Integrated financial management systems: assessing the state of the art.

An exploration of the major components of an integrated system includes ratings of the functional features of selected integrated FMS software packages by 25 state and local government users.

Across the country, state and local governments are rapidly replacing their financial management systems (FMS) to cope with the year 2000 problem and benefit from the power of modern client/server technology. Problems with legacy systems include the proliferation of independent databases, inflexibility of current budget formats, rudimentary budgetary controls, difficulty of integrating with desktop applications, and timeliness of financial reporting. Governments also have sought to modernize their financial systems to take advantage of the power of relational databases as a means to improve organizationwide decision support. The rapid pace of change in the technology market, however, poses complex and difficult challenges for finance officers seeking to acquire new systems.

Finance officers are confronted with several major questions: 1) Should their jurisdictions adopt enterprisewide integrated FMS or link together single applications, e.g., "best of breed" solutions?, 2) What are the requirements for specific components - e.g., general ledger and purchasing - of an FMS?, and 3) What are the capabilities of current software products to satisfy these requirements?

In an effort to improve financial software procurement, the Government Finance Officers Association (GFOA) Research Center has initiated programs to disseminate knowledge on technology among its members. This article, the first in a new series of GFOA publications that will focus on improving the effectiveness of software procurement, briefly reviews the pros and cons of FMS integration, summarizes "must have" and leading-edge capabilities of major software components, and presents results from a recent GFOA survey of state and local government financial software users.

Independent or Integrated FMS?

State and local governments have chosen one of two paths in designing a financial system: independent stand-alone systems or integrated systems. Independent systems are oriented toward single applications such as payroll or purchasing that function apart from other activities in the finance organization and have their own sources of data, databases, software programs, hardware, and information management standards. The main advantages of independent systems is the ability to select best-of-breed packages: e.g., the individual application is superior to any integrated system available. Some in the industry argue that best-of-breed packages cost less and pose minimal implementation risk. Another argument that also favors independent systems is that the failure of one application does not impose systemwide failure. These advantages aside, independent systems are associated with many deficiencies related to the sharing and accessing of information for decision support.

Modern integrated FMS are generally modular in nature and built around a general ledger system. In theory, each module can be implemented on a standalone basis, but the power of the system increases when the modules are tied together through common databases, financial reporting tools, and development tools. The presence of functional integration is largely driven by features of client/server technology such as distributed processing, graphical user interfaces (GUIs), and relational databases. An integrated FMS provides organizationwide access to shared data that are consistent and readily available. For example, in an integrated system, a purchasing module can share vendor information with the accounts payable module and simultaneously streamline entry of assets to the fixed asset module. In addition to minimizing data entry and document handoffs, integration significantly improves timely reporting.

Components of Integrated FMS

In acquiring integrated FMS, governments typically begin with the implementation of core modules such as general ledger, payroll, and purchasing because year 2000 compliance is likely to be most important in those areas. Other applications are then added. Each major subsystem of an integrated FMS is described below with leading-edge features highlighted.

Budget Development. Budget development modules coordinate organizationwide operating and capital budget preparation, analysis, review, and approval. These modules generally rely on a database that contains historical information, comparison of year-to-date spending with appropriations, positions by department, salary and wage scales, collective bargaining contract terms, and other information. It is also important that the modules interface with payroll, human resources, and general ledger systems.

Leading-edge features of budget development modules include coordination of department requests by the central budget office using electronic workflow capabilities. Decentralized data entry and narrative justification by departments can significantly reduce the workload for budget analysts. Some modules also allow the budget office to immediately ("on-line/realtime") assess the impact of budget office modifications, legislative modifications, and final changes to the overall budget. In addition, budget analysts have the ability to conduct "what-if" or scenario analysis (e.g., the impact of a 3 percent cut in overtime across other than public safety departments) to assess the impact of different budget balancing steps. The underlying databases also should enable the budget analyst to "drill down" from summary levels (department, program, and cost categories) to lower ones (activity or cost center). With expansion of the budget database over successive budget cycles, the ability to develop alternatives to the line-item format (e.g., program or performance budgets) is greatly enhanced. Finally, many budget development modules also have publishing capabilities that link the main database to word processing, spreadsheet, and graphics programs used to produce the budget document.

