OMES Information Services Financial Rate Update: Rate Methodology

1. OMES Information Services (IS) Financial Rate Update

2. Deep Dive – Rate Methodology • Background • Update & Key Findings • Labor Rates – Comparisons & Proposed • Next Steps

3. Project Definition • Success looks like we have a financially viable business and operating model that is transparent and sustainable while delivering quality IS services for the State of Oklahoma. • Develop options for funding OMES IS that provide: • Clarity around OMES chargeback rate system • Greater acceptance of chargebacks • Ownership for costs where it is managed (driving the right behavior) • Rates last updated in 2016

4. Project Definition What this project is: • Developing rates that cover cost • Providing transparency in how the rates are calculated • Validating that OMES IS rates are in line with the market and other states • Establishing a rate process that engages OMES IS and Agencies earlier to enable consistent budgeting What this project isn’t: • OMES IS increasing rates to make a profit

5. Background • Obtained feedback from: • OMES IS Leadership • OMES Finance • Agencies • IS User Group • Meetings with 5 Agencies of different sizes and funding sources • Interviewed Utah, Missouri and Tennessee for their lessons learned • Worked with Legislators • Developed Rate Models for Labor and Parts that will facilitate regular rate updates by OMES IS.

6. Approach May June July

7. Themes from Agency Interviews Good News • Desire for a partnership with OMES- Agencies want to have a strong partnership with OMES. In order for agencies to succeed, OMES needs to succeed. • Talent – Agencies willing to help fund the talent needed to get their projects done. • Provide Assistance – Agencies offered specific help in solving the Federal funding issue (Health) and the legislative funding (Tax). They also want to stay involved as we develop the rate models.

8. Themes from Agency Interviews Improvement Opportunities • Partnership – Agencies do not feel that their needs are being heard and responded to in a reasonable time frame. • Billing Transparency – • Invoicing is confusing to agencies and cannot easily be recreated leading to a lack of trust in the system. • When issues are found, they are not promptly corrected. • Project Management – Process feels bureaucratic and causes unnecessary delays and frustration. • Resource Challenges – Several agencies noted that they don’t have enough resources to accomplish their projects and that if they do get good resources that start to understand their agency, the resources can then be pulled to other areas without understanding the implications to the projects of the original agency.

9. Themes from Agency Interviews Areas of Agreement • Hybrid model- • Agencies supported the Hybrid Model. • Differences in opinion on what services should be legislatively funded vs. agency funded. • Some desire to have a Federated Operating Model. • Agreement with design principles – Agencies agreed that the newly developed rate model should meet the 6 design principles.

10. Key Findings • In a typical fiscal year, IS is underfunded by $15-20MM. • The current labor billable rate model is not viable. • Many products have significant losses (expenses exceed parts’ revenue). • Several customers desire dedicated IS staff. • The state should seek to maximize its Federal dollar recovery. • Current IS labor rates are well below 1025 vendor rates. • IS must operate like a private sector business because it is competing in talent and costs with the private sector. • IS rates should be established one year prior to Fiscal Year. • If there is an over-recovery of non-Federal dollars, there should be an IS Working Capital Fund established and rebates considers (per other states). • Establish a Project Governance Council to improve Enterprise Prioritization and Justification for projects.

11. Design Principles The new models should address the six principles identified in the state audit: Accountability – End User and Provider have accountability through a charge back system Consistency – Develop the philosophy for charging and apply it consistently Predictability – Enable customers to build service charges into their budgets Established Methodology – Written process detailing about how and why an agency will be charged for the services it uses Communication – Data on use of services is communicated throughout the organization Efficient Use of Limited Resources – Setting rates higher for more experienced or efficient resources to allow them to be available when needed Oklahoma Agency Performance and Accountability Commission’s OMES Comprehensive Performance Audit (DRAFT), PFM Group Consulting

12. Desired Behaviors • Improved Project Performance • Increased Early Engagement through Collaboration • Improved Awareness between Customers and OMES IS • Project Prioritization Alignment with Strategy(ies)

13. Funding Model Options Option #1 Updated Rates Option #2 Hybrid • Line of Sight • Mixed funding between Legislature and Agencies • Product rates and line of sight for labor to Agencies • Enterprise-wide costs and administrative costs to Legislature • Fully burdened rates • Full funding by Agencies • Updating rates to cover full cost Note: will continue to reflect funding by grants and exclude those from these costs above

14. *this amount is an estimate based on current FY20 budgeted expenses and could potentially change during the FY21 budget process. Fully-burdened rate 14 $181.4MM FY21 Forecasted Expenses* FY21 Other Funding Sources $0.5MM Federal Grant Funding $0.8MM OI Fund Revenue $24.8MM FY21 Direct Approp. $45.0MM Passthrough $71.1MM Total Other FY21 Parts Revenue Assume Part prices remains the same as FY21. $83.8MM Current Parts Revenue or $75.5MM Current Parts Revenue(excl. CORE-Financial System) FY21 Chargeback Dedicated Headcount 182 Application Dev Svcs 55 PM/BA 30 IT Strategists 267 Total Chargeback Headcount Fully-burdened rate recovery

