June 10, 1998

  To:Corporate Services Committee

 From:FIS/HRP Steering Committee

W. Liczyk, Chief Financial Officer and Treasurer (Chair)

M. Rodrigues, Commissioner of Corporate Services

B. Glover, Executive Director, Human Resources

 Subject:Project proposal, Financial and Human Resource/Payroll systems

  Purpose

 To recommend the acquisition of financial and human resource systems essential to the operation of the City and the effectiveness of amalgamation.

  Recommendations

 That the acquisition of financial and human resource/payroll systems from SAP be approved in principle, as outlined in this report.

 That funds not to exceed $6.1 million be authorized for expenditure in 1998, $3.4 million in 1999, $6.5 million in 2000, $6.5 million in 2001, and $3.8 million in 2002 with total capital expenditures for the financial and human resources/payroll systems not to exceed $26.3 million for the necessary hardware, software and project implementation.

 That the appropriate city officials be authorized to enter into contract negotiations with SAP for the supply of financial and human resource/payroll systems.

  Funding Implications:

 The 1998 requested capital expenditures of $6.1 million have been included in the ranked list of transition projects envelope of $40 million in a separate report to the Budget Committee. Future year's requests are also included in that report with other city transition projects. Given that the minimum required investment for financial and human resources/payroll systems is $19 to $20 million, the total requested capital expenditure of $26 million represents the greatest financial and operational benefit to the City.

  Background Summary:

 Upon amalgamation, each of the seven municipalities entering the new City had their own systems for managing financial and human resource information and administration. Payroll, purchasing, position management, salary and benefits administration, time and attendance reporting, payment of accounts, budgeting, staffing, collective agreement administration and many other administrative tasks are handled by these systems. For the most part, the existing systems are still functioning independently. In these interim months, summary financial information is being consolidated in the former Metro system, but financial detail is only available from the systems in the previous municipalities, which continue to require maintenance and support.

 It is essential that the City's administrative systems be consolidated as soon as possible, for several reasons:

Cit is impossible to exercise appropriate financial and staffing control when the necessary information is distributed among several systems

Cmost of the existing systems are not year 2000 compliant, and will not function properly when this issue begins to arise in 1999

Cadministrative efficiencies for 1999 and beyond cannot be achieved without the benefits of consolidated systems, and savings potentially associated with amalgamation become unattainable without the necessary investment in systems

Cit is essential that a single system be in place to support activity based costing and charge-back of the costs of administrative systems, as this capacity is required in order to achieve administrative savings

 The City has also received expressions of interest in outsourcing of administrative systems, through partnership with private-sector organizations. While these possibilities have not yet been subject to full analysis, it is clear that installation of effective administrative systems serving all of the new City will enable the City to realize significant savings itself. Once these immediate benefits have been realized and internal efficiencies achieved, it may be appropriate to entertain proposals for alternate service delivery arrangements.

 Movement to a single system, or set of systems, is a massive and difficult undertaking. In an organization the size of the City, a normal time-frame for implementation of a new suite of business systems would be a minimum of two years, from approval of the project and selection of vendors to full functionality. Because the City does not have a single set of administrative systems in place, and consequently does not have the necessary mechanisms to support management accountability or to achieve the available administrative efficiencies, it is necessary to move much more quickly.

 In late 1997, RFIs were issued requesting information from vendors on the supply of systems to support the City's financial and human resource requirements. Several vendors were asked to provide product demonstrations. Separate staff groups evaluated the proposals for financial and human resource/payroll systems, using systematic criteria determined in advance.

 Both the HR/Payroll and Finance groups reviewed detailed information on the functional capabilities of the various products, and the cost structures proposed by the vendors. Extensive presentations were conducted by each of the vendors for each of their products (when a single vendor proposed both financial and human resource/payroll products, each was presented separately). In addition, extensive presentations by each vendor were made to City technical staff, focusing on the technical features and support requirements for the products.

 During February and March of 1998, there were extensive discussions with vendors, and a number of site visits were conducted. Also during March, the separate financial and human resource/payroll systems projects were consolidated under the FIS/HRP Steering Committee. The Committee reviewed the staff recommendations, and the financial impact of the proposals. In light of the City's financial circumstances, and the need to ensure that the most cost-effective solutions to the City's requirements be identified, the Committee directed that further review of all options be conducted.

  Technology and management consultants LGS Group were retained to assist in the evaluation of options. LGS Group has wide experience in the application of technology to the business needs of both private and public sector organizations, including municipalities.

