Supports Item No. 2

CS&B Committee Agenda

September 9, 1997

ADMINISTRATIVE REPORT

Dated: August 28, 1997

TO: City Services and Budgets Committee

FROM: Corporate Management Team

in consultation with the Corporate Systems Replacement Project Team

SUBJECT: Corporate Information Systems Replacement - Award of Contract

RECOMMENDATIONS

A. THAT Council approve the Corporate Information Systems Replacement Project budget of $20.9 million outlined in this report; source of funds to be the Information Systems Replacement Financing Plan approved by Council on July 23, 1996.

B. THAT Council approve the City entering into a contract with SAP Canada Limited and Ernst and Young consultants for the acquisition and installation of software to replace the City’s current financial, human resource and payroll systems at a cost of $11.2 million, as detailed in this report. Implicit in this purchase is a City commitment to ongoing systems maintenance costs with SAP Canada based on 15% of the software purchase cost (translating to $656,000 annually).

C. THAT Council instruct the Director of Legal Services to execute the contract with SAP Canada / Ernst & Young Consultants on terms and conditions satisfactory to the General Manager of Corporate Services.

D. THAT Council approve an allocation of $0.5 million to fund a field data entry pilot project in Engineering Services with a report back from the General Manager of Engineering Services on the costs and benefits of the project prior to further deployment in other areas.

E. THAT Council authorize the General Manager of Corporate Services to enter into a contract with Jiwa and Associates to provide project management services to the Corporate Systems Implementation Program at a cost not to exceed $250,000, including taxes, over the life of the project.

F. THAT Council approve the creation of up to 16.5 fte of temporary, full-time positions as described in this report to serve as part of the City’s systems implementation team for a period of up to two years at a cost estimated at $1.75 million; source of funds to be the project budget. Classification of these positions to be determined by the Director of Human Resource Services.

G. THAT Council approve the creation of a temporary, full-time Systems Analyst II position to be assigned to the Equipment Management Branch at a cost of $51,800 plus fringe benefits; source of funds to be the systems replacement project budget . The City Engineer will report back on the need for this position on an ongoing basis. Classification of this position to be determined by the Director of Human Resource Services.

H. THAT the General Manager of Corporate Services report back to Council by December 31, 1998 on the ongoing staffing needs to support the new corporate information systems.

CITY MANAGER COMMENT

On behalf of the Corporate Management Team, the City Manager RECOMMENDS approval of A, B, C, D, E, F, G and H.

COUNCIL POLICY

On June 19, 1990 Council established information as a corporate priority, and directed that work proceed to "...plan for improvements in the City’s information systems."

On December 8, 1994, Council approved the Information Systems Plan which set the direction for improvements to the City’s information infrastructure and systems anddirection that a detailed infrastructure and software implementation plan and budget for consideration in the 1997-1999 Capital Budget.

On May 18, 1995, City Council approved the Better City Government - Next Steps report. The report identified 15 major corporate processes that will be reviewed and improved upon, including the major corporate systems such as the Budget/Performance Management/Accounting Systems, Revenue Billing and Collection System, Facility and Building Management System, and Payroll/Benefits Administration System. The reports outlined a supporting strategy for information systems.

On July 23, 1996, Council approved the Long Term Financing Strategy - Information Technology Replacement Program report, including:

• directing staff to continue toward the replacement of mainframe based systems;

• authorizing staff to continue with the software replacement study work and issue RFPs to the qualified vendors, with report back to Council for final approval; and,

• approving the funding for the Long Term Financing Strategy, which includes an eight year funding program of $41.29 million.

On July 31, 1997, Council approved a staff request for funding to complete the negotiation phase of the corporate information systems replacement program leading to a report back in September on a proposed contract with SAP Canada / Ernst & Young Consultants for replacement of the City’s financial, human resource and payroll systems and with CCG Systems for replacement of the City’s fleet management system.

PURPOSE

The purpose of this report is to request Council approval for the City to enter into contracts with the SAP Canada / Ernst & Young for the purchase and implementation of new corporate information systems. The report reviews the proposed contractual relationship being recommended with these vendors, the implementation plan and the resources (human and financial) that will be necessary to put the new systems in place.