15. Direct Appropriation Candidates TOTAL Direct Appropriation $16.7MM • Service Desk ($3.2MM) • IS Security ($6.8MM) • IS Admin & Fac ($6.7MM) TOTAL Direct Appropriation $24.8MM • Service Desk ($3.2MM) • ERP-Financial (9152) ($8.1MM) • IS Security ($6.8MM) • IS Admin & Fac ($6.7MM) TOTAL Direct Appropriation $34MM • Service Desk ($3.2MM) • ERP-Financial (9152) ($8.1MM) • IS Security ($6.8MM) • IS Enterprise Architecture (Exp $1.3MM) • IS Admin & Fac ($6.7MM) • IS Quality (Core) (9172) ($1.3MM) • Data-Driven Services ($6.6MM)

16. Labor Rates

17. Labor Rate Model Changes • Future IS Chargeback Staff: Staff, such as developers, project managers, business analysts, who are dedicated to support customers. • It is assumed that 80% of the IS staff headcount for these roles will be 100% dedicated to agencies. These staff will bill agencies at 2080 hours (1 Full-time Equivalent) per year times (*) the Labor Rate. • The remaining 20% of IS staff headcount for these roles will be 50% dedicated to “pools” of smaller agencies and/or assigned for projects that the dedicated staff are unable to support. • Additional staff (i.e. network specialists, workstation specialist, database admins, etc.) may be requested to support a Customer. • Hours to support IS Products to Customers will not be billed—they are included in the Product rate(s). • Current IS Chargeback Staff: Typically centralized staff, such as developers, project managers, business analysts, who worked on customer projects as needed. • Only billed for actual hours work which resulted in underbilling by vacation, meetings, etc. • Hours to support IS Products to Customers will not be billed—they are included in the Product rate(s).

18. REVISED Labor Rate Tiers (5 Parts) IS Chargeback Staff

19. OMES Proposed Labor Rates Compared to 1025 Vendors *OMES Position designates the position of OMES’s rates among benchmarked rates against the 1025 vendors on a scale from lowest benchmark rate (i.e. “1”) to the highest rate. 1025 vendors are staff augmentation providers, approved by the State.

20. OMES Proposed Labor Rates Compared to 35 Peer States

21. Product Rates

22. Product Rates 166 FY20 Product Parts 89 FY21 Product Parts 46% reduction in Parts Significant = 50% or greater variance Medium = 10% - 49% variance Minor = less than 10% variance Aligned = no variance Not Reviewed = resolved to remove, a leased or passthrough part, or lacked data for analysis

23. KEEP with NO RATE CHANGE

24. KEEP with NO RATE CHANGE

25. NEW PARTS & RATES

26. UPDATED PARTS-REDUCED RATE

27. UPDATED PARTS-INCREASED RATES • NOTES: • 578 rate will not be implemented if Direct Appropriation is $24.8 or higher. • 605 rate is to recover the full costs for the CFE data center (has been $2.9MM under-recovery) • 596 rate is currently $2,352/yr. It should be $6,365/yr, based on actuals costs. Proposal is to increase it 50% to $3,528/yr.

28. UPDATED PARTS-INCREASED RATES • NOTES: • 589 rate is currently $3/yr. It should be $5.14/yr, based on actuals costs. Proposal is to increase it $0.36/yr to $3.36. • 661 & 663 • Forecasted cost is $733/yr. • Resolved to keep rate the same to minimize impact because this affects all customers.

29. REMOVE from the Catalog

30. REMOVE but continue billing until End of Life

31. REMOVE from Catalog because Customers may purchase direct

32. REMOVE from Catalog merged or replaced with Chargeback rates

33. FY21 Compressed Budget Timeline • DUE DATE Budget Inputs Completed • FY21 Product Volume & Project Requests • Product & Labor Rate Approvals • Budget Modeling (Revenue & Expense) Budget Request Submission DUE DATE to OMES 10/01/2020 GTARB Approval 09/16/2019 App C’s Executed 05/31/2020 2019 2020 Start 07/01/2019 May Jun Dec Jan Nov Jul Oct Feb May Apr Mar Aug Sep Today 19 days 20 days 122 days FY21 Call for Projects 09/09/2019 - 09/30/2019 Budget Updates 10/1/2019 - 11/15/2019 Legislative Approvals 01/01/2020 - 05/31/2020

