Facing a budget crunch, Oklahoma financed new enterprise software by tying the vendor's rewards to the system's ongoing success.
Oklahoma's administrative software was badly out of date. State officials agreed it was time to replace it with a suite of new, integrated systems to handle vital functions such as finance and human resources. But in an era of tight budgets, the state had to determine how it could meet the massive up-front cost of a major enterprise system implementation.
Oklahoma's solution was to make the vendor its business partner. After funding part of the implementation up front, the state will make further payments over time, based on the volume of business it transacts on the enterprise system. The better the system, the more state employees will use it and the more the vendor will earn. Money for the ongoing payments will come from transaction fees paid by state agencies.
"We wanted to give the vendor incentive to not just come in, sell us something and leave," said Tom Daxon, Oklahoma's director of state finance. "We wanted the vendor to have the incentive to continually upgrade, develop the system, be on the lookout for new things that could help us operate more efficiently and effectively as they become available."
Late last year, Oklahoma chose PeopleSoft 8, a Web-based enterprise system from PeopleSoft of Pleasanton, Calif. The state is implementing modules that address finance and accounting, purchasing and procurement and payroll and human resources. After the system goes live in the summer of 2003, the state expects to add more modules.
The systems Oklahoma will replace are inadequate, according to Daxon. "I can't even say the state has a real general ledger," he said.
To prepare the annual budget or respond to questions from the legislature, employees have to gather figures from disparate computer systems, plug the results into spreadsheets and massage the data. He said the procurement system in the state's Department of Central Services is so "old and brittle" that any more changes to the software could cause a breakdown.
Along with needing better software, Oklahoma wanted a system it could integrate with its new e-government portal , which debuted last year. State officials want the portal to offer a single point of access into government services, with the enterprise system as the engine for providing them. Daxon's goal is to have all agencies use the same core administrative systems so information can flow easily from one department to another and be made available in a unified, consistent way through the portal.
Oklahoma settled on the idea of transaction-based financing partly to spread its payments for the system over time. The three state agencies that led the procurement -- the Office of State Finance, the Department of Central Services and the Office of Personnel Management -- provided funding to cover the initial costs. To pay the ongoing costs, the legislature authorized the state to charge transaction fees back to the agencies.
Another reason for the novel arrangement is to make sure the top-of-the-line system the state puts in place remains top-of-the-line in the future. "One of the problems we have in state government is that often it's difficult to get the resources and expertise we need -- because you've got to pay for it -- to really maintain systems in first-class working order," Daxon said.
According to Gov. Frank Keating's budget proposal for 2003, the contract with PeopleSoft calls for seven years of consulting services and software updates, underwritten by fees state agencies will pay to use the system.
Better Software, Higher Volume
"This is a situation where the vendor comes in and does a good job of getting the basic system installed, people are happy with it, you're going to have more people using that system, and eventually using it to do more things," Daxon said.
As the vendor enhances the system, usage will climb even further. "And they stand to get a little more remuneration in return for that," he said, adding that the vendor could earn more in the long run than if the state had paid the full price for the software at the outset.
"At the same time, we're protected, because we're not paying as much up front," Daxon added. Many software implementations fail, he observed. "I certainly don't expect to have that happen here. We're off to a good start; we're certainly going to have a successful project. But when you're making these decisions, you have to consider the fact that things may go wrong."
Daxon said he does not know of any other state that has negotiated a similar arrangement with the vendor of an enterprise system. But Oklahoma has gained valuable information from Oregon, which is financing the purchase of its statewide accounting system through assessments and service charges to state agencies.
"The charge-back method is a convenient way to spread the burden over all of state government and over time, so that current programs don't have to absorb a large, one-time hit to the state budget," said John Radford, Oregon's state controller.
Oklahoma is still determining the transaction fees it will charge and working out the mechanisms for assessing them. Each of Oklahoma's state agencies will receive an appropriation to cover the fees. As a result, much of the cost of the new system will come directly from these agencies' budgets, rather than from the budgets of the central service agencies.
Besides providing revenues to implement, maintain and upgrade the system from year to year, the charge backs will help the state better understand how to allocate costs to particular programs. This will be especially helpful when billing the federal government for subsidized programs, according to the state's budget policy statement. Today, when the state applies for reimbursements, it allocates the cost of operating the central service agencies and their computer systems to the state agencies on a proportional basis. "By separately billing the new system costs, agencies will be able to charge these costs directly to the related programs and, in many cases, realize greater reimbursements to the state," the budget policy statement said.
Fees Encourage Discipline
To some degree, the charge backs could also spur agency employees to work more efficiently. "For instance, somebody posts a bunch of entries, they were sloppy, and they find out they were wrong and they have to go back and correct them all," Daxon said. "If that costs them a couple of hundred bucks, it's going to be at least a blip on the radar screen that we need to make sure that what we send over there is correct when we send it."
The charge per transaction will be small enough that it won't force major changes. However, Daxon said, "I'm hopeful that at the margins we'll see some improvements in the efficiency with which we use these systems."
PeopleSoft's Web-based architecture will save Oklahoma money as well, since the state won't need to install and maintain any software on client machines, said Kimberly Williams, the company's director of marketing and industry strategy, education and government. Also, "you enjoy the ability to deploy this in a very dispersed environment," since employees anywhere in the state can access the system through its browser-based interface.
Savings aside, the big advantage of Oklahoma's financing approach is that it removes a major obstacle to innovation. Forging a partnership with its vendor, the state now has the wherewithal to achieve its larger goal -- providing better service to constituents online.
"I don't think we yet fully understand the potential for what we have here, marrying the portal and the core systems," Daxon said. "I think we're going to have agencies able to do things that we don't even realize we can do today."