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State of KansasState of Kansas

Financial Management SystemFinancial Management SystemNeeds Assessment Study UpdateNeeds Assessment Study Update

Briefing for Agency CFOsBriefing for Agency CFOs

October 3, 2006October 3, 2006

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AgendaAgenda Welcome and Introductions CFO Representation Project Overview Project Scope Key Activities Business Case Analysis Contact Information Questions

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CFO RepresentationCFO RepresentationStakeholder AgenciesStakeholder Agencies

Sixteen agencies have been identified as “stakeholder agencies”• Adjutant General• Department on Aging• Department of Agriculture• Department of Administration• Department of Health and Environment• Department of Transportation• Highway Patrol• Department of Labor• Department of Commerce• Juvenile Justice Authority• Department of Corrections• Department of Revenue• Social and Rehabilitation Services• Kansas Health Policy Authority• Judicial Branch• Department of Wildlife and Parks

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STA ExperienceSTA ExperienceStatewide ERP/eProcurement SystemsStatewide ERP/eProcurement Systems

State of ArkansasState of Nebraska

State of TexasState of Nevada

State of Texas

State of Tennessee

State of Wisconsin

Commonwealth of Kentucky State of Minnesota

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Enterprise Resource Planning (ERP) – A comprehensive suite of integrated modules delivered by a single software vendor that provides end-to-end support for statewide administrative services

For purposes of this study, we will use the term ‘Financial Management System’ (FMS) rather than ERP since the scope of the project includes financials and procurement only – due to current / future investment in the SHARP system

FMS is a proposed solution that provides functionality similar to STARS, SOKI, Central Setoff System, and other agency administrative systems, but in a fully integrated manner

Project OverviewProject OverviewWhat is ERP? FMS?What is ERP? FMS?

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Project Overview Project Overview Why FMS?Why FMS?

Satisfy the needs of the agencies• Eliminate the proliferation of stand-alone agency systems• Avoid the cost associated with new agency administrative

systems • Avoid the cost associated with maintenance/upgrades of

current systems

Significantly improve the quality, quantity, and timeliness of information • Effective decision-making• Efficient and accurate research capabilities • Enhanced ad hoc reporting and inquiry functionality

Streamline processing and control of electronic “documents” through workflow management• Facilitates document routing, review and approval

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Project Overview Project Overview Why FMS?Why FMS?

Streamline and simplify State’s business processes • Financial• Budgeting• Procurement• Other administrative operations

Improve operational efficiency • Commercially-available FMS systems include many features

representing best management practices

Support Web-enabled self-service• State employees• Vendors conducting business with the State

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Project Overview Project Overview Why FMS?Why FMS?

Replace existing disparate systems• Costly to maintain• Difficult to administer

Automate and integrate• State’s financial accounting, procurement, asset management,

and other administrative business processes within a single database

Provide single point of entry• Eliminate duplicate points of data entry• Eliminate duplicate databases• Simplify reconciliation

Reduce/eliminate paper documents• Reduce paper and handling costs (e.g., vouchers) • Simplify record retention and audit compliance

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CORE FINANCIAL

• General Ledger / Budgetary Control

• Accounts Payable• Accounts Receivable

& Cash Receipting• Cash Management• Cost Allocation• Grant Accounting• Project Accounting• Asset Management

PROCUREMENT

• Solicitations (RFx)• Catalog Procurement• Reverse Auctions• Inventory Management• Commodity Management• Vendor ManagementHR / PAYROLL

• Automated Interfaces to/from SHARP

BUDGET DEVELOPMENT INTEGRATION

• Appropriation Budget

Common Database

Project OverviewProject OverviewProposed FMS functionality for considerationProposed FMS functionality for consideration

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Key Activities Key Activities FMS Needs AssessmentFMS Needs Assessment

Update the system requirements for a new integrated FMS

Update the business case analysis associated with implementing a new FMS

Determine whether there is a compelling business case for procuring/implementing an integrated statewide FMS

Submit recommendations regarding:• Organizational best practices• Implementation best practices

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Business Case Analysis Report

Sept

Oct Nov Dec

Project Start-

UpValidate the

Business Case

FMS Needs Assessment Update

Key Deliverables

Key Activities Key Activities TimelineTimeline

Validate Functional / Technical

Requirements

Updated Needs Assessment

Organization / Implementation Best Practices

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Functional ComponentsProcurementGrants / ProjectsCash ManagementGeneral Ledger / Cost Allocation / Activity Based

CostingAccounts Payable / Accounts ReceivableInventory / Asset ManagementBudget Development / IntegrationHR / Payroll IntegrationData Warehousing / ReportingGeneral and Technical

Project ScopeProject ScopeUpdate/Validate FMS RequirementsUpdate/Validate FMS Requirements

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Requirements from 2001 Needs

Assessment Study

STA Requirements

Toolkit

Baseline Requirements

Draft Requirements

Final Requirements

Focus Group

End User Community

Functional and Technical Requirements Development Process

Project Team

Project ScopeProject ScopeUpdate / Validate FMS RequirementsUpdate / Validate FMS Requirements

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Business Case AnalysisBusiness Case AnalysisCosts versus Benefits Costs versus Benefits

FMS Costs • Software• Hardware• Implementation• Upgrades• Ongoing Maint. & Mgmt.• Training

FMS Benefits/Avoided Costs

System Savings• Replacing current systems• Not implementing planned

systemsProcess-Improvement Benefits• Value Pocket benefits

vs.

