Written by:

Paul Irby Market Analyst www.onvia.com

Market Analysis: ERP Procurement in Federal, State and Local Government

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2©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

After Gartner first introduced the acronym back in 19901, ERP or Enterprise Resource Planning has become not only a top IT market segment for software firms and consulting/implementation government contractors, but a key driver of transformation for the public organizations they serve.

Over the past three years, Onvia’s database tracked nearly $900 million in ERP awards

and almost 1,000 projects in the federal, state and local markets that were identified

with terminology specifically mentioning “ERP” or “Enterprise Resource Planning” in

their project title or core description. The actual volume of ERP-related projects in the

government market is likely much larger, but our market analyst team aimed to capture

projects where the primary focus of the work was on the ERP system installation itself.

Also, because contracts with published award values are generally only a small segment of

total contracting activity, the $900 million award number understates total contract value

of ERP projects in this market.

A recent survey2 of IT decision-makers at state and local agencies suggests that a full 81%

of state and local agencies either already have an ERP solution, are currently contracting

for it or implementing it, or are planning for it. Industry-wide in IT, the typical lifecycle of

an ERP system involves replacement every 7-10 years3, however in the case of budget-

constrained government agencies, there may be a greater lifespan of these systems in

order to maximize the previous investment. In addition to adding more standard ERP

modules in a phased long-term rollout, public agencies may be able to expand their older

ERP systems to add things like BI capabilities or CRM without a complete and expensive

replacement. We looked for a few instances of large scale ERP systems in state and local

governments and found three examples highlighting their longevity. Finished in 1977,

New York City had one of the earliest ERP-type systems in existence. It went through a

partial upgrade in the late 1990’s, more about Y2K-ready client-server technology than

functionality. The first full functional upgrade was not completed until 2009 – 32 years

after the initial implementation4. Los Angeles County’s first major phase of its core $160

million system is now around 9 years old5 and Chicago’s is around 12 years old6. While

additional customizations, maintenance and consulting services are possible for these

systems in the near term, the examples from New York and Chicago show ERP systems can

have a long life in state and local agencies.

1 www.netsuite.com/portal/resource/articles/erp/what-is-erp.shtml2 The Evolution of Human Resources and Finance Solutions in State and Local Government, Center for Digital Government, September 20123 Is the ERP Life Cycle Changing? ERP Focus website, blog by Tom Miller, posted 7/19/13 www.erpfocus.com/is-the-erp-life-cycle-changing-1635.html4 Modernizing New York City’s Financial Management, CGI white paper, 20105 Los Angeles County Upgrades to New Payroll System, Russell Nichols, Public CIO, July 27, 20106 Referenced in a public planning document comparing various ERP implementations nationwide: RO866301R2 Evaluation Matrix; Centralized Enterprise Resource Planning (ERP) Solution, Broward County, Florida

3©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

Over the last three years mentions of “ERP” and “Enterprise Resource Planning” in

procurement documents grew by an average of 22% according to the Onvia dataset. The

continued strong demand for ERP can be traced to several key factors. According to the

Center for Digital Government7, the top motivations for an agency moving to a new ERP

platform include improved productivity (58%), integration of data and business information

(51%), better decision-making (41%), addressing aging legacy systems (41%), improving

business processes (35%), and supporting greater government compliance (32%). The

combination of achieving all of these worthy objectives in one initiative helps justify the

large expense and extensive staff time involved.

Our research team examined ERP project data for the past three years with the goal of

understanding trends in vendors, award volume and size, importance of implementation

vs. consulting services, procurement differences by agency level and the size and impact

of project uncertainty. Our analysis deconstructs the market opportunity and provides

intelligence to help vendors win more government business in the growing and important

ERP market.

Top Successful ERP Vendors Include Both Services Firms and Software Companies

In this market, major software companies directly compete alongside the IT services/

solutions firms. In the case of the larger platform companies like Oracle and SAP, the

software company’s enterprise sales and service team can be competing against their

own partner network–IT consultants that are highly skilled at planning, implementation

and good customer support. Oracle and SAP were the most commonly used software

platform companies for implementations, listed in a majority of project documents where

the platform name or a subsidiary company/platform was mentioned. Other top makers

in the government space include CGI, Ellucian, Harris, IBM, Infor, Microsoft, Sage and Tyler

Technologies.

We examined our database of publicly available ERP awards reported by state and local as

well as federal government agencies and identified vendors who were selling directly to this

market. Among the top 10 competitors for ERP contracts who sold directly, the first three

also happened to be major ERP software makers. The remaining seven are a mix of solution

providers, VARs and two other software firms.

