Wild ERP: The New Software That's Draining the City's Coffers
Tuesday, Dec. 9, 2008 | Perhaps nothing is more frustrating than one very simple pair of facts: 1) The city of San Diego has been collecting more and more money from taxes and fees every year for many years now. And 2) the city is preparing for brutal service cuts and layoffs.
What gives? How are both of those facts true?
There are obvious answers that have been well discussed over the last few years. The city has been asked to put more in its employee pension fund than it ever did years ago. Employee costs and benefits have inflated.
We hear plenty about this.
But there's a lot more going on as well. Right now, for instance, about 40 full-time city employees are working on one project and one project only. It's not cleaning parks or running libraries. The group was supposed to be done more than a year ago. That means that with every day that passes, the wages these people earn adds to a massive cost overrun for the project.
There's more. In addition, these 40 city employees are working in partnership with a team of consultants and that team is expected to charge the city almost exactly as much as it costs to run the entire city library system.
Adding up the total city costs -- with the hours of the full-time city employees, some of whom cycle in and out of helping with the effort -- is overwhelming. The first group of consultants involved has just been dismissed as city officials blame it for yet another major delay. A new team will come aboard if the city finalizes a sole-source contract.
Ironically, the effort that has so consumed city staff and has cost so much money is part of a technological initiative to ensure, very simply, that the city can better keep track of all the money it spends.
It's a new software system linking each one of the cubicles at City Hall unlike anything before. The effort, dubbed the OneSD project and also known as the Enterprise Resource Planning (ERP) initiative, would allow the city to keep track of an overwhelming array of budgets, spending, vendors and department invoices. Software developed by SAP Public Services is the key to it all.
You want to look up the invoices a particular department or manager has sent? Old way: Send someone downstairs to come back with a stack of papers. New way: Bring it up on your computer.
The new system would help the city enforce its own rules, and, ideally, if changes needed to be made to payroll or if an audit needed to be done, a few keystrokes could replace dozens of man-hours now spent.
For now, though, the city could probably most use that new system to keep track of the spiraling costs of its own implementation. The project that managers hoped to have go live in October is now delayed until at least July 2009.
The city awarded the firm Axon Solutions Inc. an $18.8 million contract to bring this software to City Hall. That was out of a total $37 million set aside to pay for the contractors software and other orbiting needs directly associated the project -- almost the exact same cost of running the city library system for a year. Axon has not been paid the full amount and it won't be.
Just last month, as it became clear that more delays were inevitable, Chief Financial Officer Mary Lewis dismissed Axon and asked the city's Data Processing Corporation to immediately begin negotiations with SAP itself. SAP hadn't even bid for the original contract awarded to Axon, as its hourly rate is much higher.
The SAP contract is a no-bid agreement and it will not be sent to the City Council. Lewis sent a memo explaining what happened to the City Council, but it was just an FYI. The council members have no say in the process. City officials are sending the whole project through Data Processing Corp., which handles the IT procurement for the city.
Although it's a given that SAP's hourly rate is far higher than Axon's, Lewis did not want to put a price tag on it until they'd negotiated with the company. In her memo to the City Council, Lewis said "it is clear that certain scope reductions may be necessary to stay within the project's budget." In other words, they have $20 to go out with, but, as we all know, $20 goes a lot farther in some bars than in others.
Lewis and her team had hoped to have the new system ready to go in April. But that's not possible, now. The dream date is being pushed to July with some parts of the system not functioning until October -- exactly a year after the first go-live date.
How much will that cost taxpayers who are paying for the 40 employees to trudge away on the project?
"It's a soft cost that is somewhat hard to quantify," Lewis said.
The soft cost started accruing shortly after Mayor Jerry Sanders took office.
After he was elected, Sanders hired Rick Reynolds, a former Navy officer, to help run his staff and to coordinate what would become a signature effort for his early term: business process reengineering.
Sanders and his top manager -- retired admiral Ronne Froman -- were going to redesign every aspect of the city's operations ensuring they were as efficient and economical as possible. Froman put Reynolds in charge of the effort -- dubbed BPR -- and by August 2007, with Froman having moved on, Reynolds earned himself a raise and additional responsibilities.
A month later, Sanders fired him. The circumstances were never clear and Reynolds filed a wrongful termination lawsuit. Reynolds became a supporter of Steve Francis, who ran against Sanders for mayor.
Reynolds had been juggling a number of different efforts -- not the least of which was the initiative, ERP, that was supposed to link the city's computers and manage the core of its business operations. When Reynolds was fired, he believed the massive technological switchover would be complete within a year.
The responsibility and the overly ambitious timeline fell in then Chief Financial Officer Jay Goldstone's lap. Goldstone had already taken over for Froman. He had also taken over the responsibilities of John Torrell, the city's active auditor who also left disillusioned with the mayor and management.
So Goldstone found himself in charge of every aspect of the city's management. He was the CFO of a city still reeling from years of financial controversies. He was the acting chief operating officer in charge of overseeing every major operation the city undertook. And he was the auditor -- supposedly acting as a check on himself and his managers.