Many state and local governments also are considering multiyear budgeting approaches for either legal/external purposes or for internal use. It is likely that there will be demands for the budget development modules of the future to address the issue of budgeting over multiple years. (For examples of multiyear budgeting in local governments in the state of Washington, see the State of the Art article, "Biennial Budgeting in Washington Cities and Counties," on page 46 of this issue of Government Finance Review.)

General Ledger. The general ledger (GL) module, the foundation of an integrated FMS, is the main accounting system for the organization because it provides basic budgetary controls (appropriations and allotments) by recording transactions, tracking accounts, and maintaining journals. It is also the main vehicle used to produce the major financial reports issued by state and local governments - the comprehensive annual financial report (CAFR), the single audit, and interim financial reports. In addition, GL modules have capabilities to automate encumbrances, trial balances, account analysis, journal entries, and exception reports. Basic GL functionality includes the simultaneous posting of an accounting transaction to both the general ledger and subsidiary ledgers.

Leading-edge capabilities of GL modules include 1) the maintenance of multiple ledgers, which enable compliance with varying reporting requirements; 2) flexible chart of accounts; 3) definition of multiple time periods - year, quarter, month, and week; 4) accounting drill-down capabilities; and 5) automated journal entries, such as year-end closing, reversing entries, and repeated entry of similar transactions, that accelerate the ability to produce timely reports. Many systems also have the ability to validate entries immediately (e.g., account combinations) and enable data to be corrected at the time of being entered.

Leading-edge GL packages also enable governments to use multiple budgets as control mechanisms (e.g., legally approved budgets and organizational budgets where the controlling level is different from that which is legally approved). In addition, central budget offices can designate whether a department's ability to spend is linked to the department's performance in revenue collection or receipt of grants. Pre-encumbrance capabilities allow governments to reserve appropriations at the time of issuing the requisition prior to purchase orders and encumbrances. Finally, budget preparation is significantly enhanced if the package integrates GL and budget development modules because year-to-date spending totals will be readily available throughout the budget-making process.

Purchasing. For government employees and suppliers alike, purchasing is one reason why government is associated with red tape. Purchasing has an impact on numerous financial management processes such as accounts payable, fixed assets/inventory, and budgetary control. Basic functionality in purchasing includes the entry and tracking of requisitions, issuance of purchase orders, receiving, and inventory management. Routine functions that can be automated include funds checking, encumbrances, requisition management, commodity coding, tabulation of bids, change order processing, and maintenance of vendor information files.

By automating high-volume transactions, leading-edge purchasing systems focus on streamlining business processes and enabling strategic tasks such as developing procurement alternatives, contract negotiation, and building supplier relationships. Purchasing systems should be capable of providing an audit trail of all transactions related to a specific activity or a project for a designated period of time. Leading-edge systems reduce paper by using electronic data interchange (EDI) and workflow capabilities. Other leading-edge features include three-way match capabilities (matching of quantities ordered, received, and inspected), use of on-line catalogs to create purchase orders, automated inventory entries, tabulation of bids, voucher/encumbrance liquidation, automated approvals (e.g., based on type of item or dollar value), and the ability to freeze purchase orders to limit transactions for budgetary control.

Purchasing is also an area where Internet and electronic commerce capabilities significantly enhance functionality. Purchasing systems can be designed to use industrywide supply catalogs, send/receive on-line notification to/from suppliers, and allow vendors to use the Internet to update the government's database or obtain a status on their invoice. In addition, advanced capabilities in some systems enable the use of document imaging technology to significantly reduce paper attachments to main source documents.

