salvaggio, teal & associates proprietary and confidential 1 salvaggio, teal & associates...

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Proprietary and Confidential 1

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State of KansasState of Kansas

Financial Management System Needs Financial Management System Needs Assessment StudyAssessment Study

Value Pocket SurveyValue Pocket Survey

Briefing for Agency CFOsBriefing for Agency CFOs

November 2, 2006November 2, 2006

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Discussion TopicsDiscussion Topics

Introduction Business Case Methodology Value Pocket Identification & Quantification Value Pocket Data Collection Responses to System Survey

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Business Case Methodology Business Case Methodology System Benefits and CostsSystem Benefits and Costs

Cost to Implement & Operate the New System • Software• Hardware• Implementation• Upgrades• Ongoing Maint. & Mgmt.• Training

System Cost Savings & Process-improvement Benefits

System Savings• Replacing/retiring current systems• Not implementing planned

systems and upgradesProcess-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 Methodology Business Case Methodology Financial AnalysisFinancial Analysis

SUMMARY CASH-FLOW ANALYSIS($ thousands)

0 1 2 3 4 5 6 7 8 9 10

NEW 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 NEW 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

Value Pocket (process-improvement) benefits will be calculated using data obtained via:• The Value Pocket Survey that is being

sent to agencies• Interviews with central agencies and

SMEs

3

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Value Pocket Identification & QuantificationValue Pocket Identification & QuantificationWhat Are Value Pockets?What Are Value Pockets?

Value Pockets are the most likely sources of significant value (i.e., cost savings and other process-improvement benefits) to be found in each process/functional area within the scope of a system implementation

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Value Pocket Identification & QuantificationValue Pocket Identification & QuantificationValue Pocket CategoriesValue Pocket Categories

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

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

• Reduced Cost of Executing the Process (efficiency). 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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HR / PAYROLL

• Position Control• Basic Employee Data• Personnel Management• Training• Payroll• Employee Relations &

Performance Appraisal• Recruitment and

Applicant Tracking• Benefits Administration• Compensation• Time Reporting• Leave Accounting

CORE FINANCIAL

• General Ledger• Budgetary Control• Accounts Payable /

Travel• Accounts Receivable

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

BUDGET DEVELOPMENT

• Appropriation Budget• Operating Budget• Performance Based

Budget

Common Database

Value Pocket Identification & QuantificationValue Pocket Identification & QuantificationExamples ofExamples of Value PocketsValue Pockets

PROCUREMENT VALUE POCKET EXAMPLES• Reduce cost of goods and services• Reduce inventory carrying costs • Reduce cost of conducting solicitations• Reduce inventory reorder cost

PROCUREMENT & Inventory

• Solicitations (RFx)• Catalog Procurement• Reverse Auctions• Warehousing & Inventory

Management• Commodity Management• Vendor Management

PROCUREMENT & Inventory

• Solicitations (RFx)• Catalog Procurement• Reverse Auctions• Warehousing & Inventory

Management• Commodity Management• Vendor Management

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HR / PAYROLL

• Position Control• Basic Employee Data• Personnel Management• Training• Payroll• Employee Relations &

Performance Appraisal• Recruitment and

Applicant Tracking• Benefits Administration• Compensation• Time Reporting• Leave Accounting

BUDGET DEVELOPMENT


Budget

BUDGET DEVELOPMENT


Budget

CORE FINANCIAL




CORE FINANCIAL




Procurement & Inventory

• Solicitations (RFx)• Material• Warehousing• External Services• Purchasing• Fleet Management

Common Database

Value Pocket Identification & QuantificationValue Pocket Identification & QuantificationExamples ofExamples of Value PocketsValue Pockets

FINANCIAL VALUE POCKET EXAMPLES• Reduce time performing invoice matching process

• Reduce time monitoring actual expenses against budget

• Reduce time maintaining vendor information and responding to vendor inquiries

• Reduce time calculating asset depreciation

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Formula & Source of Variables

Vendor Self-ServiceSystem Enabler

Reduce the number of FTEs (and associated compensation) required to register vendors and update vendor information