ANALYSIS: Dynamics of ERP Contracting

8 The Evolution of Human Resources and Finance Solutions in State and Local Government, Center for Digital Government, September 2012

4©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

ERP Awards and Award Size by Tier of Vendor

The more experienced and successful vendors tend to win much larger awards, with the

top 10% of vendors averaging awards of $12 million each and representing one out of

four contracts. A review of ERP awards since 2011 shows that the bottom 90% of vendors

win 75% of the awards and can expect an average project size of nearly a million dollars

($910,500).

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$2M

$4M

$6M

$8M

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$12M

$14M75%

Share of ERP Awards and Average Award Size

Bottom 90% of Vendors Top 10% of Vendors

AVERAGE AWARDSSHARE OF AWARDS

$12,235,699

25%

$910,532

Top ERP Vendors Ranked by Total Awards

ERP VendorRank by # of Awards Primary Business Category

Tyler Technologies1 ERP software maker

Oracle2 ERP software maker

SunGard ERP software maker3

ERP Analysts4 Solution provider

SAP5 ERP software maker

Ciber6 Solution provider

Plante Moran7 Solution provider

DLT Solutions8 Solution provider

Infor (Lawson)9 ERP software maker

AST Corp10 VAR

Note: Based on a sample of publicly available records of awards by government agencies

5©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

Unrealistic for Newer Government Contractors to Expect Multiple Awards

ERP is generally not a market where newcomers to IT government contracting can enter and start winning multiple awards per year. The 10 most successful firms measured by number of awards average just over three per year. All other vendors averaged less than one-half (0.4) per year since 2011.

Level of Government: Cities have the highest volume of ERP opportunities but the smallest awards

Onvia examined all bids and RFP documents from U.S. cities with a minimum population of 4,000, along with counties, states and federal agencies.

The single largest source of demand for project opportunities in ERP appears to come from cities, which generated 270 bids, RFPs and awards over the past 3 years in our database. Next in line was state government, with 188 projects. Federal projects were fewer, at 104 – though award values were much higher.

Award size generally follows organization size and complexity, as illustrated in the chart below, with federal agencies having the largest contract values ($16 million average) and cities having the most contract and awards (270).

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Bid/RFP/Awards and Average Award Size

City County State Federal

AVERAGE AWARDSBIDS/RFPS/AWARDS

270

142

188

104

$1,651,427

$4,364,131$6,040,860

$15,623,422

6©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

Consulting Helps Drive Higher Federal Project Costs

Onvia’s data revealed that federal ERP projects were more likely to be categorized as

“consulting-oriented” (47% of federal projects) rather than mainly software-oriented (38%).

In contrast, smaller state/local government ERP projects tended to be more about software

(53%) and much less about planning and consulting (27%). With the federal government’s

much larger and more complex silos of data and systems, effective consulting becomes

more important because the potential costs of widespread disruption and the need for

sufficient cross-department coordination rises at the same time.

Since incrementally higher software costs would not be expected to impact the budget as

much as incrementally higher consulting hours in large implementations, the consulting

share would generally increase as a percentage of large agency budgets. While this

expenditure can’t be completely avoided, the situation does suggest a demand in the

market for ways to reduce uncertainties and cut back on additional setup and unnecessary

customization time for larger agencies. ERP software that comes already configured for

typical governmental uses and “best practices” may help reduce some of the front-end

consulting time.

Adoption Curve Visible by Size of Government: Opportunities Skewed Toward Smaller Agencies

Compared to normal or expected patterns of IT purchasing, recent ERP bids and RFPs

have skewed strongly toward cities (nearly twice the normal share) compared to counties

0

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60%

% of ERP Projects That Are Mainly Software vs Mainly Consulting Oriented

Software Focus Consulting Focus

STATE & LOCALFEDERAL

27%

47%

53%

38%

7©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

and statewide (about normal) and federal agencies (around half as strong as normal). This

suggests, as Onvia noted with cloud computing in our recent “Tactics to Win in the State

and Local Cloud Market” white paper, ERP implementation has not happened randomly but

according to a typical technology adoption curve where the largest agencies (i.e. the “early

adopters”) have invested first with the smaller agencies lagging behind in order.