34. FY22 Future-State Budget Roadmap Budget Request Submission DUE DATE to OMES 10/01/2020 Budget Instructions 07/01/2020 App C’s Executed 05/31/2020 GTARB Approval approx 08/15/2020 Start 05/15/2020 2020 2021 May Jun Dec Jan Nov Jul Oct Feb May Apr Mar Aug Sep FY22 Call for Projects Today 46 days 5/15/2020 - 7/1/2020 46 days Budget Prep 1 7/1/2020 - 8/15/2020 45 days Budget Finalization 2 08/20/2020 - 09/30/2020 121 days 11/15/2020 - 12/15/2020 Mid-year Rate Review 01/01/2021 - 05/31/2021 Legislative Approvals 1 Budget Prep includes product volume, selection, and rate discussions 2Budget Finalization period used to update rates following GTARB approvals for DUE DATE submission

35. Frequently Asked Questions • Does this mean my bill from OMES IS will go up? • It depends on your mix of labor and products, but likely yes (remember that OMES IS has been underfunded by $15 - $20 million per year) • What happens if I sign up for x number of a product and it changes during the year? Does my bill get increased or decreased accordingly? • The rates are based upon the demand you project needing during the year. If your demand goes down, you will continue to pay the amount you projected. If your demand goes up, your bill will be adjusted during the true-up period. • What if my agency has a special need for a product I don’t see on the catalog? • You can always get in touch with your IT Strategists (headcount) or Account Executive (parts) to get your specific needs met

36. Frequently Asked Questions • How can I compare my FY20 App C to this catalog? • Use the parts lists provided today to start the process. You will need to work with your AE or IT Strategists to work through part 628 (applications maintenance) • What if my agency isn’t large enough to have dedicated IS resources? • OMES IS has created a pool of resources (developers, project managers, etc.) who can be dedicated to you when needed. • Am I only paying for the hours the dedicated resources work on my project? • No – the rates are calculated based on the average 2080 hours/year and that is what you will pay for your resources. If you do not have dedicated resources, you will pay for the hours worked on your projects. • Given that OMES IS labor rates are lower than other states, how do we know we will be getting competitive resources? Should the labor rates be even higher? • This increase will help us ensure we keep good people who want to serve our state and we will continue to evaluate the rates annually to ensure we remain reasonable competitive.

37. Next Steps • Update your FY21 budget submittal based on the new rates and the expected quantities. • Work with your IT Strategist to develop your FY 21 project needs to determine dedicated or needed headcount to deliver them, if not already done. • Work with your IT Strategist and/or AE to determine the quantities for the 5 new parts (prev. App Maint). • Contact you IS AE or IT Strategists with any questions you have.

38. Questions?

39. Enterprise Prioritization Process

40. Before We Begin: Scope of Effort End State: How We Get There: Establish criteria to evaluate acceptance and prioritization of projects. Establish a governance model to review and advise components of the OMES portfolio. Establish a disciplined and transparent intake and prioritization process, with supporting templates. Establish a process to report status and roadmap progress on an ongoing basis. OMES-IS is disciplined and transparent in its receipt, assessment, and prioritization of technology requests across the state…. Purpose: …so that OMES can accurately assess capacity against demand and effectively support the State in its digital transformation efforts.

41. Assumptions • Establish an Annual Call for Projects to gather roadmap (likely in Sept/Oct prior to FY, then revise during budget cycle) • Establish standards for: • Architecture • Infrastructure • Security • Prioritization Governance should be relative to the risk and/or capacity conflicts • Large Customers will have dedicated resources (capacity) to deliver Customer-specific efforts • Customers will submit only those requests they have vetted internally (Business Owner) • IS will use this process • This process applies to all non-defects, non-operational & maintenance requests (enhancements, new projects, etc.)

42. Project Types Customer- or Domain-specific Projects These are software and hardware changes that enable unique customer (or domain of common customers) processes with the same impact and do not meet the Enterprise criteria. They have medium life cycle (1-3 years) but need to be reconfigured frequently to accommodate changing business practices and customer requirements. Criteria for Customer- or Domain-specific Projects • Enhancements and projects within capacity of customer’s resources • Impact is localized to a single customer or a small group of like customers • Does not affect enterprise data • Does not require architectural overhaul Intake • These should come into the Prioritization process during an Annual Call for Projects by Sept 1 for next fiscal year to prepare for October agency budgets. (move to N+ forecasting) • There may be ad hoc requests during the FY, but the intent is for the majority to be in the Annual Call Innovation Projects These are new software and/or hardware systems that are built on an ad hoc basis to address new business requirements or opportunities. These are typically short life cycle projects using customer-assigned or outside resources and consumer-grade technologies. Criteria for Innovation Projects • Low risk of impact to the state • High risk tolerance for change • Small cost risk • Short time to implement (0 – 12 months) • Pilot or proof of concept or new efforts may reside within the Innovation area unless it will be implemented as an Enterprise or Customer-Specific project (e.g. Innovation effort that is then deployed across the State) then it will re-enter through Intake for one of the other paths. Intake • Will be approved ad hoc throughout the FY by the Innovation governance, unless there is a resource conflict with other efforts Enterprise Projects These are software and hardware changes that affect statewide, multi-customer, enterprise standards, or system(s) of record. Established COTS software or hardware systems, or legacy homegrown systems that support core operations and manage the organization’s critical master data. The rate of change is low, because the processes are well-established and common to most organization, and often are subject to regulatory requirements. The life cycles can be up to 10 years and beyond. Criteria for Enterprise Efforts • Any new or change to a system of record, excluding defects (so changes have elevated risks) • Any life safety impact • High risk to State operations and/or citizens • Data is regulated Intake • These should come into the Prioritization process during an Annual Call for Projects by Sept 1 for next fiscal year to prepare for October agency budgets. (move to N+ forecasting) • There may be ad hoc requests during the FY, but the intent is for the majority to be in the Annual Call

