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ITEM EX6

EXECUTIVE – 7 SEPTEMBER 2004

FUTURE DEVELOPMENT OF THE SAP MANAGEMENT INFORMATION SYSTEM

Report by the Director of Resources

Introduction

1. The initial deployment of the County Council’s Management Information System (SAP) has fallen short of expectations in terms of financial management, reporting and support for change initiatives. The shortcomings have been documented in a review recently concluded by IBM. It is now essential that a remedial programme is undertaken to correct these problems and to extend the scope of SAP into operational areas that can improve management information and achieve operational efficiencies.
2. This report sets out the proposed way forward to undertake the necessary improvements. It will require an additional £1m investment this financial year above existing budgeted resources and, if the programme is carried forward for the subsequent three years, will require additional investment of £2m per annum in each of those three years. The proposed programme will be the centre of a substantial change initiative within the Authority and bring with it the potential for substantial savings, estimated at between £1m and £2m per annum when completed. This approach is consistent with the efficiency savings strategy agreed by the Best Value & Audit Committee.

Background

3. The decision to implement SAP and to use ITnet as our partner was taken by the former Strategy & Resources Committee in June 2001.
4. The SAP financial and payroll software modules went live within the Authority in November 2002. This go live operation was the culmination of a multi year project by a cross service development team, spearheaded by a management team from Finance.
5. Financially, go live represented a financial commitment in excess of £18m at the time to be paid over a 10 year contract span with our prime SAP support and integration organisation, ITnet Plc from Birmingham. ITnet is one of the larger IT outsourcing groups working in the UK public sector and was seen as a safe pair of hands for the development.
6. Operationally go live represented a commitment to SAP – one of the leading financial and human resource Enterprise Resource Planning (ERP) systems in both the public and private sectors. The SAP system replaced both in house and contracted out technology that was more than two decades old.
7. The Council saw go live as the dawn of a new age in accountancy, financial management, budgeting, payroll administration, human resource administration, procurement and a solution to many of the IEG requirements handed down from central government. SAP was to be the answer to a range of management issues within the authority.
8. Almost two years after go live, there have been many positive developments; but also there remains much that now requires urgent attention.

Accomplishments

9. The original SAP project team launched the SAP financial, payroll and parts of the HR software modules. This is a major accomplishment as SAP is a very large and comprehensive package. They also accomplished this more or less to time and to budget. The staff involved in this project should be congratulated on the success that they enjoyed, given the resources available to them.
10. The payroll modules are working and calculate a wide range of pay regimes for the thousands of OCC employees and the system does so effectively.
11. The HR modules, even though only partially deployed, provide some segments of OCC with more and better information than was previously available.

Challenges

12. Many areas of the development did not and have not met expectations. In some cases the aspirations for the new package were unrealistic, in others the goals were simply not met:

• Financial reporting with the OCC implementation is still poor and probably less effective than that available with the previous system.
• Coding structures within SAP were devised by each directorate, service and budgeting unit with a lack of central guidance. The lack of uniformity is creates major problems for reporting but also for obtaining good quality information on how the authority uses its financial resources.
• Payroll calculations and payments with SAP are thought to be an improvement but the administration for payroll is devolved into multiple regimes within the authority and within the HR realm. This is seen as both inefficient and not optimal.
• No effective budgeting regime has been created.
• No effective monthly reporting regime has been created.
• Almost no controlled procurement is done through SAP.
• Debtor management was never fully implemented.
• SAP ownership, support and governance was not clarified and structured. In many cases, the same overworked and dedicated staff do their day job and do SAP support and do SAP development.
• Internal SAP support is not structured with appropriate call support, escalation, change management and incident recording.

13. To gain a perspective on SAP, what has been accomplished, what needs to be done, and how we should move forward, a short contract was let to IBM Business Consultancy Services to provide a Gap Analysis. (This was agreed by the Executive on 4 May 2004.) The analysis has been done and is available for inspection in the Members’ Resource Centre. IBM Business Consultancy Services have given two presentations of their work: one to the Executive and a second session on 19^th August to which all members were invited along with senior managers from across the Council.
14. The outcome of the analysis was to confirm the points made above: attainments should not be over looked, but much remains to be done. SAP, a competent choice as an ERP financial support package for the Authority, is not providing the desired information, financial management and enterprise facilities. SAP is capable of providing a wide range of services for the Authority; OCC is receiving only modest value from the implementation.
15. SAP cannot be left in its current state without further development; it is the key financial management tool within the authority. As long as the tool is broken, it will be very difficult to move forward with the change agenda or to gain the financial controls outlined in the RSM Robson Rhodes report.
16. Developing SAP will require significant investment and qualified SAP technical input. Internal staff are dedicated and have produced good outcomes with the resources available to them, but they do not have the broader prospective and multi-year experience necessary to manage the required SAP development programme going forward.
17. SAP offers the very real prospect of significant operational savings and significantly improved financial management. To gain these benefits, major improvements must be made in the system.
18. Several points were highlighted as to why the original promise of SAP remains unfulfilled:

• Insufficient original investment. Good faith attempts were made to save the Authority costs. In retrospect, this was a mistake.
• Unclear governance and ownership of the original project. Those persons who stepped forward to own the project were too far down in the organisation to deliver the structure and efficiencies required.
• Unrealistic expectations. The view was that SAP could do the proverbial everything, rather than a more realistic view that OCC could do much for itself with the properly implemented support of SAP technology.
• Too few SAP qualified persons were engaged in the project; too much was demanded of in house staff who did not have sufficient training, experience and support.

