By Tony Collins
As London councils tender for outsourcing and shared service contracts worth up to £1.4bn, fresh evidence is emerging that such partnerships can lead to business disruption, financial angst and difficulties producing reports that are required by regulations.
An internal council audit report shows the depth of continuing financial reporting problems more than two years after a SAP go-live that was led by IBM on behalf of three public authorities in Somerset.
The directors of the IBM-led outsourcing company Southwest One have been chased by officials at Companies House because their year-end financial results were late.
The 2010 accounts for Southwest One, which is majority-owned by IBM, have been filed in the past two weeks although they were due by the end of September 2011.
A compliance case officer at Companies Houses said last month “We are continuing to pursue the company [Southwest One] and its directors in order to obtain the overdue documents.”
It’s unusual for a company of IBM’s size and reputation to have difficulties meeting regulatory obligations for one of its joint ventures. One wonders whether, with hindsight, IBM has any regrets about setting up Southwest One in which it owns the majority of shares.
The SAP project
For all the right reasons – to standardise and simplify the purchases and finances of three public authorities – IBM and Southwest One installed SAP in 2009, but the company has had financial reporting difficulties ever since.
Details are revealed in a Somerset County Council Audit Committee report (see below). It lists, among other shortcomings, the absence of a “useable balance sheet report”.
As with all IT-based projects and programmes that run into difficulty, there are different versions of the truth about what has gone wrong and why. Usually the official version of the truth is that nothing has gone seriously awry, or the problems are historical.
Indeed, as the NHS IT programme NPfIT has been depicted by its senior responsible owner, David Nicholson, the Chief Executive of the NHS, as a success, Southwest One has been defended by representatives of Somerset County Council, the local authority that brought in IBM to run it. A spokesperson for Somerset County Council told The Guardian last year that the council had faced mere “early teething problems” with the introduction of SAP.
Another spokesperson for Somerset County Council, when asked by Campaign4Change earlier this month for a statement on the late accounts of Southwest One, gave no hint that the council, through Southwest One, was struggling to obtain some important and accurate financial information from the SAP system.
The Somerset County Council spokeswoman said
“Southwest One has advised that the filing of 2010 accounts will be delayed. This is due to a combination of reasons. When accounts are filed, they not only record the past year’s financials, but they also need to include statements about future business outlook.
“This includes looking into 2011 to accommodate both current and future impacts, and take account of well-recognized changes in the financial landscape. We have an obligation to complete this analysis before publishing this information.”
A more comprehensive explanation is in a report by Somerset County Council’s Audit Committee. Succinct and balanced, the report last month shows the depth of the council’s financial reporting difficulties. One short annex to the report lists the benefits of a SAP implementation at the county council in 2009. Another much longer annex lists the SAP implementation problems still facing the council. The benefits take up only half an A4 page. The list of problems is nearly three pages.
Officials struggle to get reports from SAP system
The council originally outsourced its IT and finance to Southwest One to achieve standards “beyond excellence”. The idea was that police forces and local authorities in the south west would pool their back-office services, to save money by simplifying and standardising IT and finance. As well as Somerset County Council, Avon and Somerset Police outsourced to Southwest One, as did Taunton Deane Borough Council.
But the full deal is so complex the council seems unable to ascertain exactly how much the deal is saving or costing.
This is an outsourcing contract signed in haste in the early hours of a weekend morning. So quickly was it drawn up that the contract contained hundreds of spelling mistakes and literals. Lawyers say all contracts contain mistakes – but they said the number in Southwest One deal with IBM has more than normal.
We know from the NHS IT programme that rushing and excessive confidentiality deepened opposition to the new systems from NHS staff and doctors who were supposed to benefit from them. Somerset’s Audit Committee report exposes the antipathy towards the SAP system of finance staff who are supposed to benefit from the new technology.
What has gone wrong
With the benefit of hindsight it’s possible to see what has gone wrong and why.
The people who are supposed to benefit are local taxpayers and Southwest One users. But the company’s annual report just filed shows that Southwest One made double the operating loss it did the year before – more than £30m in the latest accounts – and the report says the financial benefits for customers as originally forecast have not materialised.
The problem for finance end-users of the SAP system is that they are stuck on the bottom rung of a very long command ladder. However loud they shout their complaints are lost in the ether. Those near the top rung of the command ladder continue to sing the praises of the SAP system as if the finance end-users had no voice.
This indifference to the concerns of end-users can happen when changes to the system need approval from several parties in the command structure, in this case IBM, a county council, a district council and a police authority.
It was a similar story on the NPfIT: when NHS trusts faced implementation problems the concerns of managers were not heard, or not listened to. In any case remedial action could not be taken without the approval of other trusts, strategic health authorities, NHS Connecting for Health and the IT supplier.
So the things that needed to be done weren’t done; and disillusionment spread.