43. Governance • Enterprise Review Board • Members • Chair: State COO • State CIO • Cabinet Secretaries • Governance • All Enterprise Projects • Innovation Projects where resource conflicts exist • Ability to override an ITOCs priorities • Frequency • Annual for FY Roadmap & Budget Planning • Quarterly for Updates & New Projects • Innovation ITOC • Members • Chair: Digital Transformation Secretary • Deputy Secretary of DT • State CISO • IS Application Dev Director • IS Enterprise Architecture Director • IS Infrastructure Director • Agency-specific Leader(s), based on proposed efforts • Governance • Digital Transformation Initiatives that do not conflict with other efforts • Frequency • Annual for FY Roadmap & Budget Planning • Ad Hoc/Monthly/Quarterly (depending on need) for Updates & New Projects • Customer/Domain ITOCs • Members • Chair: Agency Director(s) • IT Strategist(s) • IS Representative (S. Shah) • Agency Leaders • Governance • Agency-specific and Domain-specific enhancements • Agency-specific and Domain-specific projects • Frequency • Annual for FY Roadmap & Budget Planning • Monthly/Quarterly (depending on need) for Updates & New Projects

44. Stage Gate Process Stage 3 DEFINITION (HOW) Stage 4 EXECUTION Stage 5 CLOSE-OUT Stage 0 CONCEPT Stage 1 INITIATION (WHY) Stage 2 SELECTION (WHAT) G0 G5 G1 G2 G3 G4 • Create Business Case • Determine Gross Order of Magnitude • Determine the breadth of impact • Provide alternative solutions • Identify Risks & Assumptions • Develop kill criteria • Preferred alternative selected • Determine a high-level cost estimate • Determine a high-level schedule • Determine the high-level scope • Identify Risks & Assumptions • Provide a staffing/resource estimate • Conduct IS impact (areas/resources) • Create a high-level architecture • Develop industry/market research • Determine the procurement method • May have additional IS conversations • RFP Awarded • Detailed Requirements (if 3rd party) • Manage Change Orders, if necessary • Configuration • Testing • Implementation • Complete Handover to Operational Support • Close out invoices • Ongoing operations and maintenance • Validate performance • Finalize Budget • Finalize Scope • Finalize Schedule • Determine customer and IS resources • RFP submitted and evaluations • Meet with the business owner • If the business owner agrees, complete the intake form • Define the problem • Define the level of urgency • Define the value of the project • Commit money to the initial INITIATION definition Intake form submitted Business Case Validated Agreed upon alternatives Resources & funding committed Handover to Ops Invoices paid and project completed Deliverables • Project Intake Form Scope, Cost, and Schedule Baselines • Request for Proposal, if needed • Progress Against Plan (Status) • Change Orders, if needed • Deployment Completed • Business Case • High level Estimate • Summary of Alternatives • Revised Business Case • Request for Information, if needed • High-Level Cost Estimates • High-Level Resource Estimates • Post-Project Review

45. Stage Gates by Project Type The stage gate process allows each project to be routed according to its specific needs. Projects that are less complex and do not have significant risk associated with it are able to skip stages. The graphic below illustrates the standard stage gate process for each type of project. However, a project may go back to an earlier stage if needed. System of Record / Enterprise Projects Stage 3 DEFINITION Stage 4 EXECUTION Stage 5 CLOSE-OUT Stage 1 INITIATION Stage 2 SELECTION Stage 3 DEFINITION Stage 4 EXECUTION Stage 5 CLOSE-OUT Stages 1 and 2 INITIATION/SELECTION Customer / Domain Specific Stage 4 EXECUTION Stage 5 CLOSE-OUT Stages 1, 2 and 3 INITIATION/SELECTION/DEFINITION Innovation

46. Questions?