IMO CHANGE MANAGEMENT PROGRAMME. ERP implementation: Benefits realization. Note by the Secretary-General

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1 INTERNATIONAL MARITIME ORGANIZATION E IMO COUNCIL 92nd session Agenda item 11 C 92/11/1 31 March 2004 Original: ENGLISH CHANGE MANAGEMENT PROGRAMME ERP implementation: Benefits realization Note by the Secretary-General Executive summary: Action to be taken: Paragraph 30 Related documents: SUMMARY This document reports on tangible, practical benefits which are expected to be delivered through the implementation of an Enterprise Resource Planning (ERP) system C 89/11/Add.2, C 90/13, C 90/13/Add.1 and C/ES.22/6 BENEFITS REALIZATION AN OVERVIEW Introduction 1 This document represents an update to the Council on the tangible, practical benefits which are expected to be delivered through the implementation of an Enterprise Resource Planning (ERP) system. Council will recall that the full case for ERP rests on three elements: tangible savings and re-allocations as presented in this document, driven by greater integration and efficiency of processes; the identification that the Organization had no choice but to make significant system changes, due to the weaknesses and shortcomings of its legacy systems; intangible benefits as initially set out in document C 89/11/Add.2, annex 1 and which are a fundamental part of an ERP implementation. For reasons of economy, this document is printed in a limited number. Delegates are kindly asked to bring their copies to meetings and not to request additional copies.

2 C 92/11/ The focus of this document is on the real savings and efficiencies which can be made, both in terms of bottom-line cost savings and re-allocation of resources to more value-adding work. This should not detract from the fact that the most significant benefits will be delivered by ERP in the longer term, through improved information on the Organization s resource utilization and through providing a platform for linking the Organization s Work Programme and Budget with the Strategic Plan. 3 The Council will recall that, following competitive tendering, it was concluded that SAP, one of the largest suppliers of ERP software with previous UN experience at UNICEF and WFP, provided the best fit to the Organization s requirements. This document therefore provides an interim report on the tangible benefits expected from the implementation of SAP at IMO. There will be a detailed review of benefits following implementation as well as an ongoing process to ensure that maximum tangible benefits are derived from this project. Business case overview 4 When first presented to the Council at its 89th session, the Secretary-General provided, in C 89/11/Add.2, annex 1, an assessment of the expected benefits from the introduction of an ERPtype system. That document had set out the case for ERP, both in terms of the intangible benefits which would accrue to the Organization in terms of supporting the Change Management Programme (for example through improved accuracy and timeliness of management information) and the tangible benefits of introducing more efficient processes and the consequent savings in staff time. 5 The tangible benefits outlined in C 89/11/Add.2, annex 1, are reproduced in appendix 1. In summary, the tangible benefits set out in the benefits paper to the Council were ongoing savings of 285,000 per year, with a one-off saving from expenditure not required of 475,000. These figures therefore form a part of the targets set on the benefits realization from this project. 6 More generally, there is a desire to move resource from the back-office support functions to the front-line work of the Organization. Summary of tangible benefits in this document 7 Following a detailed analysis of the tangible savings available through the implementation of SAP as defined in the Blueprint document, the following sections set out the most recent view of these savings. The following table summarizes the benefits which will be realized through the implementation of SAP, and compares with those originally envisaged in the Business Case reported in document C 89/11/Add.2, annex 1:

3 - 3 - C 92/11/1 Benefit Council document C 89/11/Add.2, Annex 1 This document Cash savings, Re-deployment of resources, Cash savings, Re-deployment of resources, Temporary staff savings 36 work 150, ,000 - months in Financial Services Permanent staff 35,000-50,000 - savings 12 work months in Financial Services Overtime savings ,000 - in Financial Services Re-allocation of Management Accounts Service resource - 100, ,000 Licence fees and ,000 - external support TOTAL 185, , , ,000 All figures are annual. The timing of the benefit delivery is discussed in the following sections. SHORT-TERM TANGIBLE BENEFITS Introduction 8 This section sets out the most present view of the tangible benefits likely to be realized in practice through the implementation of SAP as set out in the Business Blueprint document, with a particular focus on the Financial Services Section as the main area of the Organization likely to realize tangible savings. Processing efficiency 9 It is clear that the SAP system will lead to clear efficiency gains in the short term, especially in Financial Services. These may be categorized as: integration benefits an integrated SAP system, replacing five legacy systems, means that there will no longer be a requirement for duplicate data entry, for example of publication sales information in Finance. Furthermore, there will no longer be a requirement for reconciliation between separate systems which currently requires significant manual intervention; data input benefits Finance staff will now be in a position to enter data direct onto SAP, rather than raising paper journals which are passed to data entry clerks for posting;

