Innovation and Efficiency

Beyond traditional ROI in the public sector

Simon Etherington, SAP’s director and general manager for public services, looks at “public ROI” - measuring not only the financial, but also the social and political value of IT investments.

The Government has a unique challenge which is not faced in the commercial sector. It must preserve fiscal stability while encouraging public involvement; deliver social programmes; enhance the health and safety of constituents; promote sustainable development; build consensus; manage natural, cultural, and historic resources; and plan for the future. Furthermore, the government has to deliver economic, social and political value to a wide variety of stakeholders, including the public, businesses, elected officials, regulatory agencies and other governments, to name but a few.

More than ever, the government is leveraging information technology to help it address these varied challenges and meet the needs of its diverse stakeholders. Concurrently, it is seeking ways to justify and prioritise these IT expenditures. The Government also wants to measure IT performance as a means to build public trust and maximise public value. In the commercial sector, this corresponds to measuring “return on investment”, or ROI.

The need for multi-dimensional ROI analysis in the public sector

Historical attempts at applying ROI measurement to IT expenditures in the public sector involved financial based quantitative methods from the commercial sector that calculate cost avoidance or cost benefit analyses. Since the Government is a not-for-profit organisation, applying only financial ROI measurements is limiting – and does not present the full picture of value that the Government delivers. ROI measurements in the public sector must include both the tangible and intangible impact of Government IT spending.

In traditional cost benefit analysis, tangible financial benefits might be easily calculated, but some intangible costs might be overlooked. For example, a centralised Government procurement across multiple agencies in a single marketplace generates productivity benefits for the Government and some vendors. However, local and small suppliers incur additional technology costs to join these marketplaces, which may make it difficult for them to join in the bidding process, thus impacting their business. In the end, this has a negative value for these business stakeholders in the community.

Governments worldwide recognise the limitations of traditional cost benefit analysis, and according to a recent Economist study, nearly 70 percent of almost 800 public sector executives worldwide will consider both financial and social criteria in assessing IT investments in the next five years - and make that ROI transparent to the public and stakeholders.

This confirms a global trend of governments to show effectiveness across multiple dimensions of ROI – beyond traditional, quantifiable financial metrics, to include measurement of how IT impacts the social and political landscape of government programmes. An initial challenge facing the public sector is reaching consensus on the definition of social and political ROI. Simply put, these are qualitative, indirect, and intangible benefits (or consequences) of IT expenditures. Often, social and political ROI are intertwined. In many cases, social and political ROI supersede financial ROI, particularly during election cycles. Examples of positive social ROI include improved education, increased adoption of technology, lowered unemployment, and reduced crime. Examples of positive political ROI include improved public trust, positive media coverage, or any political “capital” which can be leveraged to influence policy and legislative action.

Given these market characteristics, SAP recognises that governments need a multi-dimensional methodology to help them track the true value of IT investments and subsequently created the phrase “public ROI”. This refers to an approach which measures not only the financial, but also the social and political value of IT investments.

Public ROI in government
An example of “political ROI” was realised by the London Borough of Waltham Forest. Before implementing an ERP solution, Waltham Forest had highly fragmented procurement and finance operations and was running almost 20 different IT systems. The Council used a general ledger system that did not address the strategic or operational management needs of the organisation. The operational issues in procurement and finance were constraining the performance of the Council. Waltham Forest had no overall visibility of its budgets, payment commitments and suppliers. Critically, management information was spread across multiple systems, and it took an average of eight weeks to provide key management information.
The Council therefore decided to update and consolidate all corporate information systems into a single integrated system that would support human resources, payroll, procurement and finance. An independent investigation by IDC has shown that after successfully implementing an ERP solution, Waltham Forest realised benefits in several key areas:
? Waltham Forest now has an integrated system for all human resource, payroll, procurement and finance operations. This provides real time access to business information which had not been possible before. The time to produce an end of month report has been reduced from three days to five minutes and the budget reporting elapsed time has been halved. Payroll costs have been reduced by 30% and eProcurement targets of the national eGovernment strategy for local government have been met.