Human Resources/Payroll (HR/P). HR/P modules can provide a comprehensive solution to managing and paying employees. These modules can be used by managers to conduct applicant tracking (e.g., testing for civil service exams), manage employee records (accumulated leave, seniority, evaluations, training), administer employee benefits, and track position information (salary and wage scales) that is useful for budget preparation. Payroll is often the most important component of these systems but it relies heavily on data produced by the other applications. Basic payroll functionality includes the processing of time sheets, personnel forms, wage deductions, payroll adjustments, workers' compensation payments, and production of standard payroll reports.

Leading-edge system capabilities for HR/P include automated payroll exceptions analysis using pre-processing payroll runs, interfaces with GL (e.g., automated journal entries), accounts payable (e.g., accrual of vacation pay), and use of the Internet (e.g., to permit employment applications). In addition, automatic deposit, mass changes to employee databases (e.g., across- the-board pay increase or reorganization coding), turnover analysis, tracking of accumulated benefits, adjustments for retroactive pay, wage attachments, and labor distribution capabilities (e.g., allocating a worker's pay across projects) are desirable features in a payroll module.

Accounts Payable (A/P). A/P modules seek to accurately record current liabilities, utilize supplier discounts to reduce costs, and process payment of invoices in a timely manner. MP modules should have interfaces with the purchasing, accounting, and treasury functions. Basic MP functionality includes maintenance of vendor master files, quick entry of recurring vouchers, duplicate invoice detection, vendor ledger maintenance, and vendor analysis reporting.

Leading-edge MP capabilities include three-way matching (reconciliation of purchase order, receiving report, and invoice), contract management capabilities, pre-encumbrance, and recording of multiyear contracts. Many systems also have the ability to automatically record offsetting journal entries and the ability to set tolerances for payment processing (e.g., 4 percent in excess of encumbrance). Electronic commerce possibilities include self-service vendor access to A/P information, workflow to reduce paper, and EFT capabilities to improve handling/management of funds.

Accounts Receivable/Billing (A/R). Governments are increasingly integrating their tax and fee collection systems with enterprisewide FMS. The main functions of an MR package are to produce bills, process receipts, and record payments. Basic functionality of MR packages includes the recording of information to assess aging of open accounts, application of late charges and interest, and the ability to write off minimal balances.

Leading-edge capabilities in MR include real estate billing, automated updates of GL accounts upon lock-box receipt of cash, reporting to credit agencies, administration of special payment plans, use of credit cards, and issuance of delinquency notices. The use of EFT capabilities to improve the receipt of funds is also a desirable feature of MR packages.

Fixed Asset/Inventory Management. Non-enterprise operations of state and local governments do not record fixed assets and inventories in the general fund because the measurement focus is on outflows of financial resources. Consequently, separate fixed asset/inventory management modules are used for recording, managing, and controlling government assets. This module is a repository for land, buildings, and equipment acquisition/usage in government agencies.

Leading-edge fixed asset/inventory management capabilities include interfaces with the A/P and purchasing functions, automated recordkeeping, standard reports (acquisition, depreciation, disposition data by time period), control of leased assets, and preventive maintenance records. These modules also provide automated replacement cost values and indirect cost calculations for assets used in federally sponsored programs.

Project Costing. Project costing modules allow managers to track project costs and commitments, maintain a detailed audit trail of project transactions, and post to the GL. These modules focus on providing managers with information to keep projects on schedule and within budget. Especially in the areas of capital programs and grant management, managers can utilize these modules to define a project budget which is linked to a summary-level "line item" (e.g., capital budget) or department appropriation. Basic functionality in project costing modules includes the monitoring of project activity, employee assignments, change order control, and funds usage tracking.

Leading-edge capabilities for project costing modules include electronic audit support, definition of allowable cost rates (e.g., indirect costs), labor cost analysis, cost-projection capabilities, ability to extract cost information from other applications (e.g., fixed asset), and drill-down capabilities to analyze expenditure detail below the budgeted category.