Source of Value

# of Hours Spent Updating Vendor Information

x Salary

x (1 + Benefits Factor)

x Estimated % Reduction in Effort

Agency Survey & Central Agency Interviews

Value Pocket Identification & QuantificationValue Pocket Identification & QuantificationValue Pocket Components – ExampleValue Pocket Components – Example

HR & agency management

FTE = Full-time Equivalent

Experience of Other Organizations

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Introduction

Functional Areas within

Scope

Calc Sheet Example

Calc Sheet 1

Calc Sheet 2

Calc Sheet 3

Value Pocket Data CollectionValue Pocket Data CollectionValue Pocket Survey – Worksheet/TabsValue Pocket Survey – Worksheet/Tabs

Effort-Related Response Data

The survey is in a Microsoft Excel spreadsheet that has a number of worksheets/tabs as depicted to the right

Data entry is only required in the “Metric Data” and “Effort-Related Data” response worksheets/tabs

You can enter hours directly into the Effort-Related Data response worksheet/tab, or use Calc Sheets. Calc Sheets are essentially “scratchpads” that can be used to calculate hours and associated comp. for the “Effort-Related Data” response worksheet/tab

You can access the Calc Sheet that corresponds to a Value Pocket by:

• Clicking on the appropriate tab at the bottom of the spreadsheet OR

• Clicking on a hyperlink that is on the Value Pocket’s row. Clicking on a hyperlink on the Calc Sheet will return you to the Effort-Related Data worksheet/tab

VP 1VP 2VP 3

Metric Data

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Value Pocket Data CollectionValue Pocket Data CollectionValue Pocket Survey – Calc Sheet ExampleValue Pocket Survey – Calc Sheet Example

Calc Sheets are set up to apply either the Percent-of-Time Method (PoT) or the Units-of-Work Method (UoW) of calculating the total estimate annual hrs. (and comp.) spent each year performing a VP activity

• In the PoT method, you provide the % of time spent performing a VP activity ([4]) and the total hrs. worked on a VP activity are calculated ([6])

• In the UoW method, you provide total hrs. worked on VP activity ([6]) and the % of time spent performing a VP activity ([4]) is calculated

Calc Sheet

Totals pulled into the “Effort-Related Data” response worksheet/tab

[7] provide input

[8] = [7] x [2]

[9] provide input

[10] = [8] x ([1+[9])

[11] = [10] x [4]

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Individual or Group

# of People

Select Calc

Method(P or U)

Approx. % of Time Spent

Working on This

Activity

Approx. Total # of Hrs. Each

Person Works for the State Each Yr.

Total Hours Worked on

This Activity Each Year

Approx. Avg. Annual Total

Compensation for Each of the Individuals on

Each Row

Total Annual Comp. for All

Those on Each Row

Add 30% for Benefits for

State Employees, but Add 0%

for Contractors

Total Comp. Plus

Benefits

Relevant Total Comp.

Plus Benefits

Supervisor 1 P 25% 1,920 480 60,000 60,000 30% 78,000 19,500

Data Entry Clerks 3 U 75% 1,920 4,320 30,000 90,000 30% 117,000 87,750

Contractors 1 U 60% 1,536 922 92,160 92,160 92,160 55,320

Analysts 2 P 50% 1,920 1,920 40,000 80,000 30% 104,000 52,000

0% 0 0 0 0

0% 0 0 0 0

7,642 214,570$

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Value Pocket Data CollectionValue Pocket Data CollectionValue Pocket Survey – Calc Sheet Example (PoT)Value Pocket Survey – Calc Sheet Example (PoT)

To calculate total hours using the PoT Method for a Calc Sheets row: Enter values for columns [1] and [2] Enter “P” in column [3] Enter % of time the group/individual works on the VP activity in column [4] Enter in column [5], the approx. total # of hrs. each person in the group works for the State

each year Column [6] will be calculated for you. [6] = [2] x [4] x [5]

Calc Sheet

[7] provide input

[8] = [7] x [2]

[9] provide input

[10] = [8] x ([1+[9])

[11] = [10] x [4]