1 2

3

Standard financial analyses will be performed using dollar-quantifiable costs and benefits: - NPV (Net Present Value) - IRR (Internal Rate of Return) - Payback Period

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Business Case AnalysisBusiness Case Analysis Financial AnalysisFinancial Analysis

SUMMARY CASH-FLOW ANALYSIS($ thousands)

0 1 2 3 4 5 6 7 8 9 10

ERP SYSTEM COSTS Total

Project Labor (40,000) (30,000) (10,000)Hardware (5,000) (5,000)Software (6,000) (6,000)Facilities (1,000) (500) (500)Other (3,000) (2,000) (1,000)

Initial Cash Outflows (55,000) (43,500) (11,500) 0 0 0 0 0 0 0 0 0

Labor to Support New System (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500) (3,500)Software Maintenance (600) (600) (600) (600) (600) (600) (600) (600) (600) (600)Hardware Maintenance (400) (400) (400) (400) (400) (400) (400) (400) (400) (400)Warranty and Service Contracts (54) (54) (54) (54) (54) (54) (54) (54) (54) (54)

Ongoing Cash Outflows 0 (4,554) (4,554) (4,554) (4,554) (4,554) (4,554) (4,554) (4,554) (4,554) (4,554)

TOTAL ERP SYSTEM COSTS (43,500) (16,054) (4,554) (4,554) (4,554) (4,554) (4,554) (4,554) (4,554) (4,554) (4,554)

BENEFITS / AVOIDED COSTSAvoid costs associated w/ implementing new systems 11,000 2,000 5,000Other one-time benefits/savings 750

One-Time Benefits 0 11,750 2,000 5,000 0 0 0 0 0 0 0

Avoid costs associated w/ operating avoided new systems 4,400 6,000 8,000 9,000 8,000 8,000 8,000 9,000 8,000Eliminate operating costs of retired systems 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700 1,700Reduce FTEs required to process invoices 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000Reduce inventory carrying cost 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000 3,000Reduce FTEs required to develop plans and budgets 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000Generate revenue from eProcurement 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000Reduce FTEs required to process POs 2,844 2,844 2,844 2,844 2,844 2,844 2,844 2,844 2,844All Other 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500

Ongoing Benefits 0 0 23,444 25,044 27,044 28,044 27,044 27,044 27,044 28,044 27,044

TOTAL BENEFITS / AVOIDED COSTS 0 11,750 25,444 30,044 27,044 28,044 27,044 27,044 27,044 28,044 27,044

NET CASH-FLOW ANALYSISNet Cash Flow (NCF) (43,500) (4,304) 20,890 25,490 22,490 23,490 22,490 22,490 22,490 23,490 22,490Cumulative NCF (note Payback) (43,500) (47,804) (26,914) (1,424) 21,066 44,556 67,046 89,536 112,026 135,516 158,006

PaybackWeighted Avg. Cost of Capital (WACC) 7.5%Net Present Value (NPV) 88,197Internal Rate of Return (IRR) -35.47% -1.22% 13.42% 21.91% 26.71% 29.70% 31.63% 32.97% 33.84%

Years

Illustrative1

2

3

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Business Case Analysis Business Case Analysis Information We Need From AgenciesInformation We Need From Agencies

Value Pocket Survey Interviews with State employees

who are process/functional SMEs

Process-Improvement Benefits: Estimated cost savings and other benefits that an FMS system would likely enable/yield

Agency System Survey Interviews with statewide

administrative systems SMEs

System Savings: Estimated cost savings from:

Replacing existing statewide & agency-specific systems

Not implementing planned/anticipated systems

Information provided by vendors and other statewide ERP projects

STA experience

FMS Costs: Estimated costs of implementing, maintaining, and upgrading

Information Needed

Data-Gathering Approach

SMEs = Subject Matter Experts

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1

3

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Business Case Analysis Business Case Analysis Agency System SurveyAgency System Survey

Walk-through of Agency System Survey

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Contacts for Agency System SurveyContacts for Agency System Survey If you have any questions whatsoever regarding

this survey, please do not hesitate to contact:• Chip Julian at:

– chip.julian@staconsulting.net– (281) 794-1391 mobile

• Mitt Salvaggio at:– mitt.salvaggio@staconsulting.net– (512) 797-7338 mobile

• Please complete and return the survey via e-mail attachment to Chip Julian no later than the close of business on October 18, 2006

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Business Case AnalysisBusiness Case AnalysisCost versus Benefits Cost versus Benefits

FMS Costs • Software• Hardware• Implementation• Upgrades• Ongoing Maint. & Mgmt.• Training

FMS Benefits/Avoided Costs

System Savings• Replacing current systems• Not implementing planned

systemsProcess-Improvement Benefits• Value Pocket benefits

vs.

