HOUSE FINANCE COMMITTEE February 11, 2016 1:34 p.m. 1:34:29 PM CALL TO ORDER Co-Chair Neuman called the House Finance Committee meeting to order at 1:34 p.m. MEMBERS PRESENT Representative Mark Neuman, Co-Chair Representative Steve Thompson, Co-Chair Representative Dan Saddler, Vice-Chair Representative Bryce Edgmon Representative Les Gara Representative Lynn Gattis Representative David Guttenberg Representative Scott Kawasaki Representative Cathy Munoz Representative Lance Pruitt Representative Tammie Wilson MEMBERS ABSENT None ALSO PRESENT Sheldon Fisher, Commissioner, Department of Administration; Everett Ross, Consultant, Alaska Shared Services. SUMMARY ^PRESENTATION: SHARED SERVICES INITIATIVE - DEPARTMENT OF ADMINISTRATION 1:35:14 PM SHELDON FISHER, COMMISSIONER, DEPARTMENT OF ADMINISTRATION, explained that shared services was a historically different approach to savings that involved centralizing functions, but as part of the centralization there was a focus on streamlining and driving efficiencies. He said that the efforts would be ongoing to continue to make improvements with a focus on customer services. He introduced the PowerPoint Presentation: "State of Alaska Department of Administration: Shared Services Overview." Commissioner Fisher shared the genesis of the department's relationship with Everett Ross. He relayed that the administration felt the initiative was right for the state and that Mr. Ross had private sector experience that would prove useful for the implementation of the Integrated Resource Information System (IRIS). 1:38:32 PM Commissioner Fisher turned to Slide 1: "Table of Contents": · Iris Overview · Shared Services Overview · Public Sector Examples · Scope Of Shared Services Model · Client Migration Approach and Timeframe · Governance · Key Performance Indicators and Independent Verification and Validation · Expected Challenges and Resolutions · Project Status Dashboard · Cross Departmental Efficiencies Background Commissioner Fisher turned to Slide 2: "IRIS Schedule". He stated that the state had launched the financial and procurement components of IRIS in July 2015, and was now in the stage of stabilizing and optimizing the environment. He said that the human resources module would be launched at the end of 2016. He continued to Slide 3, "Change Management and 'Managing Change'". He said that the department was in the process of adding data to the system and that the capabilities of the system were increasing daily. He estimated that most state departments were between hope and acceptance. He added that some departments were behind schedule, but that work was being done to catch up. 1:40:12 PM Commissioner Fisher scrolled to Slide 4: "Looking Forward: The Promise of IRIS": Reengineering Financial Business and Decision-Making Processes · Real-time access to complete information · Ability to search by session reference - legislative bill source for an appropriation · Expense budgets linked to revenue budgets for better compliance controls · Accounting corrections tied directly to original transaction · Budget structures control and enforce budgets for projects and grants · Expedite annual close-out activities that normally occur over two month period · Easier Comprehensive Annual Financial Report (CAFR) development Reengineer Purchasing for Improved Savings · Vendor Self-Serve - empowers vendors to be custodians of business opportunities available through state procurement · Over 100 solicitations posted to VSS since Go-Live (44 RFQ, 20 RFP, 19 ITB, 15 IRFP and 2 RFI) · 20 solicitations have had electronic responses from 33 vendors · Vendors have submitted 86 electronic invoices, ranging from $1.50 to $88,500 · Greater Transparency · Vendors and members of the general public can track the prices paid per NIGP unit per commodity code Workflow Reengineering · Approvals and workflow are integrated and inseparable · Workflow - routing of the document to "team" work lists · Email notification when an event occurs · Serve as internal controls - provide central control and monitoring of transactions · Specific department and managerial requirements · Significantly reduce elapsed time for document approval processing - eliminate routing of paper files · Three-way-match - integrating procurement and financial processes · Purchase Order using Punch-Out E-commerce capability / Vendor ships / Receiving Confirms / AP processes….all tied together in an automated process Commissioner Fisher expressed excitement with the possibilities for efficiencies that the system would bring, but stressed that processes needed to be built around collected data in order to facilitate those possibilities. 1:42:45 PM Co-Chair Neuman queried the original proposed cost of IRIS. Commissioner Fisher stated that the department had budgeted $85 million to $90 million and expected to stay on budget. Co-Chair Neuman thought $90 million had been originally appropriated for the initiative. Commissioner Fisher agreed. 1:43:23 PM Vice-Chair Saddler asked that the acronyms in the presentation be identified as the conversation progressed. 