19. SAP has been and is being successfully introduced by other authorities in the UK. Many of the other SAP implementations are also experiencing challenges and set backs owing to the comprehensive nature of SAP and the complexity of handling large scale change programmes. It is a fair statement, however, that the OCC implementation of SAP is as challenged as any other; we have more difficulties than most. This may reflect the fact that we implemented relatively early. It almost certainly reflects the fact that we did not invest sufficient resources into the project.

Objectives

20. Fixing SAP is paramount. It is the key financial and ERP system in house. Moving to another technology is not a reasonable financial or technological decision (as IBM Business Consultancy Services confirm). We must make SAP work and work well. With this is mind, a project to revitalise SAP has been developed.
21. The SAP Revitalisation Project addresses the shortcomings that have been learned from the original project. Specifically it addresses:

• Governance at the highest level.
• Realistic investment levels.
• Realistic objectives.
• Deployment of SAP qualified specialists to work alongside our dedicated in house resources.
• Targeting of fundamental financial requirements – coding, reporting and financial processes - as the first phase.
• Targeting of realistic efficiency and modernisation developments – HR extensions, eProcurement and Management Information – as the second phase.
• Implementation of a dedicated SAP services desk, incident management, change management procedures, call tracking and escalation.
• A unified approach to development – vetting, prioritisation, technical architectural ownership, tracking and implementation.

22. This proposal now being made to improve SAP for OCC is not unusual in the industry. It is a common and proven approach to ERP development.

Project Definition

23. The project is defined as two phases, running in parallel but with different time lines.

• Rectification of the coding structure in SAP.
• Development of standard and effective reporting; distribution of live monthly cost centre reports.
• Deployment of standardised budgeting.
• Creation of a sustainable SAP support arrangement, independent of line staff with full duties elsewhere.
• Creation of a SAP development authority that will focus and administer SAP development going forward.
• Analysis of the options for meeting the needs of schools. Development of a business case for the use of SAP in schools, and, if the results recommend SAP, the development of a comprehensive proposal for the rollout of SAP into the OCC school system.

• Deployment of effective purchase orders and eProcurement
• Consolidation of payroll outside of HR and deployment of a unified administration.
• Deployment of Employee Self Service (ESS) modules in SAP to allow each staff member controlled access to and ability to change pertinent information.
• Deployment of the Manager Self Service (MSS) modules to allow cost centre managers access to pertinent information.
• Given the business case for SAP in schools in proven in the preliminary work, the actual rollout to schools would take place as part of Phase Two.

24. Several other aspects of the project represent significant changes:

• The project will accept ownership and governance of the SAP system and development. It will focus and coordinate all SAP development going forward.
• Additionally the project will own the processes, procedures and improvement of all subsidiary systems that relate to and interface to the SAP implementation. This will provide for the first time a unified change authority within OCC that is responsible for the full range of financial and related process and procedures – a development in line with the RSM Robson Rhodes report recommendations.
• It will deploy a unified accountancy and reporting system as determined by the Head of Finance
• It will be administered by a Steering Group comprised of senior representatives from each Directorate and chaired by either a member of CCMT or the Executive.
• It will allow the SAP development, a development that has much wider reach than just financial systems, to be directed by an authority wide group. It will not be an ICT project.
• The progress of the project will be reviewed on a three monthly basis. Should the project not be running as required, shortcomings can be addressed.
• Financial BPR will be centralised in the project group, bringing together the delivery of the system assets, business process engineering and training in an integrated development.

25. The most efficient operational structure moving forward could be an internal shared services centre. Back office shared service centres are now being set up by a number of local authorities to handle high volume transactions such as payroll data administration, eProcurement, procure to pay, financial reporting, and invoice processing. The benefits of a shared service centre seem quick attractive on first inspection. A significant element of the work within the first six months of the project will be to look further at the setup of a shared centre for OCC. Given a positive result from the research, a proposal could be brought forward in Spring 2005 to include the elements of a shared service centre within the scope of the project development. This decision is seen more as a way forward. Any additional costs of setting up the centre would need to be met directly from the savings that it would create.