The adoption curve can also be witnessed in the skew toward smaller or mid-sized – rather

than large - cities. We assembled a top 10 list of U.S. cities based on ERP procurement

activity and readers will notice none are in the top 10 list of U.S. cities by population, instead

focusing on cities generally between 200,000 and 900,000 residents. The top 10 list of cities

generally reflects agencies spending between $2 million and $16 million in total for ERP-

related project phases or follow-up work since 2011. Missing from this list are larger cities

such as New York, Chicago, Atlanta or Los Angeles – who had already funded or completed

major implementations (see pg 2). Atlanta, interestingly, did have a smaller project for less

than $2 million that was ranked lower on this list, which was titled “post-production ERP

planning support” and was a follow-up activity as opposed to the initial major system install

done in 20088, Based on this, vendors should keep in mind that ERP opportunities within

large cities will most likely be relatively modest in size due to the fact that they typically

have already made their large initial investment. There should be a relatively larger market

for full implementations among smaller to mid-size agencies that have not yet put into

place a full-scale ERP platform.

Top 10 Cities in Total Spending for ERP-related Work Since 2011

CityRank Sum of Awarded Contract Value

Tampa, FL1 $34M

Ft. Worth, TX2 $26M

Anchorage, AK $16M3

Corpus Christi, TX4 $7M

Mesa, AZ5 $6M

Roswell, NM6 $5M

Jacksonville / Duval County, FL7 $3M

Hayward, CA8 $2.5M

Richmond, VA9 $2.4M

Mesquite, TX10 $2.2M

8 https://oracleus.activeevents.com/2013/connect/fileDownload/session/ECDAE5978122CBF57FDD32567DF73A5B/CON5909_Kumar-City%20of%20Atlanta%20OOW2013%20Session%20Deck.pptx

8©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

Use of Term Contracts for ERP

ERP contracts can often take the form of a fixed term contract, however this varies greatly

depending on the level of government. In the case of cities, only 19% of projects use this

approach with a standard fixed term length of between one and five years (sometimes

longer). Federal agency projects were similar, with only 29% being term contracts. However,

at the county and state levels, fixed term awards for ERP were much more common. More

than 60% of these ERP projects were on a fixed term contract.

One explanation for county and state term contract use is that at the larger scale of state

and local government, these agencies have more of a need for ongoing assistance and

troubleshooting after the initial implementation takes place. While federal agencies are

also large, they may have enough internal or general IT resources available to handle the

ongoing component. The most common contract term length for counties and states was

four years while for cities and federal agencies a shorter one-year term was preferred. Many

of Onvia’s IT clients use a tool called Term Contract Center to track when these contracts

will be expiring or renewing and help vendors prepare to win clients who may not be fully

satisfied with the initial vendor’s performance.

Forecasting Future State & Local Agency ERP Projects

State and local governments are planning on a fairly large number of ERP projects in their

CIP plans and budgets over the next 3-5 years. As a point of reference, the number of

actual bids/RFPs/awards in 2013 in the state and local universe where ERP was mentioned

was 270. Using Onvia’s Spending Forecast Center tool, the total count for mentions of ERP

in budget documents of state and local agencies for 2014 came to 1,514. It’s important to

note that this total includes both confirmed spending as well as possible spending that

is being considered, but may not end up being included in a final approved plan. Some

of these instances may also only indirectly list ERP. Vendors that use this intelligence are

able to follow-up on these mentions to establish influential relationships with agency

decision makers well before the projects come up for public bid. Another 2,792 ERP-related

document mentions fell in the later 2015 to 2018 period.

The Realities of Projects: Unpredictable with Longer Timelines and Uncertain Outcomes

Successfully completing an ERP initiative is not a guaranteed outcome, even with large

budgets. Industry observers have generally described them as more likely to be challenging

9©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

than smooth or predictable. Gartner9 noted that budgets normally allocate about half the

total project cost (47%) to system integration and consulting and only 22% to the ERP

software itself. In a recent study from the Center for Digital Government10, nearly half (49%)

of state and local IT leaders report experiencing problems with integration, 38% reported

higher-than-expected costs and 36% indicated scope modification/change orders. A total

of 20% mentioned delays in delivery, while another 18% mentioned a “postponed go-live

date.” Even without delays, on-premise ERP requires longer timeframes than normal for IT

projects. Nearly one out of three (28%) respondents reported taking longer than two years

and 43% cited a length of at least 18 months. As the survey included both small and large

agencies, timeframes for state agencies and large counties would generally skew toward

the multi-year model. Experienced vendors are more likely to be able to propose realistic

schedules and budgets, but relatively new entrants to the ERP government space should

understand that timelines can be hard to predict and these types of projects often take

longer than originally estimated.

Many agencies separate large ERP projects into phases over multiple years. For example,

Onvia calculates in our Spending Forecast Center that Hawaii’s large statewide $85 million

ERP implementation will allocate a maximum of $24 million per year. In 2014 the agency

is expected to allocate around $2 million to planning/consulting, $5 million for specific

technical designs and $17 million for implementation. Spending should fall to $14 million by

the last year of 2017.