[1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Individual or Group

# of People

Select Calc

Method(P or U)


Working on This

Activity







Each Row


Those on Each Row



for Contractors

Total Comp. Plus

Benefits


Plus Benefits

Supervisor 1 P 25% 1,920 480 60,000 60,000 30% 78,000 19,500


Contractors 1 U 60% 1,536 922 92,160 92,160 92,160 55,320

Analysts 2 P 50% 1,920 1,920 40,000 80,000 30% 104,000 52,000

0% 0 0 0 0

0% 0 0 0 0

7,642 214,570$

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Suggested ways to calculate % of time spent:• If spends about 2 hrs. each day, use 2 hours / 8 hours per day = 25%• If spends about 2 days each week, use 2 days / 5 days per week = 40%• If spends about 3 days each month, use 3 days / 21 business days = 14%• If spends about half of his/her time during only two months out of the year,

use 50% x 2 months / 12 months = 8.3%

Value Pocket Data CollectionValue Pocket Data CollectionCalculating % of Time Spent Performing a VP ActivityCalculating % of Time Spent Performing a VP Activity

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Value Pocket Data CollectionValue Pocket Data CollectionValue Pocket Survey – Calc Sheet Example (UoW)Value Pocket Survey – Calc Sheet Example (UoW) To calculate total hours using the UoW Method for a Calc Sheets row:

• Enter values for columns [1] and [2]• Enter “U” in column [3]• Column [4] will be calculated for you after values have been entered for columns [2], [5] and [6]. [4] = [6] / ([2] x [5])• Enter in column [5], the approx. total # of hrs. each person in the group works for the State each Year• Enter in column [6]: (# Units processed each year) x (# hrs. ea. Unit is processed). For example, if 1,000 units are

processed each yr. by the group and it takes 20 min. to process each Unit, enter (excluding quotation marks) “=1000*20/60”

Calc Sheet [1] [2] [3] [4] [5] [6] [7] [8] [9] [10] [11]

Individual or Group

# of People

Select Calc

Method(P or U)


Working on This

Activity







Each Row


Those on Each Row



for Contractors

Total Comp. Plus

Benefits


Plus Benefits

Supervisor 1 P 25% 1,920 480 60,000 60,000 30% 78,000 19,500


Contractors 1 U 60% 1,536 922 92,160 92,160 92,160 55,320

Analysts 2 P 50% 1,920 1,920 40,000 80,000 30% 104,000 52,000

0% 0 0 0 0

0% 0 0 0 0

7,642 214,570$

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And please keep in mind that what we need are reasonably good estimates, not exact numbers

Calc Sheets are essentially “scratchpads” that can be used to calculate hours for the “Effort-Related Data” response worksheet/tab using the Percent-of-Time method OR the Unit-of-Work Method. Use whatever method you feel comfortable using just as long as you develop for each Value Pocket activity on the “Effort-Related Data” response worksheet/tab a reasonable estimate for:

• Total number of hours spent annually performing the VP activity, and• Total amount of compensation paid for those hours

You can enter hours and compensation amounts directly into the “Effort-Related Data” response worksheet/tab, instead of using Calc Sheets

Things to keep in mind…Things to keep in mind…

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Let’s take a look at the

Value Pocket Survey

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Responses to System SurveyResponses to System Survey Survey responses to date Will be contacting some of the respondents for clarification It is essential that we include in the study:

• Approximate system costs that will likely be incurred if a new statewide system is not implemented

– Upgrades/enhancements to existing systems– New systems

• All personnel costs pertaining to the implementation and ongoing operation and support of hardware, as well software. Also, include training resources. Do not include the cost of the end users of the software

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Value Pocket Data CollectionValue Pocket Data CollectionValue Pocket SurveyValue Pocket Survey

Chip Julian• 281.794.1391• [email protected]

Please complete and return the survey via e-mail attachment no later than the close of business on November 17, 2006 to:

If you have any questions whatsoever regarding this survey, please do not hesitate to contact Chip

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Questions/Next StepsQuestions/Next Steps

salvaggio, teal & associates proprietary and confidential 1 salvaggio, teal & associates...

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