Schools SAP

26. The requirement for financial support in schools mirrors that of the Authority as a whole. The delivery of a supportable and appropriate SAP schools’ module will be an integral part of the project. To assure that the special requirements of schools are met, a stream leader will be appointed to be the lead officer for schools development and will be responsible for a successful outcome. The development of a business case for the use of SAP in schools will be one of the first deliverables from the work stream. Provided that the business case is positive, then a user requirements catalogue and associated product specification will be developed, culminating in a plan to rollout SAP to all participating schools in the Authority.

Composition of the Project Team

27. A tender is now being developed to recruit a business partner to manage and structure the project. The basic outline of the project team will look like this, supplemented by internal and external staff.

Phase One:

• Financial Coding and Budgeting Stream Leader (SL)
• Financial Reporting SL
• Financial Procedures and Policies SL
• Financial Interfaces SL
• S&HC Related Financial SL
• Schools Requirements SL
• Shared Services Centre Investigation SL
• Training SL

• eProcurement / Purchase to Pay SL
• Employee Self Service/Manager Self Service SL
• Management Reporting SL
• HR Extensions SL

Support Development

• SAP Service Desk Development SL

28. The proposed additional investment in 2004/05 is £1m. This sum will be combined with the sums already committed for SAP development and support, to fund the build up of the project team and the delivery of Phase One and (as noted in the July Financial Monitoring report) will require a supplementary estimate.
29. Supplemental investment in subsequent years will be £2m per annum for a minimum of 3 years to continue the project into Phase Two. Since this would require ongoing financial provision it would be subject to the Council’s agreement in setting the budget for 2005/06 and would not proceed unless such agreement was forthcoming. The strategy set out above assumes that the proposals for Phase Two will come forward for consideration by the Executive in the first instance and then by Council.
30. The total additional investment for the development as outlined is therefore £7m up to 2007/08.
31. The investment estimate for the project is based on the recruitment of individuals necessary to do the development work and to lead the teams necessary to install the changes. Longer term investment, beyond the scope addressed here, will need to be funded by savings achieved in the early phases of the project.

Potential for Savings

32. IBM Business Consultancy Services have had experience of implementing SAP in other local authorities. They estimate that savings of £2m a year are possible based on their experiences at other local authorities.. Their report provides further details. They have stressed that they have taken a cautious approach to these figures.
33. As SAP is the key support system for business process re-engineering in the authority’s financial and HR processes, rectifying the SAP installation is essential to a wide range of efficiency measures. Without SAP rectification the ability to achieve meaningful efficiencies would be substantially reduced.

Team Structure

34. Currently estimates are that 30 persons will be dedicated to the project. In rough numbers, approximately 10 of these posts will be represented by internal transfers to the project of staff who are currently working with SAP, approximately 10 posts will be permanent new hires that will be employed for support, business analysis and development. The remaining 10 will be contract specialists to help with the rollout of individual SAP modules. The contract staff will be phased out at the end of the project.
35. In the project definition section, a Programme Manager and 12 work stream leaders were identified. Every attempt will be made to use existing staff in these key positions however, a majority of these key positions may need to be provided by the business partner identified as the outcome of the tendering for SAP support process mentioned earlier. (At the end of the project it is hoped that all support services for SAP will have been internalised through the training of existing staff or the recruitment of trained staff, and, that the dependency on external contractors will have been reduced to an absolute minimum.)
36. Having established the project cadre, additional support staff will be provided from internal and external sources. In general it is believed that each work stream should be comprised of two persons. An additional person will be required for project administration and at least six persons are likely to be retained for support positions. Sufficient training resources already exist in house.

• It is unlikely that all 12 work streams will be fully active for the entire life of the project. Some of the Phase One modules will close out in the first year. Some of the Phase Two modules cannot really start until Phase One has been completed. Average FTE commitment to the project will average between 22 and 24 persons.
• The Programme Manager is key to the overall development. He/she will lead the overall project, reporting to the Steering Committee. A key factor in the choice of a SAP support business partner will be the availability of a SAP qualified programme manager of sufficient calibre to lead this engagement.
• As the majority of costs associated with the project will be staff costs, the numbers employed and the speed of the Phase Two development will be adjusted to assure that the project remains within its financial limitations. Savings found early in the project could be used to accelerate the change process and subsequent SAP developments.
• Housing for the project team will be at Clarendon House in Oxford, adjacent to the ICT Services Unit. ICT Services will provide the technical support for the staff involved.
• The new SAP Service Desk will share the same technical facilities, though probably not the same staffing resources, as the existing Schools and ICT Service Desks.

37. A support team will be assembled within the project that will continue to provide support for SAP after the project has terminated.

• Dedicated support desk with a call administration system linked to both internal ICT and to our external contract support organisation.
• The SAP Service Desk will be organised according to industry best practice guidelines.
• Dedicated support staff for each of the major modules deployed
• Change Management.
• Development coordination.

38. The Executive is RECOMMENDED to:

JOHN JACKSON
Director of Resources

Background papers: IBM Gap Analysis

Contact officer: Stephan Conaway Head of ICT 01865 815590.

August 2004

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