 Subsequent analysis included detailed consideration of the financial impact of the most viable options, including estimates of the impact of each on the staffing requirements of the City over the next few years. Reports were also obtained from the Gartner Group, consultants specializing in analysis of technology companies and products, on the financial status and viability of each of the "qualified" vendors, and on the strengths of each product line

 The results of this extensive evaluation process are summarized in this report. A minimum investment of $19 to $20 million is required to meet the basic needs of the City. The recommended additional investment of $6 million brings the total required investment to $26 million. This will generate additional savings of almost $6 million per annum, and will position the City well for future reengineering and efficient operations.

  What is a Financial Information System (FIS)?

 A financial information system is the set of computerized business tools used by organizations to perform a variety of finance-related tasks, and to track and control expenditure and revenue. It provides essential support to an organization's operations. Even the smallest businesses make use of automated accounting systems; all large organizations require the support of sophisticated and integrated financial systems in order to conduct business efficiently and with appropriate financial control. At the City of Toronto, this system will track $5.6 billion of annual expenditures and revenue. The very wide variety of FIS components has an impact on virtually all areas of the City's operations, as can be seen from the following FIS component summary.

 General Ledger (G/L):

The G/L is at the core of any financial system, and is central to all accounting operations. All revenues and expenditures are recorded in the G/L, and the structure of its Chart of Accounts allows these to be tracked at any required level of detail. It is through the G/L that budgets can be assigned to operating units, authority for expenditures assigned to individuals, financial reports produced, and so on. All of the financial transactions accomplished through other modules of the FIS are reported to the G/L, requiring that all of these be integrated with the G/L in a single system.

 Budgeting:

Financial information systems provide budget development support, allowing for the systematic preparation and modeling of budgets. Managers can model and prepare their budget proposals on a decentralized basis, and these are consolidated and subject to analysis, with necessary amendments made prior to final submission. Once the budget is adopted, the final figures are loaded into the G/L, allowing funds to be expended within the budget parameters.

 Purchasing:

The purchasing applications provide for the specification of product requirements, the sourcing of supply, vendor management and the preparation and management of tender processes (including the creation and management of Requests for Information and Requests for Proposals). When goods are to be purchased or otherwise obtained, these systems provide for requisitioning, and the subsequent issuing of purchase orders. In an effective integrated system, requisitions are created, approved, and submitted for action electronically. Purchase orders may also be forwarded to vendors electronically. Under normal circumstances, a requisition will not be allowed unless funds are available, and the appropriate approval obtained. Available funds are determined by looking up the necessary information in the G/L, which will have the up-to-date available balances (which include any previous requisitions, even if the goods have not yet been received or paid for). This is all accomplished electronically.

 Accounts Payable:

The accounts payable system is closely linked to the purchasing system. When goods have been received after a purchase order is issued, their receipt in good order is documented electronically. Invoices are matched with the purchase order and the receiving information, and payment scheduled to optimize the City's interests. Once payment has been made, the expenditure is recorded in the G/L.

 Accounts Receivable:

When the City provides goods or services to individuals or other organizations, payment or reimbursement is accomplished through the A/R application. Examples include program registration, license fees, property rentals, etc. The A/R module ensures that appropriate amounts are charged, and that the revenues get properly posted to the general ledger.

 Fixed Assets:

An organization's property (including real estate, buildings, equipment and other tangible items) is tracked and managed through the fixed assets module of an FIS. Where appropriate, depreciation is recorded, and all transactions reported to the G/L.

 Inventory:

Closely linked to fixed assets and purchasing, the inventory module of an FIS allows tracking of the current status of goods that are stocked, for instance, in a warehouse or store-room, and to document distribution of the goods. When a critical level is reached, re-ordering of the product is accomplished automatically. It is essential that an inventory system use standardized coding systems, and support tools such as bar code identification. An inventory system will also be closely linked to any future fleet and equipment maintenance system used by the City.

 Project Management:

An effective project management component allows the creation of project budgets (e.g. capital), and the tracking of expenditures over a multi-year period against the budgeted amounts. This allows the early identification of potential cost overruns and of delays in the completion of projects. To be effective, a Project Management component requires efficient links to the information generated by or contained in Human Resource/Payroll systems.

 Cost Accounting:

In some instances, tracking costs across organizational units is necessary in order to identify program costs, where programs involve more than one department or other organizational unit. As well, a cost accounting module provides the mechanism through which the costs associated with an activity can be tracked, and subsequently charged to a purchasing department or outside organization. As in Project Management, effective Cost Accounting requires an efficient link to the HR/Payroll system.