4 C 92/11/1-4 - reconciliation benefits system-based controls over posting, the integration of the system and a more closely controlled month end procedure may be expected to significantly reduce the effort required to conduct regular reconciliations of the balance sheet accounts, and speed up the production of the Organization s final accounts. 10 To provide a context, the total budgeted costs of the Financial Services Section in 2004 are 780, Detail on the anticipated savings is set out in appendix 2 to this document, but the timings and magnitude of such savings may be summarized in the following table: Area of Benefit Work months Annual saving, Timing Reduction in FS ,000 90,000 from 2005 temporary staff 110,000 from reduction in 2006/07 duplication of data entry and reconciliation Reduction in GS staff in FS reduction in data entry workload. 12 (GS) 50,000 50,000 from 2006/07 12 It may also be anticipated that the improved efficiencies will lead to a reduction in the overtime expenditure in Financial Services of approximately 10,000. Other changes 13 There are other tangible benefits available from the system which will not have a direct bottom-line impact on the budget, but which merit mention. Re-allocation of resources 14 In addition to the bottom-line savings summarized above, there are a number of areas where staff time will be made available for more value-adding tasks, and where resources will be re-allocated between Major Programmes: Re-allocation of resource Work months Annual cost, Timing 1 full time Professional 12 (P level staff) 100,000 Immediate post golive post in Management Accounting Services now freed to perform analysis and reporting functions in place of data reorganization and reporting.

5 - 5 - C 92/11/1 15 As foreshadowed by the document C 89/11/Add.2 on benefits, it is clear from the system design proposed that the present burden on Management Accounting Services (MAS) of rekeying figures from Masterpiece into Excel to provide management reports will no longer be required, and will allow more time for analysis and value-adding work. 16 It had been envisaged by MANNET that the MAS Section would ultimately require three professional posts a Section Head, and two Budget Officers assigned to the Regular Budget and to Technical Co-operation. At present there are only two Professional Officers in the Section. With the efficiencies gained from ERP, it will now be possible to effectively run the Section with the present complement, and the additional post envisaged will not be required. A professional post which was available within the former Finance and Budget Section which had been planned to allocate to MAS was already transferred from MAS to IT as part of the 2004/05 budget, and no further Professional level staffing will now be required in MAS. This post transfer may be considered to be a saving of 100,000 realized through the introduction of ERP, as per Council document C 89/11/Add.2, annex 1. Licence Fees and Support 17 It is anticipated that there will be a saving in the direct support and licensing costs for SAP when compared with the range of legacy systems that it will replace. This is summarized in the following table: System Present Annual Cost, Masterpiece licensing 70,000 - Future Cost, Annual Masterpiece maintenance 9,000 - Atlas maintenance 10,500 - Sweetens maintenance 10,000 - TC PROMIS maintenance 5,000 - SAP software maintenance - 35,077 SAP Support - 60,000 TOTAL 104,500 95, This produces an annual saving of approximately 10,000, which will be realised once the existing legacy system support arrangements are concluded.

6 C 92/11/ It should be noted that SAP will require in-house and external resources to support and manage the system. To a large extent this will be met by redeployment of resource. System administration and ongoing development support will also be required, but these arrangements will be made within the existing resources of the Organization. A principle of the design during the project to date has been to ensure that the system is configured in such a way as to minimize the ongoing support requirements. 20 There will also be a requirement for ongoing development and minor works on the system, as there is with the present legacy systems. It is anticipated that there will be similar expenditure levels involved, although of course this will be managed on a case-by-case basis and there may be annual fluctuations. Other tangible benefits 21 Further savings may also be expected in other areas, for example: management of treasury balances improved cash flow reporting from the system will allow more effective management of the Organization s cash balances, with a view to improving the return achieved on them. It is not practical to put a figure on this improved return, as changing investment rates will distort the picture; more effective procurement research has shown that the more complete and timely information provided by an ERP system on purchases can allow more effective procurement and decrease purchase costs by an average of 5%. This would lead to a saving of some 45,000 on non-staff purchases, although again the actual improvement would be essentially impossible to quantify. 22 These figures are sufficiently tentative and difficult to measure in practical terms that it would be imprudent to include these claims as part of this benefits document. They are included for information only, and the Organization will continue to test the validity of these benefits once the system is in operation. 23 It is anticipated that other areas will be resource-neutral following the introduction of the SAP system. With regard to procurement, for example, the system will be configured on the basis of four Strategic Business Areas which will formally have decentralized responsibility for procurement of particular types of goods or services, within the framework of the Organization s financial and procurement rules and regulations, and subject to overview monitoring and control. The specific areas identified are Human Resources for temporary staff and general consultants, Conference Division for staff associated with the Meetings Programme, Technical Co-operation Division for TC consultants and the Office of General Services for all other goods and services. This may lead to additional workload in some areas which do not presently have this responsibility, but this would be absorbed within the Organization s overall existing budget. LONG-TERM TANGIBLE BENEFITS Introduction 24 This section foreshadows the idea of long-term benefits which are enabled by the introduction of SAP.

