Finance launches investigation into ERP software costs

By Julian Bajkowski

The Department of Finance has put some of the world’s biggest business software companies on notice that their lucrative contracts will soon be the subject to a sweeping review as the federal government seeks to extract better value from so-called enterprise resource management (ERP) systems.

Just a week after the election of a new Coalition government, technology vendors have been notified that an “investigation into optimising Enterprise Resource Planning (ERP) systems across the public service” will be put in train, with Finance to provide advice to the government in a report in 2015.

Finance documents provided to industry plainly say that it the department wants to “drive efficiencies to support a reduction in the net cost of ERP solutions to the Commonwealth”  words that strongly indicate the government is no longer prepared to maintain spending at present levels.

A previous assessment of desktop software pricing for government by Finance in August 2012 found that products from Microsoft were 50 per cent more expensive in Australia than in the US or Singapore, even after volume discounts.

So-called ERP platforms are essentially the core administrative software systems that underpin accounting, financials, payroll and human resources functions across government departments and agencies and frequently cost well into the hundreds of millions to procure and maintain.

The systems are crucial to delivering transparency over how money is being spent across agencies and have been a long term source of frustration when figures do not tally or need to be corrected at Budget estimates.

“The devolved nature of the public service has resulted in Commonwealth entities, over time, implementing various, often customised ERP systems or systems for key functions. This has afforded Commonwealth entities the opportunity to pursue systems and processes that best meet their needs. However the fragmented approach may also have reduced the overall efficiency and effectiveness of government operations,” the paper on the investigation from Finance said.

“In a fiscally constrained environment, government investment must be smarter, and more innovative. This Project is an opportunity to undertake a whole-of-government analysis of ERP systems, to determine a strategic approach for the medium to long term.”

Two of the biggest software vendors to the government sure to take an interest in the investigation are German company SAP and US-based Oracle that have essentially taken out the lion’s share of deals in big departments and agencies   including Defence, Human Services, Tax, Immigration and Education Employment and Workplace Relations.

A well-known problem in terms of getting best value from ERP systems is that many departments, including Defence, use different customised products for core functions like payroll and finance creating siloed repositories of information that is difficult and costly to manage or pull into other systems.

Another issue is that big ERP system builds and subsequent upgrades can often take so long to procure, build, deliver and operate that they can be out of date or almost obsolete by the time they start working.

Now Finance is wants to run the ruler over not only what is running in departments, but importantly the government business processes and rules that necessarily dictate how such systems are built.

“Finance recognises the complexities, specialities, and constraints of Commonwealth entity requirements for ERP operations. However, Finance sees the Project as an opportunity for the public service, to establish a transformational, progressive approach to government business architecture,” the notice said.

One of the biggest sources of profitability from the government for ERP software vendors is so-called ‘maintenance revenue’ which is normally charged as a percentage of the initial procurement price on an annualised basis.

While the maintenance fees ostensibly cover the cost of ongoing tweaks and fixes to products, like security patches, in reality they have become a form of annualised rental on top of the initial purchase price   with any real modifications normally attracting additional systems development fees.

But the level of maintenance fees, even for common commercial products like Microsoft’s Exchange suite, has prompted a fightback from big buyers like the Commonwealth Bank of Australia that are increasingly demanding utility-style pricing for software that is based on its actual usage rather than an annual fee that pays for dormant products.

Utility pricing is most commonly available through cloud computing deployments where software users can dial up products as they need from remote datacentres without needing to incur the cost of deploying local servers.

Now, as both the federal government and state governments in Australia progressively move to cloud infrastructure, enterprise software companies like SAP and Oracle look like they will be required to come along for the ride and take a haircut, or potentially lose business.

Indicative timings for industry consultation and input into Finance’s ERP investigation show that December 2013 has been marked as a prospective completion date for an environmental scan, research and industry consultation.

However that date will almost certainly be influenced by changes in the machinery of government and new administrative orders that are yet to be issued.

Even so, there is plenty for industry to mull over before Christmas.

Specifically, Finance has asked industry to consider and report back on “options for ERP solutions” that:

• represent the Commonwealth’s interest;
• reflect innovation;
• improve business processes of Commonwealth entities;
• establish an appropriate allocation of risk between vendors and the Commonwealth;
• support the budget management needs of Commonwealth entities; and
• drive efficiencies to support a reduction in the net cost of ERP solutions to the Commonwealth.

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2 thoughts on “Finance launches investigation into ERP software costs

  1. Part of the issue within this initiative is the need to properly define what each department needs at fundamental level. Once this is done the ‘characteristics’ or variations of each department can be considered. I expect that 95% of the fundamentals will be exactly the same for each department with the other 5% being variations from the norm that are best described as ‘departmental characteristics’.

    The very name of “Options for ERP Solutions” is actually at the back end of defining what is needed. If the software industry, to whom this review seems directed, is involved without being provided with a clear Statement of Requirement, then Petronus Arbiter will out – nothing will change.

    The review at this point is probably better dealt with by an external 3rd party with no ties at all to software industry to identify what each department needs and ultimately document and define the requirement at the whole of government level. At this point software industry should become involved – as tenderers pitching to meet the whole requirement. Such an approach will establish the correct foundation stones for a successful program and worthwhile review. Anything else is putting the cart before the horse.

  2. Its typical for larger companies to look at going with the international ERP software companies due to the thought that they are most ideally suited due to mass appeal.

    The reality is though, Australia has it’s own ERP Software companies who have provided SME’s ERP for close to 30 years like . This company has provided ERP solutions that can be customised to the needs of the Business – far less than an Oracle or a Microsoft product ever could. The development house is Australia based and the investment being made helps provide Australian jobs.

    If the report finds anything, it should reflect on what is locally available, and if that company can customise and provide the services required compared to over the top SAP systems.

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