BACKGROUND

On July 31, 1997, Council considered a report from the Corporate Management Team and the Corporate Systems Replacement Project Team which marked the beginning of the final phase of software selection for the corporate information systems replacement. That reportdiscussed the rationale for the proposed systems replacement; the selection process undertaken to identify the preferred vendor and the costs and benefits of the replacement program. SAP Canada / Ernst & Young Consultants was proposed as the supplier of financial, human resource and payroll software and CCG Systems was proposed as the supplier of fleet management software at a cost estimated at $20.2 million, including software licenses, hardware, implementation consultant and City implementation costs.

DISCUSSION

Since July 31, staff have continued discussions with SAP Canada / Ernst & Young and with CCG Systems with the intention of finalizing contracts for report to Council.

1. Financial, Human Resource And Payroll System Contract -

SAP Canada / Ernst & Young Consultants.

The negotiations have been ongoing with SAP Canada / Ernst & Young for the purchase and implementation of SAP/R3 software to satisfy the needs for replacement financial, human resource and payroll software. The recommended agreement has been drafted by the City’s Legal Department with input from SAP Canada, Ernst & Young and the City negotiators. The general terms of the contract are as follows:

• the primary agreement is with SAP Canada for the supply of SAP/R3 enterprise software and initial training services. SAP will also provide technical support through the implementation project as well as ongoing support once the system is in production.

• The City will purchase the entire SAP software package, with the exception of those modules which are industry specific, and 1,000 user licences from SAP and will provide the computer hardware necessary to run the software.

• Ernst & Young will provide implementation services to the City as part of a subcontract with SAP Canada. Although the City is not contracting directly with E&Y, it will be protected from any failure to perform. Implementation assistance will be provided to ensure successful implementation of all SAP Financial modules, Human Resource/Payroll and Materials Management, including the best practices inherent in the software.

• the City will be responsible for providing an implementation team comprising technical and operational skills and will also be responsible of development work related to interfaces between SAP software and other City systems and for conversion of existing data to the new software.

• the agreement identifies the project deliverables, the project milestones and procedures by which the City can accept completed components of the work and dealwith non-acceptance issues.

At the completion of the contract, the City will have a fully implemented and brought into production the SAP/R3 software including the following modules:

General Ledger

Budgets / Performance Budgeting

Cost Allocation

Project Costing

Accounts Payable

Accounts Receivable

Purchasing

Inventory

Billing

Asset Management

Preventative Maintenance

Cash Management

Human Resources

Payroll

The functionality of this software goes beyond the scope envisioned in the systems replacement program with the inclusion of billing, cash management, asset management and preventative maintenance capabilities. These are areas where the City may be able to achieve benefits beyond the expectations of this project, including the areas of utility billing and facilities management.

In addition to the purchase of software and implementation services, installation of the SAP software will require the City to purchase additional computer hardware on which the software and information databases will reside. Initially, the City will purchase a "development server" and related equipment from Sun Microsystems Limited which will serve the project needs during the implementation phase. This initial equipment purchase is estimated to cost $92,400 (excluding estimated taxes). This development phase will assist the City and SAP Canada to determine the specifications for the production and database servers. Future purchases will be reported to Council as necessary. The project budget includes a provision of $1.2 million for system hardware as identified in the original SAP Canada tender.

2. Fleet Management System

With respect to the proposed fleet management system, staff have continued discussions with both CCG Systems and SAP Canada / Ernst & Young about the implementation of the new fleet system and its integration with the new financial system and have concluded that the timing is not right to proceed with this project at this time. While a delay in implementing the software is recommended, the project team has submitted a proposal to continuedevelopment of the necessary systems infrastructure (computer hardware and wiring) and to begin investigation of alternative business processes to improve productivity in the garage and shops area. This delay will also have the advantage of allowing further review of the capability of the SAP/R3 software to accommodate the needs in this area. This is consistent with the original intention of utilizing a fully integrated software package to meet all of our information system needs. Funding for this work is provided for in the project budget and will be allocated by the Project Steering Committee on the recommendation of the project team.

In order to ensure that this work proceeds, it is recommended that a temporary, full-time Systems Analyst II position be assigned to the Equipment Management Branch for two years. The cost of this position, anticipated at $51,000 plus benefits annually, is provided for in the project budget. The City Engineer will report back on the need for this position on an ongoing basis.