1:43:43 PM EVERETT ROSS, CONSULTANT, ALASKA SHARED SERVICES, began with Slide 5: "Business Model Compare": Shared Services Model vs. Centralized  Decentralized Model · Federated support model of varying processes & systems within the agencies. · Focus on responsiveness and customer service. Centralized Model 5% - 15% Savings · Processes and systems consolidated into a single cost center. · Standardized processes with a single technology platform. Shared Services Model 30% Savings / 50% Hybrid · Centralized, standardized, simplified. · Profit center driven to create efficient service delivery & meet customer needs. Mr. Ross related that the savings associated with the Centralized Model was short-term; the savings went away because the focus was on information technology (IT), and staff, and not business process reengineering or standardization. He said that the Shared Services Model focused on centralizing technology, standardizing the business process, training staff, using customer data, and delivering value based on those factors. He asserted that the model constantly focused on process standardization, reducing cost, increasing efficiencies, and delivering higher quality service to the customer. 1:47:27 PM Vice-Chair Saddler understood that the Centralized Model would yield only short-term savings, and the Shared Services Model centralized IT while maintaining a focus on business process. Mr. Ross replied that the Centralized Model was a business process that was supported by a technology platform which were all centralized. He stated that the initial savings was because staff was being reduced and the process was coming before one entity; savings eroded because there was not a constant focus on business process, standardization, and staff training. He offered the example that the state had 13 different cabinet agencies, with 13 different ways of doing accounts payable; all 13 variant models would need to be standardized in order to move them to one platform without losing cost savings. 1:48:58 PM Mr. Ross explained Slide 6: "Shared Services Overview", which offered an illustration of Decentralized Services versus the Shared Services Model. He asserted that the Shared Services Model was a "win on both sides." He explained that the core mission of the Shared Services organization was to deliver high quality back-office functions, with efficiency, and at a low cost. Meeting customer needs cheaply and efficiently would free up budget and staff in the agencies to focus on core mission activates. Mr. Ross continued to Slide 7: "Shared Services Overview": Shared Services Foundation  Mission · Provide back-office support of common administrative transactions to allow agencies to use budget and staff to focus on core mission responsibilities. Mr. Ross explained that if an organization wanted to expand into a new service offering, customer data would need to be collected in order to assess need. Structure · Strong data-centric organization focused on Key Performance Indicators (KPIs). Mr. Ross stated that the KPIs were metrics around quality, cost, efficiency, and staff associated with each service offering, and were reviewed with clients monthly. · Use of Lean Methodologies to drive continuous improvement (reduce costs, improve quality, reduce cycle-times). · Service Level Agreements (SLAs) established with each client / service. Mr. Ross shared that if accounts payable were provided to a client, the client would request that drivers be measured, which was part of a Service Level Agreement. He elucidated that SLAs were two-way: the service delivery on the shared services organization side, but was also on the client commitment to change. He asserted that in order to fully leverage the technology investment, or the investment in the new business process, there were certain actions were required of the client. · Strong governance and controls of spend while supporting adoption of enterprise investments. Benefits · Shared Services Models targets 30% - 50% reduction in costs. · Increased quality and service delivery. · Increased speed delivery. · Increased client satisfaction. Strong leadership is required to support and mandate the use of a shared services model. Mr. Ross advanced to Slide 8: "Business Model Compare - Accounts Payable": Before Shared Services  · Manual Volume: 1.5M Transactions · FTE: 219 · Cycle Time: 30 + Days · Transaction Rate: $56 · Annual Cost: $13.5M After Shared Services  · Manual Volume: 150K Transactions · FTE: 45 · Cycle Time: 1.4 Days · Transaction Rate: $0.00 - $12 · Annual Cost: $2.7M The slide contained an example of actual data form the state of Ohio Accounts Payable service offering before a shared services approach and after implementation of a shared services model. The shared services approach allowed the state to realize reductions in: manual volume, full- time equivalents (FTE), cycle time, transaction rate, and annual cost. Reduction in cycle times from 30 plus days to 1.4 days allowed the state to leverage additional savings with prompt-pay discounts (2/10 net 30), with a total opportunity of $150 million. 