What can be done now?
For Southwest One and its stakeholders it’s too late to go back and start again. IBM expects £585m of revenue from the contract. Yet it will be difficult to investigate properly and overcome the reporting problems while Somerset and its partners Taunton Deane and Avon and Somerset Police continue to portray Southwest One as a success.
When a plane crashes the law in most countries requires an independent investigation, one that is often carried out in opposition to the parties that may have much to hide.
It is a pity that in computer project disasters independent investigations are not required. In the case of Southwest One a genuinely independent investigation and report could help to show what Somerset, its partners, IBM and Southwest One need to do to get the finances back on an even keel. The solution may include a graceful exit from the SW1 contract.
Having outsourced to transcend excellence, local council officials and police would be happy to return to normality. Meanwhile the risks for officials at London councils that are planning to outsource back-office services are huge.
They need to understand the dangers from the Southwest One deal before they sign anything.
If they talk to the Southwest One partners, though, they’ll need to get beneath the ebullient language of press releases. Somerset County Council’s finance staff are the best people to talk to.
SAP – the pros and cons
Audit Committee, Somerset County Council – benefits of Southwest One SAP system
Finance Purchase Orders – Having a strict purchase order policy means that the financial data in the system more accurately reflects up to date spend. The use of Purchase Orders has also enabled more consistent coding of expenditure as codes are automatically populated based on product type.
Bank Reconciliation – This process is much more streamlined with SAP because the system allows for the majority of transactions to be automatically matched without any manual intervention. This was not possible with the previous system Cedar.
Procurement Scanning and three-way matching – This allows for some automation of the payment process whereas this was not possible before.
Procurement Process – The introduction of SAP and requisitioning has tightened up our procurement process, ensuring Purchase Orders are produced. However, it should be noted that rationalisation of suppliers has not occurred, which means that we are not procuring as effectively as we could be.
Audit Committee, Somerset County Council – SAP problems and the ongoing consequence of not resolving them. [The report says that many of the problems have been outstanding since the SAP system was implemented in 2009. Phase 1 of the SAP implementation took place on 1 April 2009. This included Finance, Procurement and CRM (Customer Relationship Management). Phase 2 took place on 1 January 2010. It included Payroll and HR.]
From Somerset County Council’s Audit Committee report (verbatim)
Problems as they affect SAP finance users:
Finance System Performance – Although there have been some improvements, some SAP Finance Reports continue to run very slowly or not at all. Large reports “time out” (fail to run), meaning that Finance have to piece together overall data from smaller component parts.
Finance Business Intelligence (BI) Reports – to date, only one finance BI report is being used. Despite the significant time and investment that has been given to BI, only one working BI report, the Aged Debtor report is being used by finance staff. This means that the Council has paid for more reports than have been delivered. It is very disappointing that we are not getting the benefits from what is reported to be a very effective reporting tool.
Open Purchase Order (P.O.) report – this report remains unavailable. An open PO report would provide staff with essential information regarding the status of POs. Requisitioners require this report to easily view PO status, in order to ensure POs are appropriately goods receipted, closed, fully consumed and fully invoiced. An open PO report would also help finance staff to ensure that accruals are kept up to date therefore reducing the likelihood of inappropriate accruals being included in our accounts. Finance staff from both Southwest One and Somerset County Council require this report.
Fixed Assets Module – Asset Value Upload. The County Council’s asset values were not loaded correctly into SAP. The consequence of this is that we are not able to split current cost and historic cost for some of our assets. We are also not able to calculate the amount of depreciation attributable to earlier revaluation gains. Accounting regulations state that we must have the two separate values. Therefore if left unresolved we are likely to be criticised by our external auditors.
Fixed Assets Module – Access to Fixed Asset Reports
There are a number of key fixed asset reports which officers do not have access to. Without the access to these reports we are dependent on the Application Support Team (Southwest One) to process this work for us. We have serious concerns that Application Support will not have resources available to do this work when it is needed. This could lead to errors in our accounts which would be criticised by our auditors.
Balance Sheet Report
We do not have a usable Balance Sheet report. The “SAP standard” report shows the overall balances but it is not possible to drill down on it to show any transactional detail. It is also not possible to confirm opening and closing balances to the auditors as this is not visible within the report. In order to produce a balance sheet for the Council we have to download from another report into spreadsheets and add it to the previous years’ figures. This is not satisfactory because we shouldn’t be reliant on using spreadsheets for such a fundamental report.
SAP problems as they affect procurement users:
Contracts Register. We were promised that all contracts would be held within SAP, supplying SCC with the complete contracts register and in turn making the procurement process more robust. This has not happened. Instead a number of estimated contracts were loaded.
Procurement Guidance. Procurement guidance has mainly been developed by the SCC in-house Change Team. Procurement guidance and training from SPS has been sparse.