3. City Implementation Costs

Implementation of new software is a cooperative effort among the software vendor, implementation consultant and the City. During the implementation process, the three parties will function as a team to ensure that the scope of the project is adequately defined, that the software is successfully installed and brought into production and that the necessary transfer of knowledge takes place from the vendor/consultant to the City. The staffing requirements of the software vendor and its consultant are specified in the contract and include specialists in all of the functional areas of the software as well as in the areas of change management and quality control.

The City’s participation in this project will be significant and will add to the contractual costs identified above. The major components of this commitment are as follows:

i) Project Management

The systems implementation project will require specialized skills in project management to ensure that the workplan and project milestones are met. These skills are not currently available within the City and are not those that the City needs to employ on a long term basis. It is therefore proposed that these services be contracted for the duration of the project. Discussions with potential bidders for this work have been ongoing and it is anticipated that a contract can be awarded shortly. It is the recommendation of this report that the City Manager be authorized to sign a contract for these services from Jiwa and Associates at acost not to exceed $250,000 over the duration of the implementation project. The project budget provides for this expenditure.

ii) City Implementation Team

The information systems replacement project is a corporate project and its longer term success depends on the involvement of all stakeholders in the implementation process. It is anticipated that a City team comprising up to 40 individuals from Information Technology and the operating departments will be involved on virtually a full time basis for the duration of the implementation process. In addition, special support teams in areas of training, communications and change management will be formed using City and consultant staff to assist the core team. This strategy will ensure that a core group of staff will be in a position to acquire the knowledge necessary to provide ongoing support for the new system without reliance on the consultant.

Providing this level of staff resource will present a challenge because, in many cases, staff seconded from operating branches will have to be replaced in order to continue the provision of City services. Recommendation F of this report recommends the creation of up to 16.5 new positions including database administrators, system analysts, and programmers, primarily in Information Technology. This staff is necessary because, while the new system is being implemented, the existing financial, human resource, payroll and fleet management systems will have to continue operating. Once the new systems are in production and the old systems are eliminated, IT staffing levels are expected to return to current levels, so these positions are being recommended as two year temporary positions. The cost of these temporary positions are anticipated at $1.75 million over the 20 month implementation project. The General Manager of Corporate Services will report back to Council by December 1998 should any of these positions be required after the two year implementation period.

Similar situations will be identified in other areas of the City operation. The project team is not recommending full replacement for this operating staff, proposing instead to have departments consider the priority of this project compared to other departmental initiatives during the implementation process. In some cases, departments may be able to reduce or curtail some aspects of their operations to accommodate secondments, while in others backfilling will be necessary. The project budget includes a provision of $750,000 for backfilling to be provided upon justification of need.

The implementation phase of the project will be an extremely intensive, 20 month periodduring which critical deadlines will have to be met in order to have the new systems operating by the planned completion date. It is anticipated that staff will regularly be required to work beyond their normal work week, resulting in additional compensation under current contracts. Although the extent of these costs is difficult to anticipate, the project budget includes $1.0 million to provide for this kind of additional compensation.

iii) Training

The implementation of SAP/R3 software in the City will require an extensive training effort at two levels. First, the new system will run on PC-based, client server technology with a Windows interface. For many City staff, this will represent a fundamental change in the way they view and handle data and will require basic PC training in keyboarding and Windows 95 or NT.

Second, up to 1500 staff will require training to use the new software. Under the direction of a full time training coordinator based in Human Resource Services, the project will utilize a variety of training techniques:

· where training is available outside the organization at competitive cost, or where limited, specialized training is required, outside resources will be used to provide training.

· global training in Windows or SAP/R3 software will be provided in a temporary, in-house training facility and at individual worksites using a train-the-trainer approach.

· staff will also be looking at establishing a local SAP user group to partner our training needs with other local organizations that are also implementing SAP software.

It has been acknowledged from the beginning of this project that implementation of the best business practices imbedded in new software could result in some displacement of staff from their current positions. The Better City Government - Human Resource Strategy approved by Council on May 18, 1995, provides a safety net for employees affected by these changes, including retraining, to broaden the scope of work activities and develop competency profiles to match the new demands of the workplace. The extent of the retraining necessary in this are will not be clarified until the end of the first phase of implementation, however, the City’s commitment is to provide the necessary support to existing employees to ensure they have access to meaningful employment and the opportunity to add value to City services.