The city had fallen years behind in producing basic annual financial statements. Goldstone was dealing with growing annual deficits and a summer of controversy borne out by a fiery city attorney; a building that was too tall for federal aviation authorities' comfort; and other, minor things, like the collapse of a hillside in La Jolla. Wildfires were months away from consuming entire neighborhoods of the city.
Goldstone had plenty on his plate.
Yet a project that was consuming a great portion of his employees and gobbling up valuable city dollars was languishing. The ERP had hit a crossroads and its implementation would have to be delayed -- costing millions more in those soft costs.
I asked Matt McGarvey, the city's former chief information officer -- who was tasked with implementing the new computer system -- what crippled the project. Were there too many cooks in the kitchen?
"It wasn't that there were too many cooks in the kitchen. It was that the cooks kept changing," said McGarvey, who's now working in the private sector.
McGarvey said that Reynolds' dismissal meant that Goldstone got the project right at a critical time for its implementation. The city's staff had already become disillusioned with Axon, the company they had hired to shepherd the initiative. Axon was slow to bring in staff. It was unresponsive, he said. And the talented staff members that Axon had used to attract the city's confidence during the bidding process failed to materialize.
"We should have held their feet to the fire on those things. They should have been addressed much more strongly," McGarvey said.
Goldstone was busy. Eventually, he put the new chief financial officer, Mary Lewis, and her deputy, Comptroller Greg Levin in charge of the initiative. By May 2008, Lewis and Levin had decided to delay the go-live date for the new system until April of 2009. Axon submitted a plan to make it happen.
Lewis and Levin were unimpressed.
"After a detailed review of Axon's plan, we continue to have serious concerns regarding Axon's ability to manage this project and execute the contracted Statement of Work," Lewis wrote in a memo to the company.
But Axon kept its contract. It took until last month for city staff to reach its breaking point with the firm.
In their memo to the City Council Nov. 20, Levin and Lewis said they just couldn't trust Axon to get the job done.
"The decision was based on City staff's assessment that Axon's project management was not successfully leading the project and that the continuation of the contractual relationship with Axon could lead to possible cost overruns and missed deadlines," they wrote.
What's worse, even though millions of staff hours and dollars had been spent, the city was still far away from its new internal controls system.
The city's patchwork of computer systems is not only inadequate, but it is alarmingly inefficient. City Hall has committed itself to being as transparent as a major corporation working under public disclosure laws in the wake of its whole financial mess. But it simply couldn't do that with so many systems barely able to manage the business functions of their own departments.
The city processes more than 100,000 payments a year. Right now, a department can submit an invoice to pay one of its contractors even though that department may not have enough money in its budget. To catch the error, city accountants must look at it, manually compare it to the approved budget for that department and then determine that there's enough money available for the expenditure.
The new computer system will ensure that the department has enough funds available to even ask for the money.
Right now, city staff must consult the City Council for any contracts worth more than $250,000. But sometimes, a vendor may have multiple contracts with the city. The new system will automatically ensure the limits aren't broken and it will check to make sure there are no duplicate accounts.
They are the kind of controls a modern city needs.
But getting them is not easy.
I caught up with Steve Peck, the president and CEO of Axon. I wanted to know what he thought about losing the San Diego gig.
He emphasized that while Axon was fired as the project manager, the company would still be part of the team. I think in metaphors too often lately but when I likened it to a head football coach being demoted to defensive coordinator to make way for a new coach, he said he liked that.
"We would have preferred to stay in a leadership role but we welcome the city's choice to use SAP and we look forward to being a big part of it going forward," Peck said.
I asked him what he plans on telling potential future clients about the problems in San Diego. A few months ago, for instance, Axon inked a deal with the city of Huntsville, Ala. It was at about the same time city of San Diego officials were gritting their teeth about the firm's lack of production so far.
Peck said that these sorts of "sweeping transformational projects" are inherently difficult. He said he would simply point any concerned customer to the company's history of successfully implementing them.
"When you're reengineering the entire financial operations of the 7th largest city in the country, you're replacing legacy systems and business processes that have been in place for 20-30 years. It's not an easy task," he said.
It seems to be a common theme.
"These projects are always more complicated and longer term than anyone ever expects. It's not an excuse, it's just reality," Mary Lewis told me.
What's more, when the system is operational, they will have to test it to ensure that things like the payroll run correctly. City employees will undoubtedly be immediately frustrated by the new modus operandi.
Lewis said that the city's operating efficiency is expected to drop immediately after the new system comes online. But she calls it the "j-curve" -- meaning that after a dip in efficiency at the beginning, the staff will learn to use the new tools and the machine of City Hall will eventually run better.
That's the promise, at least.
By July 2009, the city will have paid consultants at least $37 million on the project and it will have churned out an overwhelming number of paychecks to its own staff to get the work done. At the same time, the city's budget for the coming year will have to have been completed. And it will undoubtedly have required layoffs and service cuts unlike anything the city's felt in recent years.
With the city teetering on financial disaster after years of revenue growth, this is part of the story of where all that money went. We'll need a couple more years, apparently, to see if it was worth it.
Please contact Scott Lewis (scott.lewis@voiceofsandiego.org) directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.
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