1 2

3

Standard financial analyses will be performed using dollar-quantifiable costs and benefits: - NPV (Net Present Value) - IRR (Internal Rate of Return) - Payback Period

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Business Case Analysis Business Case Analysis What Are Value PocketsWhat Are Value Pockets©©??

Value Pockets • Most likely sources of significant value (i.e.,

cost savings and other benefits) to be found in each process/functional area within the scope of an FMS implementation

• Provide quantified justification STA’s proprietary formulas and calculations

• Used to quantify process-improvement benefits obtained through the implementation of a statewide FMS

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Business Case Analysis Business Case Analysis Value PocketValue Pocket©© Categories Categories

Dollar-Quantifiable System Benefits/Cost Savings (Tangible Items)• Improved Process Outcomes/Results, for example:

– Decreased cost of goods and services– Decreased inventory carrying costs

• Reduced Cost of Executing the Process. For example, reassign/reduce headcount (FTEs) by:

– Reducing the number of FTEs required to enter data into systems:• Avoid entering the same data/transactions into multiple systems• Avoid entering data on a form that is then entered into a system (instead of

entering into system directly)– Reducing the number of FTEs require to generate needed information by no longer

being required to obtain and consolidate data from multiple sources (also results in faster and better decision making)

– Reducing the number of FTEs required to reconcile data among multiple systems– Reducing the number of FTEs required to track transactions spread over multiple

systems (e.g., avoid keeping tracking data in spreadsheets, using paper logs, etc.)

Non-Dollar-Quantifiable System Benefits/Cost Savings (Intangible Items)• Reduced Cycle Times• In Support of Strategic Initiative(s)• Increased Accuracy• Improved Usefulness of Information

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CORE FINANCIAL

• General Ledger / Budgetary Control

• Accounts Payable• Accounts Receivable

& Cash Receipting• Cash Management• Cost Allocation• Grant Accounting• Project Accounting• Asset Management

PROCUREMENT

• Solicitations (RFx)• Catalog Procurement• Reverse Auctions• Inventory Management• Commodity Management• Vendor ManagementHR / PAYROLL

• Automated Interfaces to/from SHARP

BUDGET DEVELOPMENT

• Appropriation Budget

Common Database

Business Case Analysis Business Case Analysis Examples ofExamples of Value PocketsValue Pockets©©

PROCUREMENT VALUE POCKETS• Reduce cost of goods and services• Reduce cost of conducting solicitations• Reduce cost to maintain vendor file• Reduce inventory carrying costs• Reduce inventory reorder cost

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CORE FINANCIAL

• General Ledger / Budgetary Control

• Accounts Payable• Accounts Receivable

& Cash Receipting• Cash Management• Cost Allocation• Grant Accounting• Project Accounting• Asset Management

PROCUREMENT

• Solicitations (RFx)• Catalog Procurement• Reverse Auctions• Inventory Management• Commodity Management• Vendor ManagementHR / PAYROLL

• Automated Interfaces to/from SHARP

BUDGET DEVELOPMENT

• Appropriation Budget

Common Database

Business Case Analysis Business Case Analysis Examples ofExamples of Value PocketsValue Pockets©©

FINANCIAL VALUE POCKETS • Increased compliance with State prompt payment law (interest savings)

• Increase collection of receivables • Reduce time responding to vendor inquiries• Reduce time maintaining the chart of accounts

• Reduce mailing costs

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Specific Nature and Source of the Value FMS Enabler Formula for Calculating the Value (i.e., Benefit or

Cost Savings), if applicable Source of Value for Each Variable in the Formula

Business Case Analysis Business Case Analysis Value PocketValue Pocket©© Components Components

For each Value Pocket in each process/functional area, we identify:

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Formula & Source for Values of Variables

Integrated FMS functionality, including eProcurement functionality, would enable the State to better leverage its purchasing power via consolidated reporting and reduced maverick spend

FMS Enabler

Reduce the prices the State pays for goods and services

Source of Value

Relevant State spend

x Savings factor

Division of Purchases

Business Case AnalysisBusiness Case AnalysisValue PocketValue Pocket©© Components – Example Components – Example

Experience of Other Organizations

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Questions?Questions?