The cost of the training initiative is estimated at $1.0 million over the course of the implementation process.

iv) Field Data Entry Pilot Project

The City’s current processes currently rely heavily on the use of paper forms to record information about almost everything we do. Paper forms are delivered to staff who manually enter the necessary data to the major corporate systems to ensure employees are paid, inventories are maintained and resources are appropriately accounted for. It is not unusual to have the same data entered three or four times into our systems because they each have their own database and do not "talk" to each other.

The new system will operate with a single database so that all the information will be need only be entered once, providing the opportunity to streamline the process of data entry and management. For example:

· foremen on the shop floor can order parts through a terminal at their workstation. If the part is in inventory, it will be "set aside", the inventory will be updated immediately and the cost will be charge directly to the job. If inventory is low or the part is not available, the system will automatically generate an order for replacements. Today, these actions would take considerable manual intervention.

· foremen at individual worksites can enter labour hours and material information directly rather than on a paper form, providing for immediate notification to the payroll system, project costing system and financial system. Today those transactions often take several days to be recorded in the appropriate information systems.

"Point of capture" data entry will represent a significant change for the City which needs to be assessed prior to full implementation. In order to evaluate the potential of this change, Engineering Services will conduct a pilot project at a selected operation, and will report back on the results prior to further expansion. A provision of $500,000 has been included in the project budget to undertake this pilot project.

v) Project Contingency

There are three main factors that affect the outcome of the project: timeframe, project scope and project budget. Within the time and budget available, there is a limit to what can be achieved. The purpose of the negotiation process is to clarify and rationalize the expectations of the parties to the contract around these limits. This process will lead to the prices to be included in the final contract.

The initial phase of the project, to commence immediately upon approval of the contract, willproduce a clear definition of the scope of the project and will finalize the detailed implementation plan. It will also identify the potential benefits of the project and the means by which they will be captured. This phase will also identify where the potential deficiencies are in the project budget.

While it is not the intention of the project team to entertain change to the scope of the project once it is underway, the inclusion of a contingency provision in the project budget will allow the project management team to make adjustments to the scope of the project where proposed adjustments can be justified based on business case analysis. The project budget includes a general provision of $1.8 million for contingency purposes, with allocations from this provision to be subject to approval by the City Manager and General Manager of Corporate Services.

The ability of the City and consultant to meet the milestone dates of this project are very dependent of the ability of the City to provide the necessary technical and operations staff to participate in the implementation. The initial Implementation Plan leaves very little flexibility around timelines if the new systems are to meet our needs to be in production by January 1999. That timeframe is now threatened by the current job action and a prolonged labour dispute will increase the risks that this project cannot be completed on time. As a result, the consultant and the City have drafted a contingency plan which will allow the project to proceed as planned under circumstances where the City is unable to perform under contract. The first step in this plan is to ensure that the key milestone of a refined implementation plan is met without jeopardizing the production date of January 1, 1999.

Increased risks related to the "Year 2000" issue, such as those that arise from the labour disruption, have led staff to add to the contingency that should be provided in the project budget. The proposed budget includes an additional $500,000 that can be utilized specifically to deal with these issues. As with other contingency funding, approval to allocate these funds will be subject to approval by the General Manager of Corporate Services and City Manager.

THE IMPLEMENTATION PLAN

The program to replace our information systems will take several years to achieve. Staff have already invested three years of work in defining and positioning the City to migrate applications from the mainframe computer to client server based networks. Several of our smaller systems have already been replaced. There is considerable work left to do, both inproviding the platform and installing the new software. It is anticipated that it will take up to two years to install and have available all of the functionality of a new financial, human resource and payroll systems.

The agreement with SAP Canada / Ernst & Young is a two stage agreement involving the following steps:

Phase 1: "Gap" Analysis and Implementation Planning.

The "Gap" or fit analysis identifies the differences between the way the City currently processes financial, human resource and payroll information and the opportunities for improvements based on software design. This is the point at which decisions about process or system redesign are made and a plan for implementing these changes in subsequent phases of the implementation process is developed. This phase will also identify the benefits to be achieved in the final implementation.