1:52:58 PM Vice-Chair Saddler asked whether the cost line for annual transactions included both automated and manual transactions. Mr. Ross said that was correct. Vice-Chair Saddler assumed that much of the remaining cost was because of the manual transactions. Mr. Ross agreed that most of the annual transaction cost was due to manual transactions. Vice-Chair Saddler posited that the transaction rate on the slide of $12, was the average for both the automated and the manual. Mr. Ross relayed that the number was a point in time; October 1, 2015, and was an average rate. He shared that reducing cycle times had presented other opportunities in other procurement areas For example, prompt pay discounts, which were standard in most contracts, often resulted in a 2 percent reduction of the overall invoice. Representative Gara asked whether Alaska was receiving the 2 percent, prompt pay discounts for prompt pay. Mr. Ross clarified that his information was limited to the experience of the state of Ohio. Commissioner Fisher interjected that the administration was in the process of modifying its contractual terms in an effort to lock in the 2/10 net 30 terms. Representative Gara asked why a company would want to offer a 2 percent reduction for paying a bill 30 days early. Mr. Ross stated that the time value of money was important to most business and it was not unusual in business to receive a 2 percent discount for prompt payment. Co-Chair Neuman thought that the prompt payment discount made business sense. He felt that the idea of making payments, electronically in to IRIS, rather than manually entering them, had value. Representative Gattis thought that being paid back on a timely basis when borrowing at higher than 2 percent was significant. She stated that the discount was common. Co-Chair Thompson commented that as a vendor he had experienced the benefits of the 2 percent discount, and added that it was a common business practice across the United States. He shared that the discount created faster turn around and financial savings. 2:00:54 PM Representative Munoz asked whether the Medicaid management system would benefit from the IRIS. Commissioner Fisher believed that the Medicaid management system was a "different can of worms." Representative Gara deduced that 2 percent, for 30 days, was equal to 24 percent per year, which was a surprisingly high number. 2:01:45 PM Mr. Ross turned to slide 9: "Business Model Compare - Travel & Expense": Before Shared Services  · Annual Transactions: 28,000 - 30,000 · Avg. Cycle Time: 32.5 days · Cost: $267.21 per transaction · FTE: 129 · Annual Cost: $7.75M After Shared Services  · Annual Transactions: 28,000 - 30,000 · Avg. Cycle Time: .8 days · Cost: $6.42 per transaction · FTE: 3.1 · Annual Cost: $285K The slide reflected the difference before shared services and after shared services using the same drivers as the previous slide. Travel & Expense processes supported by 26 Agencies were migrated to Ohio Shares Services from 2009- 2010. Ove the next 24 months several re-engineering and standardization efforts resulted in reduced costs, reduced FTE support, increased compliance, higher quality, and faster cycle times. Changes in policy, process, and fully leveraging existing technology resulted in a $7.4 million savings annually. Mr. Ross noted that the changes were experienced over 3 years, and that gains were constant. Co-Chair Neuman wondered how many transactions Alaska handled annually. Commissioner Fisher responded that the Ohio numbers were comparable to Alaska. 2:04:30 PM Co-Chair Neuman queried the total of all of the transactions in every department. Commissioner Fisher said that he would get back to the committee with the information. Representative Edgmon thought that it would be interesting to apply the before and after scenarios to Alaska's operations. Commissioner Fisher believed that the magnitude of the change could differ between Alaska and Ohio, but expected that, directionally, there would be similarities. He anticipated the savings to the state would be between 30 and 50 percent. Co-Chair Neuman asked how much the state spent per year in purchasing. Commissioner Fisher lamented that he did not have the numbers but that the department was working toward establishing those benchmarks. Co-Chair Neuman asked how much the state spent in FY16 in purchasing transactions. Commissioner Fisher stated that the total spend, some funded by the federal government, and was approximately $1.5 billion for procurement of goods and services. Co-Chair Neuman asked how much of a percentage of savings on that total the state could expect with the new system. Commissioner Fisher said that the main focus of shared services was to drive the efficiency of the organization that was managing purchasing, accounts payable, and travel. He said that savings would be realized by finding efficiencies in personnel and related costs associated with personnel. Co-Chair Neuman worried that smaller companies would not offer the state the 2 percent, prompt pay discount, and