Cleansing Supplier List. The initial basic cleansing of suppliers was undertaken by retained staff. Further cleansing has been requested since SAP go-live, but has not been carried out. Many duplicates remain, causing problems for requisitioners and the Accounts Payable Team.
e-Marketplace. Prior to SAP, SCC were deep into a project which had delivered connectivity to an e-Marketplace (@UK) and were then looking at on-boarding the main suppliers. With the introduction of SAP, SCC were asked to put the adoption of suppliers on hold and passed the management of the @UK marketplace to Southwest One with the expectation that they would continue adopting the main suppliers. Management of @UK marketplace has been non-existent, with no-one in SPS [Southwest One’s Strategic Procurement Service] assuming responsibility.
Since SAP go-live, there have been no further suppliers adopted to the marketplace. There has been talk that SPS [Southwest One’s Strategic Procurement Service] would wish to only host one marketplace and that they have not supported @UK pending decisions regarding a shared marketplace. However, the non-support of an SCC chosen and annually paid for system, pending a possible shared system is not a situation that is acceptable given that we are now more than three years into the contract.
Purchasing Organisation. SAP for the SWOne partners was configured with a single Purchasing Organisation (at the request of IBM representatives). This was quickly found to be inappropriate and caused many sharing issues. Since go-live, SWOne [Southwest One] has created a separate Purchasing Organisation for itself, but there is only one Purchasing Organisation for the remaining three Authorities. We have spoken direct with SAP who confirmed that this has been inappropriately configured and there should be separate Purchasing Organisations for each Authority. This would provide better confidentiality, increased control and more efficient processes within SPS.
Problems as they affect other SAP users
Vendor Search Function. There are plans underway to improve the “Search for Vendors” function. Users may struggle to locate an appropriate vendor and therefore may request creation of a duplicate.
Other Organisational Management (OM) replication errors from ECC to Supplier Relationship Management (SRM ) There continue to be errors occurring with the replication of the OM structure from HR into SAP. This has the effect of approvers dropping out of their positions in SRM and prevents them from being part of the P2P (Procure to Pay) process, causing frustration and confusion, potentially delaying POs and causing additional work for both Somerset County Council [SCC] & SWOne in rectifying these errors.
Citizen Portal. While the Citizen Portal (SCC’s website) has been delivered and improvements made, those improvements have been difficult and time-consuming to execute. SCC’s website is not as flexible as the Authority would like. Further, SWOne has stated that the SAP solution is not ideally suited to delivering “Do it Online” forms. SWOne has agreed to describe and recommend an alternative solution for SCC services to be efficiently online enabled, while retaining the benefits of the SAP solution. It is not fully compatible with some of the latest versions of Internet Browsers. The SAP solution is also not fully compliant with the “A” and “AA” Accessibility Standards. SCC is currently not able to quickly and cheaply make services available online, where those services require an online form to be completed.
The Communications team believe that 65% of customers will not be able to use the site without making adjustments to their browsers (using the “compatibility” mode) or using Internet Explorer 7. Some customers with disabilities may not be able to use parts of the website. We have not received any customer feedback on this issue, however SCC is concerned that it is not fully compliant with the required standards and has recorded its request through SAP that the system is made compliant. Some mitigating features have been put in place by SWOne, .e.g Contact telephone numbers are now listed on the website.
Problems as they affect Accounts Payable SAP users – the ongoing consequence of not resolving
e-Invoicing. Prior to SAP, SCC had implemented e-Invoicing through the eMarketplace (@UK) and had targets identified in terms of increasing e-Invoicing over the next three years. When SAP was introduced SWOne chose not to include e-Invoicing. This was not the desire of the client. Since SAP go-live, e-Invoicing has ceased and SCC are keen that it is recommenced. E-invoicing would also benefit SWOne financially, as it would reduce scanning costs and resources required to verify the image in Cockpit.
Problems as they affect Human Resources SAP users
E-Recruitment This module has not yet been delivered or signed off by Partners (Somerset County Council, Taunton Deane Borough Council, Avon and Somerset Police). SWOne continue to handle recruitment through the old processes.
Organisation Structure Report. Managers do not have sight of their teams in terms of structure – list view only. This impacts on the data available to SCC as the Change Programme progresses.
Learning Skills Overview (LSO). While this is being used by SWOne Corporate Training team, it is difficult to demonstrate that the Adult Social Care Learning & Disability Team (ASC L&D) would benefit through switching to LSO due to the low and reducing number of delegates that could book themselves on to the system. In the face of major organisational changes (for example the Futures Project) there does not appear to be a satisfactory cost/benefit to changing the current arrangements. ASC L&D Team continue to handle course administration through the current system and associated processes.
Thank you to Dave Orr whose persistence and public interest concerns over Southwest One have elicited much information that would otherwise not have come to light, or to our attention.