	Start Date	End Date
Project Preparation	Sept 11, 1997	Oct 10, 1997
Complete Detailed Implementation Plan		Dec 31, 1997
"Blueprint" Phase	Sept 22, 1997	Jan 20, 1998

Phase 2: Implementation of SAP/R3 Modules

Final design, testing and implementation of revised business processes, user training on the new system, conversion of existing data to new system.

	Start Date	End Date
Simulation Phase	Jan 5, 1998	June 1, 1998
Validation Phase	May 15, 1998	Oct 26, 1998
Final Preparation Phase	Sept 10, 1998	Nov 6, 1998
"Go Live"	Nov 2, 1998	Jan 8, 1999

As noted, these implementation plans are dependent on the City being able to provide the necessary staff resources almost immediately upon approval of the contract. Any delay as a result of the labour dispute could delay the project or increase its cost because of the need for additional consultant assistance to expedite completion.

PROJECT FINANCING

In July 1996, Council approved the Information Systems Replacement - Long Term Financing Plan which provides a source of funding for system improvements that are anticipated to cost up to $44.0 million by 2005. These improvements include: the PC Replacement Program, systems infrastructure upgrading, development of GIS and applications upgrading and replacement. The corporate information system replacements contemplated in this report are key components of that plan and involve purchase and implementation of software, staff training and provision of the technical infrastructure and hardware necessary to make it all work.

Based on the contract with SAP Canada / Ernst & Young and a staff assessment of the additional City costs associated with the corporate information system replacement program indicates the following overall costs for this project that will be drawn from that long term plan:

	Table 1
	Systems Replacement Project: Proposed Budget
Contract:
	SAP Canada - Licences	$4.806 million
	Ernst & Young - Implementation	6.386 million	$11.192 million
System Hardware (servers, peripherals, data devices)			1.205 million
City Implementation Costs
	Project Management	$0.250 million
	Temporary Staffing	1.750 million
	Implementation Team costs	1.750 million
	Staff Training	1.000 million
	Field Data Entry Pilot Project	0.500 million
	Miscellaneous	0.250 million	5.500 million
Fleet Management1			0.700 million
Contingency Reserve			2.300 million
Project Budget (including estimated taxes)			$20.897 million

Note: The budget for fleet management is maintained to ensure that the necessary funding is available when a decision to proceed with system implementation is made. A contract with a fleet system vendor will be subject to Council approval. Staff propose to proceed with systems infrastructure (hardware and data entry devices) and some systems development work using a portion of this funding subject to project team approval.

In addition to these implementation costs, there will be ongoing operating costs associated with this purchase. The City will be required to contract with SAP Canada for ongoing software maintenance that will include all upgrade costs over the life of the software. Once the system is fully operational, these costs will amount to approximately 15% of the software purchase contract or an estimated $656,000 annually for SAP.

These one-time costs of the project will be spread over approximately 20 months beginning immediately upon approval of the contract. At the same time, necessary system infrastructure improvements, including the planned replacement of mainframe computer terminals and data communications systems previously approved by Council will be underway.

The timing of the expenditures necessary to bring about completion of this project will create demands for cash early in the project that will not be matched to the cashflow approved by Council as part of the long term financing strategy. The need for bridge financing was identified in the long term financing plan and Council authorized the Director of Finance to provide any necessary financing from the Capital Financing Fund to ensure funding is available when necessary. Any such financing would be on terms and conditions similar to those utilized for other internal business improvement purposes. This bridge financing will in no way change the overall impacts of the long term financing plan and will be repaid with interest within the original timeframe of the plan.

CONCLUSION

Negotiations with SAP Canada / Ernst & Young for replacement software for the City’s financial, human resource and payroll systems have been completed and Council approval to enter into final purchase and implementation agreements is recommended. The cost of this contract is estimated at $11.2 million. Staff are recommending that replacement of the fleet management system replacement be delayed for one year but that the estimated cost of $500,000 be retained in the project budget. In addition, City costs and contingencies associated with the replacement project are estimated at $9.2 million, bringing the total cost of the project to approximately $20.9 million. The source of funding for the project is the Systems Replacement Long Term Financing Plan approved by Council in July 1996.

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(c) 1997 City of Vancouver