? cash flow has improved significantly through the enforcement of 30 day payment terms and better debt collection. As a result of better cash flow management, Waltham Forest has reduced its borrowing by some £20 million over a period of 24 months and has reduced cash owed by its debtors by £6 million in the last 12 months alone. In itself, the reduction in borrowing has resulted in significant savings through reduced interest payments.

? the number of suppliers has been drastically reduced, and the remaining suppliers are better managed through the system and a set of preferred suppliers has been established. Better working relationships between the council and suppliers have ensued through a clearer and consistent procurement process. Invoice matching has improved, due mainly to the centralisation and integration of procurement and accounts payable functions. This is a key best value performance indicator for local authorities in the United Kingdom.

? The overall integrity of the budget and accuracy of the finance function have improved, with better internal cost controls, real time access to information and security and traceability being introduced by the new capability. There is now full control and transparency with regard to Waltham Forest's spending.

Perhaps the most tangible benefit delivered by IT to the council was the improvement in its Comprehensive Performance Assessment (CPA) rating. Waltham Forest was rated 137th in the UK for use of resources. It is now rated 27th in the country, and 4th in London. Waltham Forest achieved quantifiable, financial benefits from IT solutions. However, many of these benefits also correspond to “political” ROI, particularly Waltham Forests’s advancement from 137 to 27 on the CPA rating, its enhanced working relationship with suppliers, improved cash flow, and lower debt obligations. Together, these exhibit improved management control, maximum leverage of public funds for procuring goods and services, and improved operational transparency. Waltham Forest’s employees and elected officials promote these improvements to the community at large, bolstering public trust and improving the public perception of Waltham’s stewardship.

Launching the public ROI initiative

Although the Government is achieving multi-dimensional returns from its IT investments, SAP recognised there was no formalised, comprehensive “public ROI” methodology to follow to assess and document these returns. Although there are various ROI models available in the market, developed by both governments and the commercial sector, they often have limitations, are too focused on financial metrics, or have limited geographic applicability.

In response to this, in 2005 SAP launched a public ROI thought leadership initiative to develop a universal, non-proprietary methodology to help the Government track financial, social and political value of IT investments. The goal of this initiative was to provide Government leaders with a framework to identify and show a linkage between IT and the impact it has on real life issues.

The project goals were straightforward - to develop a new framework that is:

? relevant to central and local government
? based on best practice, case studies, and expert workshops
? geographically “agnostic”
? non-proprietary
? comprehensive in risk assessment
? flexible for all types of government programs
? balanced across a set of measurements from research/statistical methods with practical application

Conclusion

From the example above, it was evident that measuring ROI from an IT expenditure – whether by a traditional financial metric, or expanded to include social and political dimensions - isn’t a cultural standard and rarely mandated in the public sector. Common reasons for not conducting such measurements were limited resources (people, data, time, funding); lack of incentives to assess ROI; limited baseline data and overly complex measurement models. Yet the Government is contending with continually rising service demands and increasing stakeholder expectations for measurable outcomes.

As exhibited in the Waltham Forest case study in this project, and in ongoing dialogues with public sector experts, the need for connecting IT investments to public value is a growing concern within governments around the world. More and more, elected officials are insisting on more comprehensive cost and return analyses for IT investment proposals. The Government is now developing business cases with targeted outcomes before submitting budget requests. The public is demanding accountability and transparency of Government operations. Simply put, the tide is shifting, and the Government may have no choice but to implement assessment methods showing the public value of IT investments.

Conventional approaches to ROI analysis may simply be inadequate for these increased demands. Most traditional ROI models are too narrow in scope and do not consider the context and culture of government. The motivation for a more comprehensive justification for IT investments is tied to its integrative and transformative potential. Large IT investments require a means to assess public value that matches their scope. In this light, using this new, non-proprietary public ROI framework is justified. Moreover, the new knowledge about public value possible from such an assessment can help guide other forms of investment and contribute to long term government improvement and improve societal credibility, build political support, and ultimately improve public trust in government.
Using such a public ROI framework, perhaps everything that counts in government can be counted, after all.

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