those that did would not have the high average of Ohio. He reiterated his request for a spreadsheet with all of the state's transactions. Commissioner Fisher agreed to provide a document that could give the committee greater insight, He indicated that the administration would be developing a specific set of goals and targets for savings. Co-Chair Neuman asserted that the state needed to have accountability for IRIS, he felt that the administration should already have transaction and spending numbers. He opined that Alaska had fewer contractors for hire than Ohio. 2:09:23 PM Representative Guttenberg asked if there was an interagency aspect to the shared services organization. Commissioner Fisher replied that he would address the question further in the presentation. 2:10:12 PM Representative Gara wondered whether companies would inflate prices by 2 percent in anticipation of the prompt payment discount. Commissioner Fisher responded that there was value to being paid promptly. He reiterated that the term was a business standard and did not believe that companies would be increasing their prices in a competitive market. He said that cash flow was one of the hardest things for small businesses to manage, which increased the value of prompt payment. Co-Chair Thompson added that the majority of companies offered the prompt payment discount for commodities and not services rendered. Mr. Ross replied that, in Ohio, service contracts were a little different, but small consulting firms and services gravitated toward the 2 percent discount. He said that discounts were commonly given for commodities, but there had been some crossover into services. Co-Chair Thompson thought that some companied even offered up to a 5 percent discount. 2:12:49 PM Vice-Chair Saddler asked whether the shares services model had already been integrated into the IRIS system. Commissioner Fisher replied that the presentation was on how the IRIS system could be leveraged and expanded. He said that the system provided the capability to enable shred services, but the expansion would take the disciplined and sustained effort of the state. Vice-Chair Saddler wanted clarification on what could be added to the system. Commissioner Fisher explained that IRIS needed to expand and evolve in order for the state to benefit, otherwise it might as well be working under the old system. Vice-Chair Saddler understood that the administration was endorsing the additional capacity of IRIS in the presentation. Commissioner Fisher indicated that the agency was already utilizing the system and proceeding forward with the development of shared services. Co-Chair Thompson relayed that he had been surprised when he learned how much of the state's systems were under the old mainframe. He wondered how departments with the older systems would be handled and how they would interact with IRIS. He opined that the coding would be out of date, which would lead to problems. Commissioner Fisher agreed that there were a number of programs supported under the mainframe. He offered that many departments were working to migrating to other systems off of the mainframe and that many would be off within the next 3 years. Co-Chair Thompson asked whether there was interactions between the old mainframe systems and IRIS. Commissioner Fisher responded that some systems interacted with IRIS and some did not depending on the functionality of the system involved. 2:16:52 PM Representative Wilson asked if it would take legislation in order for there to be only one system. Commissioner Fisher clarified that IRIS was the state's financial system and all departments were using it, there is no alternative. He explained that there were a variety of applications on the mainframe that IRIS did not provide, and had not been intended to be replaced. 2:18:36 PM Representative Wilson understood that moving to the shared services organization could result in greater efficiencies throughout all departments. Commissioner Fisher agreed. He said that one of the challenges for the administration would be that each agency processes and invoice slightly differently. He related that the state would need to move to a common management process for accounts payable as the result of moving to a shared service model. 2:21:16 PM Representative Wilson surmised that a shared services model would allow departments to share information and eliminate redundancy. Commissioner Fisher replied that the essence of shared services was pulling departments together and then working with them to meet their needs in a standard and consistent way. Mr. Ross turned to Slide 10, which presented a table charting the scope of Ohio Shared Services, with color indicators of: Original Scope for Ohio Shared Services, Most frequently in Shared Services, Typically in IT Centric Shared Services. He relayed that when he arrived in Ohio in 2011, 8 of the 26 cabinet agencies were on board with the shared services program. He said that once an independent audit was performed the reduction in costs was validated, client demand rose, and the shared services program proved successful for the state. 