 Performance measures:

Tracking the effectiveness of an organization requires that activities be monitored and costed, and that comparisons be made to external standards. The performance measures component of an FIS provides the mechanism through which this is accomplished.

 Fleet Management:

Fleet Management is sometimes included as part of an FIS, and provides for acquisition control, cost tracking, maintenance, assignment and disposition of fleet assets. Although several of the vendors reviewed here can provide a Fleet Management application, it was not included in our original specifications, and has not been explicitly evaluated.

  What is a Human Resource Information and Payroll System (HR/P)?

 Human resource and payroll systems are the mechanisms through which an organization's human resources are managed. Payroll costs are by far the largest single component of the budgets of municipal organizations, and efficient allocation of those resources, and tracking and control of payroll costs, are essential.

 There are several functions within an HR/P system, which fall logically into two categories - those related to attendance and compensation, and those related to the management of positions and employees. There are complex relationships among the various elements of the HR/Payroll system, and between HR/Payroll and the financial systems of the organization.

 Payroll:

The payroll module collects information about employee salary rates (taking into account overtime and special rates), time worked, sick time used, etc., and pays employees appropriately. Payroll staff throughout the organization use the payroll system, in order to record necessary data. The system must interact with the general ledger in the finance system, in order to post salary expenses to the appropriate chart of accounts features, in order that both total expense and detail relating to projects and programs is reflected properly.

 Pensions and Benefits:

Pension and benefits administration ensures that appropriate pension contributions are made and recorded, and that benefit options are implemented correctly for each employee. Where there are benefit systems allowing for wide choice (e.g. "cafeteria" or flexible arrangements), the benefit system provides the mechanism through which the choices are exercised.

 Time and Attendance:

Recording work time and attendance is an essential element of the overall payroll system. It is this system which provides data to the payroll system, triggering employee pay. It is also this system that records absences and bank balances (sick time, vacation time, lieu time), according to the multiple variations on employment terms. Attendance management systems rely on the time and attendance module for information on absence patterns. The Time and Attendance system is also closely linked to project management and fleet and property maintenance systems.

 Position management:

Most public sector organizations control staffing levels and expenditures through a position management system. Positions are created, each of which has an authorized number of employees who may be assigned to it, and a salary range. Hiring more employees into a position than the "authorized establishment" is not allowed by the system unless an exception is approved by someone in an appropriate position of authority. The position management module provides the mechanism through which positions are defined and created, and through which control of staffing levels is achieved.

 Compensation and Salary Administration:

Job Evaluation programs allow for the description and rating of jobs according to a defined set of criteria. Salary rates have to be administered, including provision of mass increases, stepping of employees through salary levels, etc. Together, the compensation and salary administration functions of an HR/Payroll system support these functions.

 Staffing:

The staffing module supports all the recruitment and promotion activities of the organization, and is the first point through with information about employees enters the system. Information from résumés and applications is captured electronically, and entered into employee or applicant databases. Movement of employees through jobs is tracked.

 Grievance Tracking:

In a large organization, managing grievances, tracking each one individually and recording outcomes, is essential if the organization is to exercise proper control. An effective HR/P allows labour relations staff to enter information and associate the data with employees and workplaces. Pattern analysis allows problem areas to be anticipated and addressed before the grievance problems become unmanageable.

 Training and Organizational Development and Competency Management:

Training strategies are supported by HR/P systems in several ways, including scheduling of employee attendance at courses, and the generation of information about organizational structure and operations. Employee skills and competencies can be recorded and tracked, and the information used in the identification of individuals with skills suitable to particular assignments.

 Health/Safety/WSIB:

Every employer has statutory responsibilities with respect to the health and safety of employees, and must record and process information about any incidents involving injury. As well, workers' compensation claims must be recorded, processed and managed. Data can be entered initially from the field, with all follow-on events recorded as part of the same record. The HR/P is essential to these processes.

  Existing FIS and HR/P Installations (Former Municipalities)

 All seven of the former Toronto municipalities have functional systems for management of financial and human resource/payroll processes. These systems represent a wide diversity of vendors and installation types, with very little overlap. Many of the systems would have had to be replaced in order to address problems associated with the "Year 2000" (Y2K) issue - these systems would likely become non-functional on January 1, 2000. In other cases, the applications provide relatively limited functionality, not appropriate for a large organization.