7 - 7 - C 92/11/1 Outline areas to consider 25 One of the intangible benefits of SAP is the availability of more timely and accurate expenditure information. Furthermore, that information will be presented in a format which encourages and supports detailed analysis of the Organization s costs, with a view to examining the long-term requirements for the Secretariat and how these might best be delivered. The system will provide a much clearer picture of the Organization s cost structure and the allocation of resources. 26 The SAP system will therefore support the development of a Strategic Plan for the Secretariat as a companion document to the Organization s ongoing Strategic Review. This will allow the Organization to take a look at the full costs of operations and determine whether these might be more effectively met in other ways, through a proper options analysis. It will therefore provide a platform from which to start evaluating costs of activities more rigorously for example through establishing the full costs of the Organization s publishing activity. This in turn would better enable the Organization to support the pricing of its products. 27 Further on this line, the system will allow the Organization to establish the full costs of particular activities including indirect costs and overheads. This will move the Organization closer to the position envisaged by MANNET in Recommendation 30 of their 2001 report, covering Activity Based Budgeting. This will then go some way to providing the information needs of the Council and Assembly during the iterative budgeting process itself, allowing a fuller and more informed discussion of the options available to the Secretariat. 28 Beyond its use for external reporting in this context, the SAP system will provide greatly improved management reporting on budgets and expenditure, thereby improving budgetary controls through identifying areas of loose budget management. In particular, the introduction of SAP will provide the managers of the Integrated Technical Co-operation Programme with financial and non-financial information on their work on a more timely basis, greatly improving the quality and usefulness of reporting available. This in turn will support the continuing work on technical co-operation as part of the broader Change Management Programme. 29 More generally, the SAP system will provide the information base to support the ongoing implementation of the MANNET report as an iterative process over the coming biennia. Action requested of the Council 30 The Council is requested to take note of the information contained in this document and comment as appropriate. ***

8 C 92/11/1-8 - Appendix 1 Business case presented to the Council at its 89 th session This paper focuses on the tangible benefits. As set out in the benefits paper to the Council, these fell into two categories: ongoing savings through process improvements; one-off savings in terms of capital investment which would have been unavoidable had ERP not been introduced. Ongoing Process Savings To turn to the process efficiencies first, the following is an extract from the Council document, setting out preliminary estimates of savings available: The benefits provided by the introduction of the ERP system will be many. Template processes used by the ERP system are best practice ones, and the use of such templates will drive greater process efficiencies from the implementation. Further, the increased integration resulting from the implementation will produce its own efficiencies, with a reduction in the need to re-enter data in a number of different systems. Finally, the increased distribution and greater user-friendliness of the system will support distributed data entry by users, rather than requiring specialist data entry staff. The process improvements and associated efficiency gains are likely to be widely spread throughout the Organization, and many may be realised only some time after the system has been introduced, once users become more familiar with the concepts involved. As a result, the benefits shown in Table 1 below are indicative and likely to be only a part of those available. They serve to illustrate the business case for implementation, rather than being an exhaustive list of all expected benefits. The first phase of the implementation Project Preparation with the contractor will involve a detailed consideration of expected benefits, the development of a Benefits Realisation Strategy, and setting of metrics by which improvement can be monitored. The translation of these benefits into purely financial measures will not be straightforward. In many cases, the gains will result in staff being freed for more value-adding tasks, for example in the case of Management Reporting for more thorough analysis of the information, increasing the quality of the work done. Where potential to free staff resource emerges, staff will be re-deployed.

9 - 9 - C 92/11/1 Table 1: Quantifiable Annual Benefits of ERP Introduction Anticipated Benefits Data Capture and Processing Anticipated Annual Savings, k 150,000 1 Note Data duplication reconciliation Management reporting entry and 35, ,000 3 TOTAL 285,000 Note 1: Based on 36 temporary staff months in Finance. Saving produced as Finance and other staff in the Organization can enter own data. Note 2: Based on 12 GS work months in Finance. Saving produced as no requirement to re-enter data from Sweetens into Masterpiece. Note 3: Based on 12 Professional work months in Management Accounts. Saving produced no requirement to re-enter data from Masterpiece into monthly reports. There is thus an expectation in the Council that in the medium term, ongoing annual savings of 285,000 may be made in Finance and Management Accounts. In the case of Management Accounts in particular, it was made clear that this saving would in fact amount to freeing staff time from data entry to provide more time for greater analysis of data, a more value-adding service. One-off Capital Savings Under capital savings, the Secretariat identified a number of pieces of systems work which would be required were ERP not to be approved in order to provide the Organization s minimum management information requirements. This therefore represents future expenditure which would not be incurred, rather than a saving on existing levels of expenditure. The relevant section from the Council document is shown below:

10 C 92/11/ Table 2 sets out those projects which would be required in the medium term without ERP, and provides an indication of the cost of each. Table 2: Existing Investment Needs Superseded by ERP Anticipated Benefits TC PROMIS 2 fully functional programme management Anticipated One- Off Savings, k 50 Interface Sweetens to Masterpiece 50 Develop and implement precommitment recording system for temporary assistance 75 Upgrade of Masterpiece 150 Develop Management Information System and budgeting tool 100 Develop financial workflow capability 50 TOTAL 475k It should be noted that the investment listed above would be the bare minimum required for the Organization to continue functioning at its existing level. It would far from meet the Organization s requirements, and would not be sufficient to support the properly controlled delegation of responsibility to line managers. It would also not deliver the goal of an integrated financial and management information system, nor deliver process improvements and the benefits noted in the previous section. There is therefore an expectation in Council that the Organization would not spend 475,000 which it would otherwise have been required to spend because of the introduction of ERP. In practice, since the Council decision on ERP was delayed from the 89 th Session to the 90 th Session while further analysis of the Brazilian Government s offer was conducted, an element of the expenditure above was spent in providing an interim solution, particularly in the areas of TC and finance interface to Sweetens. Summary of tangible benefits outlined to the Council In summary, therefore, the tangible benefits set out in the benefits paper to the Council were ongoing savings of 285,000, with one-off expenditure not required of 475,000. These figures therefore form a part of the targets set on the benefits realisation from this project. More generally, there is a desire to move resource from the back-office support functions to the front-line work of the Organization. ***

11 C 92/11/1 Appendix 2 Detailed Review of Savings in Financial Services It may be expected that Financial Services costs could be reduced by: Efficiency Saving Reduction in temporary staff Estimated annual value, 90,000 in 6 months 20,000 in 12 months Rationale There are presently six temps in FS, with three covering the work of staff members presently on long-term sick or seconded to the ERP team, and three providing additional resource to support the work of the Section under the present processes. It is anticipated that the introduction of SAP will mean that the two additional temporary staff are no longer required. Realisation Options and other considerations Non-renewal of temporary staff arrangements. Timescale 6 months following go-live for 3 temp staff; 12 months following go-live for temp secretary. Clearly the two temporary staff covering staff on the ERP project will no longer be required, but these have not been considered as a genuine saving. There is also a temporary secretary, and it is envisaged that this position would be required for the medium term only. Reorganization of structure in FS 12 work months per annum 50,000 for one G-grade data entry staff There are presently five P-grade staff in FS: o Head of Section P5 o Head of Financial Control & Accounts Unit P4 o Head of Transaction Processing Unit P3/P4 o one P2 grade staff; o one staff on special post allowance to P2 level. P-grade: Re-deployment of two Professional posts to other sections in need of greater financial and administrative support; P-grade: Re-deployment possible approximately 12 months post go-live following completion of 2004 final accounts; Present incumbents due for retirement in 5 years.

12 C 92/11/ Efficiency Saving Estimated annual value, Rationale It is the view of the present Head of Section that the Section could properly be operated with three professional staff, the Head of Section and two Heads of Unit. The remaining posts could be reclassified to G-posts, although this would represent minimal tangible cost savings. Realisation Options and other considerations Non-filling of posts once present incumbents retire. Timescale Re-deployment would not reduce the overall costs of the Organization, but would move them to front-line services from Administration. It would provide a career path for Finance staff from high G-posts to P3/P4 Heads of Unit. In practical terms, the retirement of staff is the most realistic opportunity to change the P-grade structure, as it is not clear that the staff to be redeployed would have the skills required in their new roles. Under the present arrangements there are eight G-grade staff in FS. It is the view of the present Head of Section that there is scope for reducing this by 1 post in the medium term, with a view to greater restructuring once the system has settled down. In particular, efficiencies would require: o A reduction in data-entry staff. Neither of these would be required, with one being re-deployed to support the work of the Travel Unit. The medium-term reduction proposed here therefore represents a halving in the data entry staff requirements. G-grade: Re-deployment of administrative posts to other sections in need of greater administrative support; Non-filling of posts once present incumbents retire. G-grade: Re-deployment would be possible approximately 12 months post go-live, following completion of 2004 final accounts; Present incumbents not due for retirement for a significant period. Note that it is also envisaged that the additional data entry post would be re-assigned within FS to support the Travel Unit. More radical re-structuring of the G-grade staff in Finance would require a professionalization of the Section, with an increase in the skills base of the remaining staff. Under this scenario, much more significant cost savings could be realised. It should be noted that these savings are expected to be a result of the more efficient operation of the Section as a whole, under the Change Management Programme and a new Head of Section, with not all being directly attributable to the introduction of SAP.