Although modern FMS systems have made substantial improvements in FMS functionality, major improvements still remain. In the following section, results of a survey of state and local government finance officers are used to assess the state of the art of various functional and technical features for FMS.

Survey of FMS Software Capabilities

In November 1997, the GFOA Research Center surveyed 25 state and local governments to assess their evaluation of functional and technical features of five major integrated FMS packages (i.e., five governments were contacted per major software vendor). Because of the paucity of fully implemented client/server FMS applications, random sampling was not used to identify respondents. Instead, governments were selected based on their use of the five top-selling integrated financial software packages.

The respondents included five counties (20 percent), seven cities (28 percent), seven enterprises (28 percent), one school district (4 percent) and five state agencies (20 percent). Interviews were conducted with the project manager and/or the purchasing agent using a standard questionnaire. Respondents using particular software packages were asked to rate their satisfaction with 1) the overall financial system, 2) fifteen technical features, 3) twenty FMS functional features, and 4) fifteen purchasing features. Finance officers were asked to rate each feature on a five-point scale: unsatisfactory, satisfactory, average, excellent, and leading-edge. The responses of the 25 jurisdictions were summarized across the five software packages to obtain an average for each feature. The results are presented below.

Exhibit 1 presents ratings of FMS technical features. Finance officers reported that their level of satisfaction with the overall FMS system was close to the excellent rating. Features that ranked high on the scale included inquiry/drill-down capabilities, flexibility to customize accounts, and power of the database. Features that ranked lower were integration with other applications, germaneness to government, upload capability, written documentation, and reporting capabilities. These findings were supported in open-ended interviews with finance officers. Many finance officers felt that, although vendors label their products as "integrated" and as being "public-sector solutions," in practice most products still have integration problems and are packages designed originally for the private sector that have migrated to the government environment. The unique nature of state and local government functions (e.g., fund accounting, purchasing, fixed asset account groups) makes it difficult to simply paint a public-sector face on a product designed for private enterprise.

Exhibit 2 presents ratings of FMS functional features. Applications and tasks that received the highest ratings included accounts payable, human resources/payroll, contract management, and report-writing tools for customized reporting. Applications and tasks that were rated lowest included cash/investment management, budget development, grant management, purchasing, and fixed assets. Most of the accounting-related features - encumbrance accounting, preparation of financial statements, cost accounting/allocation, and GL - were rated between above average and excellent.

Exhibit 3 presents ratings of functional features for purchasing software. Features that received the highest ratings include electronic contract approval process, integration with inventory systems, and automatic creation of purchase orders. Features receiving lower ratings include vendor registration, use of procurement cards, and contract tracking. What the results show overall is that electronic commerce capabilities are already present in software packages and are likely to be in greater demand in the future.

Conclusions

The wave of public-sector FMS conversion projects taking place across the country provides a rare opportunity for finance officers to 1) redefine and solidify linkages between budgeting systems and other management information systems (MIS); 2) take advantage of database integration permitted by FMS to conceptualize more effective budgeting approaches; and 3) organize an IT-intensive finance function that utilizes electronic commerce and Internet capabilities to minimize administrative costs and improve responsiveness to citizens. The survey results presented in this article demonstrate that there is a moderate degree of satisfaction with most major FMS packages. Nevertheless, the findings also show that there is significant opportunity to further develop these systems to meet the unique needs of the public sector.

ROWAN MIRANDA, PH.D., CGFM, is director of research at the GFOA. Through the GFOA Research Center's system selection practice, Dr. Miranda is presently working with several cities and counties to assist them with financial process reengineering and financial system procurement. TIMOTHY KEEFE is manager of the GFOA's consulting practice. Keefe's responsibilities include managing the analysis of software proposals in the GFOA's system selection practice.