2:22:21 PM Mr. Ross continued to Slide 11: "Migration Approach & Timeline." Uphill Stages · LNW Horizons of Value (Vision, Launch, Growth, Sustain) · Service line(s) identified · Service line launch & growth · Increase in clients, volume, staff, costs, & defects Downhill Stages · Continuous improvement cycles (Improve, Automate) · Business process re-design · Technology implementation / support · Decrease in manual volume, staff, costs, & defects · Downhill stages are continuous as ROI permits Mr. Ross discussed his approach for successfully launching the shared services system in Ohio. 2:25:25 PM Co-Chair Thompson asked how long it had taken for the State of Ohio to realize savings. Mr. Ross replied that the savings were immediate if the plan was implemented correctly. He stated that often organizations would migrate everything all at once, or "lift and shift". He opined that the lift and shift model was unsuccessful because of non-standard processes and different customer expectations, coupled with the shared services organization not being mature enough to support 13 different ways to pay a bill. Co-Chair Thompson understood that the "customers" in this scenario were state agencies. Mr. Ross replied in the affirmative. He added that the lift and shift model always failed, and that his approach had changed into a more incremental approach. He shared that the slower approach allowed for knowledge of client needs, a mature shared services organization, and a standardization of each client as they crossed over. 2:26:51 PM Vice-Chair Saddler requested further clarification of Slide 11. Mr. Ross responded that the 12, 24, and 36 months was an average maturity cycle time. He explained that as the curve on the chart grew, so did the staff, volume, and the cost of the process for the internal service provider. He added that defects also increased because of the number of non- standard processes. He said that the downhill slope of the graph indicated that continuous improvement was occurring and automation was pushing staff and costs down. Vice-Chair Saddler understood that the "Y" axis on the chart represented cost and staff time. 2:28:16 PM Mr. Ross discussed Slide 12: "Governance & Service Level Agreements (SLAs)": Governance Council · Executive Council approving overall strategy. · Address major scope expansion and investment decisions. Executive Council · Approve policy recommendations submitted by Process Council. · Independent Verification & Validation (IV&V) to ensure value realizations. Process Council · Client Subject Matter Experts (SMEs) recommending and approving process changes and policy recommendations to Executive Council. · Ensuring goals established by Executive Council are delivered. Service Level Agreements · Driving day-to-day tactical work effort to meet customer expectations and shared service goals. · Client commitments defined. 2:30:07 PM Mr. Ross reviewed Slide 13: "Independent Verification & Validation (IV&V) & Key Performance Indicators (KPIs)." Key Performance Indicators (KPIs) · Key Performance Indicators (KPIs) are the metrics used to assess the organization's efficiency, quality, and cost effectiveness. · Key Performance Indicators (KPIs) are established by clients. · Data drives course correction and continuous improvement initiative (i.e. Lean / Continuous Improvement Program). · Client Scorecard reviewed with clients each month to compare service delivery against Service Level Agreements (SLAs) and client baseline. Independent Verification & Validation (IV&V) · Independent Verification & Validation (IV&V) functions to ensure the shared services organization delivers expected value to clients. · Aligns agency investment with enterprise goals. · Validates successful delivery of enterprise strategies. · Clients self-report data related to program delivery. · Builds client confidence in accuracy of data and value of shared services model. Mr. Ross continued to Slide 14: "Expected Challenges & Resolutions." Leadership & Stakeholder Support · Resistance to change & line of business focus. · All leaders create and "sell" the vision (Market vs. Mandate). Implementation Cost · High cost of implementation / expansion. · Utilize existing resources to execute on the vision and drive change (i.e. Business Integration Services). Return on Investment · Inability to predict when/if ROI will be achieved. · Align agency spend to achieve enterprise goals. · Leverage existing investment to meet objectives of the business. Shared Services Process Focus (Upstream vs. Downstream) · Implementation focused on downstream transactional processes. · Upstream processes largely ignored (i.e. procurement). · Force upstream focus to drive greatest benefit. Mr. Ross read from slide 15: "Cross Departmental Efficiencies." Background  Opportunity Review: In May 2015, OMB Director Pat Pitney convened commissioners, deputy commissioners, and administrative service directors to identify cross-department opportunities to address the $29.8M in unallocated reductions. As a result