Findings and
  Recommendations
• High-level Implementation Plan

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Study Challenges

• Determining total cost of ownership over 11 year
  period not initial software and implementation
  costs only
• Lack of response from some large agencies --
  estimating the benefits and costs for these
  agencies
• Determining when savings from the ERP system
  implementation will be realized
• Quantifying the additional process improvements
  that will arise from innovation once in production

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Study Results

• Benefits/Avoided Costs
• System Savings
• Replacing current systems
• Not implementing planned systems
• Process Improvement Benefits
• Value Pocket benefits

• Cost of New System
• Software
• Hardware
• Implementation
• Upgrades
• Ongoing Maint. Mgmt.
• Training

2
1
vs.
3
134.1 million
2
1
167.8 million
3
51.8 million
Net Savings 18.1 million over 10 years
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Cost of New Systems
1

• Included cost estimates to acquire, implement,
  and maintain an ERP system over a 10-year period
• Obtained acquisition and implementation estimates
  from 5 leading vendors
• Interviewed other states
• Used prior STA ERP systems experience
• 58 of amount is to acquire and implement ERP
  conservative (high) estimate

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Systems Savings
2

• Retired/avoided systems savings
• States central administrative systems such as
• STARS (State of Tennessee Accounting Reporting
  Systems)
• TOPS (Tennessee On-line Purchasing System)
• SEIS (State Employee Information System)
• TIS (Tennessee Insurance System)
• Agency systems to enhance central systems
• Agency systems to be replaced by ERP but not done
  centrally (e.g., fleet, inventory)
• Phased - savings realized, in general, six months
  after ERP module put into production

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Process Improvement Benefits
3

• Identified 5.6 million/year in HR/Payroll value
  pockets, and 5.9 million/year in Financial
  savings
• Savings start, in general, six months after ERP
  module put into production
• Due to learning curve of new ERP system, savings
  discounted initially (75 year 1, 50 year 2, 25
  year 3)

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ERP Study Summary
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Study Results the Bottom Line

• Breakeven/payback occurs in Year 10
• Net savings over 11 year period 18.1 million
• 11-year internal rate of return 7
• Once payback is achieved in Year 10, the State is
  estimated to realize a net benefit of more than
  21 million per year from implementing an ERP
  system
• Documented numerous additional intangible
  benefits of implementing a new ERP System whose
  value is not quantifiable, is unknown, and/or
  cannot be validated

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Questions?