ESA Software Switch Creates $124M Contractor Payment Backlog

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SAN SEBASTIAN, Spain — The European Space Agency (ESA) has run into problems as it changes its management software, resulting in a backlog of up to 100 million euros ($124 million) in unpaid legitimate bills from industrial contractors, ESA and European industry officials said.

The glitch, which ESA officials say should be resolved in a few months, has come at a particularly difficult time for small- and mid-size companies, where cash-flow management presents challenges that do not confront larger contractors.

ESA Director-General Jean-Jacques Dordain confirmed that the software change-out, which is part of a broader financial reform effort designed to give agency managers more flexibility, has stalled legitimate payments to industry.

Dordain, addressing the Space Propulsion 2010 conference here May 3, said agency management is well aware of the problem and the urgency of getting expense-claim checks sent out to contractors without delay.

“We shall pay industry” as the agency works through the issues, Dordain said, “even if we have to go back to the old technique of signing checks.”

Ludwig Kronthaler, ESA director of resources management, acknowledged the issues in a May 26 interview and said the agency is making a special effort to reimburse smaller companies as both ESA and its contractors adapt to the new business software.

Kronthaler said the new software, provided by SAP, was installed for ESA’s internal use starting Feb. 18. On March 22, it was extended for use by industry. In both cases, he said, it required an immediate change in the way ESA personnel and agency contractors input their data. Any input errors, he said, will lead to nonpayment of bills.

Once it was aware that the problems of adapting to the new system would take several months to wash through the system, ESA assigned seven accountants to handle questions and complaints delivered to ESA’s online contractor mailbox.

“This [account reconciliation] project is fully in place and payments have top priority,” Kronthaler said. “There is clearly a backlog. I don’t deny the problem, and we apologize to our contractors. We know they desperately need to be paid. But we believe at this point it is under control.”

One measure of progress in getting payments out the agency’s door is comparing today’s situation with 2009.

Kronthaler said that by May 1, 2009, ESA paid out 1 billion euros in contractor bills. As of May 21 this year, it had made some 6,000 payments totaling 900 million euros.

“So we have a gap of perhaps 100 million euros,” he said, adding that 500 million euros of the payments made so far — representing 5,500 separate transactions — occurred after March 22, when industry had begun to use the new software system.

But the actual shortfall may be less than 100 million euros because the difference between 2009 and 2010 includes the effect of a change in ESA’s contract payment policy that took effect in January.

To help struggling contractors, the agency had agreed to pay up to 50 percent of a contract’s value up front, at the time of contract signature. Starting this year, the top up-front payment is 25 percent. But Kronthaler said small companies continue to be eligible for up to 50 percent at the time of the contract’s signature, in recognition of their cash-flow requirements.

The contract payment modification, instituted in part to reduce ESA’s cash demands on its 18 member governments, likely accounts for at least some of the difference between 2009 and 2010 payment rates.

Kronthaler said the SAP software suite is being installed in three phases. The first, which is nearing completion, accounts for well over 60 percent of the total system and is the most difficult because it introduces abrupt, low-tolerance changes for contractors and agency program managers alike. Problems related to this installation should be resolved by September, he said. The second phase will be the project cost-planning portion. The third, to be fully installed by early 2011, involves accounting for fixed assets and assets under construction.

Dordain has said the financial reforms he persuaded ESA governments to accept will make it easier for the agency to move cash around and all but eliminate the problem of having idle cash building up in one ESA program’s account while other accounts require the agency to ask its member states for fresh payments.

“This is a long-term investment, and we don’t do it for fun,” Kronthaler said. “It will give us greater budgetary flexibility and a way of better using our treasury.”