 Table 1 shows the products in use in the various organizations, as well as the date of installation and Y2K status.

 There has been concern that the recent substantial investment in business systems at the former City and Metro will all have to be "written off". Both organizations were very large, with many complex operational needs. However, at the same time as the new systems were installed, a great deal of technical infrastructure was also put in place. This included networks, servers and desktop computers. The infrastructure was necessary to support the modern business systems being installed, but was also necessary to support electronic mail, geographical information systems, etc. At the time that decisions were made to install these business systems, the amalgamation of the seven municipalities into a new City of Toronto was not yet even under consideration. Most of the technical infrastructure will remain in place after the business systems are replaced, and will be utilized with any new installation, as well as the other technical requirements of the organization. It is expected that most of the infrastructure components implemented within the last two or three years at the City and Metro will be Y2K compliant, or readily made Y2K compliant, although final analysis has not yet been completed.

 The total cost of the installations at the City and Metro are shown in Table 2, along with the amounts attributable to the business systems themselves and the amounts that represent a reusable investment.

(Copies of Table 1 and 2 are on file in the office of the City Clerk.)

  Evaluation Process

 The City's requirements for business systems were determined by a thorough analysis of the City's business needs and amalgamation-support requirements. Detailed business analyses conducted by Metro, the former City of Toronto, North York and Etobicoke were also reviewed.

 Separate Requests For Information (RFIs) were issued for the FIS and HR/P software were issued in late November, 1997.

 The FIS RFI was issued to seven vendors after a survey of municipalities and the financial systems in use. Four of these vendors' financial systems are currently in use at four of the former seven municipalities. These are SAP (former Etobicoke), Computron (former Metro), SCT Government Systems (former Toronto) and American Management Systems (former North York). SCT and AMS declined to respond, indicating that they were not in a position to address the requirements of the new City. Submissions were received from SAP, Computron, J. D. Edwards, PeopleSoft and Oracle. Oracle later withdrew from the process when it could not comply with the timetable for presentations.

 The HR/P RFI was issued to five vendors, three of whose systems are currently in use within the seven former municipalities. These are Cyborg (former Metro HR/P and Scarborough payroll only), SCT Government Systems (former Toronto) and PeopleSoft (former Scarborough HR only). SCT declined to respond. Submissions were received from SAP, PeopleSoft and Cyborg.

 Information about the responding vendors and their products is outlined in Table 3.

 Evaluation teams composed of business and information technology staff were assembled, and detailed evaluation criteria were prepared for each of the two separate (FIS and HR/P) processes. Product demonstrations were conducted by vendor representatives during December, 1997, following demonstration scripts prepared by the evaluation teams. Follow-up requests for information were forwarded to the vendors, and responses considered in determination of ratings. Further discussions were held with each vendor to investigate implementation strategies and to refine software, hardware and implementation costs.

 After the formal evaluation was completed, contact was made with several client sites to assess the level of product and vendor satisfaction. Site visits were conducted for the FIS systems by a team of accounting, information technology and library representatives.

 Functional and Technical Analysis

 Data on the current business and product status of each of the vendors was obtained from the Gartner Group, a consulting organization that produces widely used analyses of technology companies and products.

 A summary analysis of each of the products is provided in Table 4.

  System Integration

 There are two approaches possible to installation of Financial and HR/Payroll systems. The first is the "best of breed" strategy, which separately identifies the best available options (all things considered) for the Finance and for the HR/Payroll systems. Excellent functionality can be obtained, but appropriate interfaces must be built between the Financial and the Human Resource/Payroll systems. In most cases, this means that the FIS and HR/P will come from different vendors.

 The alternative approach see the Financial and HR/Payroll systems fully integrated, and that they share data seamlessly without the necessity for building interfaces. This can only be provided by a single vendor supplying both HR/Payroll and Financial systems.

 The initial intention was to adopt a "best of breed" strategy, and to separately evaluate and acquire the financial and human resource/payroll systems. The original project structure reflected this intent, with separate project teams conducting separate product evaluations.

 Over time, however, it became clear that integration issues would have to be considered in the evaluation. In particular, analysis from the Gartner Group, and from LGS Group, the consultants retained to assist the City in the decision process, indicated that substantial benefits would accrue from an integrated system. The LGS analysis, attached as Appendix B, concludes:

 "We strongly recommend that the City pursue the integrated alternative as the target solution for the City's administrative system. This path will help the City maximize the benefits of amalgamation, transform its administrative operations and provide the City with a solution flexible to sustain future business improvements and technology advances."