of this session, eleven cross-departmental efficiencies were identified; nine align with common shared services programs. Cross-Departmental Initiatives: Administrative Initiatives: 1. Train and implement process improvement principles statewide 2. Travel process revamp 3. Renegotiate procurement/lease contracts for 10-20% savings statewide 4. Implement IRIS 5. Unify facility maintenance / management 6. Central collections office for agency fines, debts and attachments 7. Re-examine charge back system between departments 8. Statewide IT consolidation; call centers, disaster recovery, helpdesk staff, and data storage 9. Streamline billing for LAW Next Steps: The Departments of Administration and Transportation are leading the administrative efficiency initiatives. As the administrative initiatives align with common shared services support models, Everett Ross (former Director of Ohio Shared Services) has been brought in for external support. 2:34:24 PM Commissioner Fisher referred to an earlier question from Representative Guttenberg, noted the interagency sharing both externally and internally. 2:34:48 PM Representative Kawasaki shared that he had pondered in the past why every department needed an administrative services division. He wondered whether there were some agencies for which combining procurement efforts could be difficult. Mr. Ross joked that every division held the belief that it was special and unique. He said that over time that mindset changed, he said when he began offering zero-cost on accounts payable invoices 90 percent of the divisions came onboard. He shared that there were certain services that would not fit into the shared services model; a small percentage of services should be expected to remain being handled solely by their agency. 2:36:45 PM Representative Kawasaki surmised that the eventually Alaska would not need an administrative services division in every department. Commissioner Fisher replied that the administrative services within each different department had a number of functions, some of which were specialized. He said that a paring down would vary depending on the service provided by the division. Representative Kawasaki hoped that the all departments would work to realize savings. 2:38:16 PM Representative Guttenberg asked about the 11 cross- department efficiencies that had been identified, 9 of which had been aligned. He queried the 2 efficiencies that had not aligned. Mr. Ross believed that they were aligned with the Department of Corrections and that the administration had chosen not to focus on those pieces. Commissioner Fisher interjected that one of the issues had been improvement of prisoner transport, which had not seemed like an appropriate fit for the shared services model. 2:39:06 PM Representative Wilson asked whether the shared model would centralize procurement and lessen confusion between agencies. Commissioner Fisher replied that the goal was to make the non-core mission functions that could be performed in a shared service model, centralized and delivered in the most efficient way possible 2:39:55 PM Representative Wilson asked whether the budget process be easier with the shared services. Commissioner Fisher indicated that there would still be examples of interagency payments for services. He thought that it would make budgeting management and accountability easier to track. 2:41:06 PM Vice-Chair Saddler asked whether there was anything in statute that would pose challenges to implementing the shares services model. Mr. Ross replied that every agency would have to review policies and implement laws in order for the model to reach full maturity. He guessed that changes would need to be made to adopt to a new way of doing business. Commissioner Fisher interjected that substantial impediments had not been identified that would prevent the change from moving forward. 2:42:36 PM Representative Gattis thought that the transition to shared services was a good idea. She said that the onus would be on the administration to prove that the centralization would benefit the state. She asked why Mr. Ross was no longer working in Ohio. Mr. Ross related that he worked with a lot for Harvard University and often traveled on speaking tours. He had met Commissioner Fisher at a presentation and had discussed the possibilities of shared services in Alaska. He concluded that he had done all of the work he needed to do in Ohio and welcomed the challenge of helping Alaska. 2:45:33 PM Representative Pruitt who was paying Mr. Ross's salary. Mr. Ross responded that his contract was through the Department of Administration and the Department of Transportation and Public Facilities. 2:46:34 PM Representative Pruitt asked whether Mr. Ross was a vendor who received his payments through IRIS. Commissioner Fisher clarified that all state payments were being process through IRIS. Mr. Ross indicated he had gone through the vendor process and had been paid promptly through the IRIS system. Co-Chair Thompson discussed housekeeping. #ADJOURNMENT 2:49:21 PM The meeting was adjourned at 2:49 p.m.