ERP vendors in the government market are up against technical, business culture and

staff challenges of various magnitudes. According to Gartner11, organizational change

management (i.e. “mobilizing and preparing the workforce for business process,

organizational and job changes”) was the single biggest success factor for ERP in their

survey of state agencies. Vendors can add tremendous value before beginning the

implementation by helping their contracting agency prepare for and anticipate human

complications and roadblocks. Consultation in pre-bid and planning stages can be an

effective tactic to build strong relationships with agency decision makers.

ERP project uncertainties and risks are well known in the industry. Perhaps before its

time, a 14-year-old IBM-sponsored conference presentation about ERP implementation

in government12, recommended that agencies “pad” their budgets, include a 10-20%

contingency fund and “protect it with your life.” While “padding” may be less necessary

now due to vendors having more experience in government ERP and the improvements

in implementation and usability in ERP systems over the last decade, the suggestion to

9 Trends in Statewide ERP Implementations, Gartner Industry Research, Massimiliano Claps and Ivy Anderson, October 200910 The Evolution of Human Resources and Finance Solutions in State and Local Government, Center for Digital Government, September 201211 Trends in Statewide ERP Implementations, Gartner Industry Research, Massimiliano Claps and Ivy Anderson, October 2009

10©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

understand and expect cost overruns is still sound advice for both vendors and agencies

in today’s market. The expectation of complexity is often overtly addressed in project

documents themselves. One recent ERP project description in Onvia’s database for a federal

award began by explaining how difficult it was for the agency to estimate cost:

One last recommendation for vendors in regards to project budgets and award values is

that vendors need to keep in mind award values are sometimes “maximum spend” numbers

reflecting the highest possible level that the agency is willing to spend on a “worst case”

basis. In one extreme case, the U.S. Army awarded three different “maximum spend”

contracts for the same ERP initiative to three different contractors. The sum of the three

maximum spend amounts was $518 million, but in the description the contracts cautioned

that the agency would not spend more than $240 million in total. Logically, the odds that

any one vendor would end up with most of their maximum amount were slim.

This contract action was not awarded as a fixed price type because it was not possible to estimate accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence.

“”

12 ERP Implementation in Government, IPMA Executive Conference sponsored by IBM, September 13, 2000

11©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

By the numbers, the ERP market looks very strong in terms of volume of opportunities as

well as healthy project budgets for awards. Due to the adoption curve of ERP, the largest

opportunity for vendors focusing on first-time or brand new system implementation is in

the small to midsize city and county segments. While the larger agency market will typically

be about upgrading older ERP systems or making incremental improvements, budgets

can still be sizable due to the consulting, customization and larger organization software

licensing fees involved.

Compared to typical IT contracts, ERP projects typically are longer in length, highly labor-

intensive, business process-oriented and people-focused as opposed to simply technical

in nature. Successful ERP implementations drive significant organizational changes and

efficiencies and agencies are seeking vendors who can be trusted partners to help guide

them through the maze of project complexity, help them engage with affected teams and

ultimately live up to the high expectations associated with a successful ERP implementation.

To summarize, the following key takeaways and recommendations are provided to assist

vendors in winning more ERP business from government agencies:

Engage with agencies early to become a valued consultant and help them craft a

sound RFP

Anticipate typical roadblocks during the planning stage: prepare for surprises and

delays in schedules and avoid creating unrealistic budgets that can destroy profit-

ability

Align with top platforms to accelerate platform buy-in

Consider software options that are already pre-configured for government agency

use to reduce configuration and customization time. There is evidence that some

of the top ERP software makers are creating solutions focused specifically at the

government market

Consider subcontracting or teaming with successful vendors in the government

ERP market to build experience and a portfolio of successful projects prior to

competing as a prime yourself

CONCLUSIONS & RECOMMENDATIONS

12©2014 Onvia, Inc. All rights reserved.

Market Analysis: ERP Procurement in Federal, State and Local Government

About Onvia:

Onvia specializes in providing business intelligence solutions to vendors to grow their

government business, helping them get ahead of the bid and RFP process. Active vendors

in the government market that need timely, comprehensive and unique insights in their

industry vertical, key buyers and competitive landscape should visit www.onvia.com and

request a demo to speak with a Business Development Manager in their industry. Onvia

helps clients strategically grow their government business with solutions for project

intelligence, agency intelligence and vendor intelligence in the public sector.

Disclaimer:

The information contained in this Onvia publication has been obtained from publicly available

federal, state and local and government data sources. Onvia disclaims all warranties as to the

accuracy, completeness or adequacy of such information. The views and opinions expressed in

this publication are those of Onvia’s research organization and are subject to change.