 Of particular concern was the likelihood that non-integrated systems would require either cumbersome multiple-entry of data into the financial and human resource/payroll systems, or the expense of creating and maintaining electronic interfaces among the products. In either case, real efficiencies are difficult to achieve. Specific issues revolve around the need to obtain financial information for certain human resource actions (e.g. funds availability for position creation), and the need to obtain payroll information for financial transactions (e.g. time worked on a project, for billing purposes). These are more fully documented in Appendix B.

 A careful review of the issues led to the conclusion that substantial additional savings would be achieved by an integrated solution, relative to a "best of breed" solution. These savings will come through the elimination of multiple data-entry functions, and greater efficiency of transaction processing. While it is not possible at this stage to identify specific positions which would be effected, we are confident that savings in the affected administrative areas will exceed 15% relative to non-integrated solutions, and this analysis is supported by industry experience.

  Ranking and Short-Listing of Products

 All available information was reviewed in order to determine which applications or combinations of applications could serve the City's needs, so that detailed financial and implementation analyses could be conducted. The issues were complex and many variables entered into the analysis. Ultimately, four factors were considered in short-listing products for detailed analysis, and in determining the ultimate recommendations:

a)relative scores on the functional and technical evaluation, as determined by the original evaluation teams

b)ability of the vendors to support an implementation on the scale required by the City and within the required timeframe

c)degree of functional integration available across financial and human resource/payroll functions

d)the presence of existing installations at the City, which could provide a base for a new installation, as well as staff with familiarity with the products

 An investment has been made in the Computron/Cyborg installation at Metro, as documented in Table 2, of which approximately 50% is infrastructure investment necessary to support the new City and is reusable, subject to year Y2K compliance. In any event, it is essential that future costs and benefits be a significant criteria on which the evaluation is conducted.

 It is not possible to simply add additional data or hardware to the existing Computron/Cyborg installation to support the new organization. Entirely new financial structures must be created, a multitude of new business rules implemented, new hardware installed and a vast amount of existing data converted to the new system from the seven existing municipalities (including Metro, whose existing data will have to be converted to the new standard necessitated by amalgamation). As a result, all software including both current and new modules would have to be reinstalled (or installed for the first time) and appropriately configured. It would be necessary to treat the implementation of Computron and/or Cyborg as a new installation, at a capital cost of $10.5 million.

 Neither Computron nor Cyborg ranked high in the head-to-head evaluation. In particular, Cyborg was identified as lacking the minimum functionality necessary to support the City's Human Resource and Payroll needs. Its Payroll module is unable to support sufficient earnings categories to support the complex operational and labour relations realities at the City. Position Management could not be successfully demonstrated, or otherwise evaluated, as it was still in development without any implementations. Employee self service capacity was very limited, and the company has no apparent plan to move toward web-enablement, which would facilitate ease of access with a standardized web browser user interface through either the internal intranet or remotely via the internet. The Cyborg product cannot be used by the City, and was not included in the final short-listed analysis. As a result, the minimum investment required in FIS and HR/P systems by the City is $19 million because of the need to completely replace the HR system.

 Computron did not evaluate well relative to the other products, but not quite so dramatically as Cyborg. It has been determined that Computron could be acceptable for the City's financial systems needs, at least for the short term. Because of the existing installation at the former Metro, and the possibility that implementation of Computron financials could be accelerated as a result, this product was included in the final implementation and cost/benefit evaluation.

 PeopleSoft provided both Financial and HR/Payroll systems for evaluation. It is clear that PeopleSoft is committed to production of an integrated suite of business systems, and will likely be very competitive in the integrated systems market in the future. However, our evaluation suggests that the version of the PeopleSoft financial systems product submitted for evaluation does not yet meet the City's needs, and therefore an integrated PeopleSoft system is not possible.

 However, the PeopleSoft Human Resource and Payroll applications are clearly "state-of-the-art", and provide a very good fit relative to our needs in those areas. PeopleSoft HR/Payroll systems were included in the implementation and cost/benefit evaluation.

 Although J. D. Edwards financials were evaluated highly, the absence of either an integrated HR/Payroll system or an existing installation at the City on which to build a new implementation were significant factors in the decision not to pursue the JDE applications. In addition, Gartner Group analyses have identified J. D. Edwards as a niche player, with strength in AS400-based smaller organizations, but with limited capacity to service organizations the size of the City.

 Only the SAP product line provided the potential for achieving an integrated solution across the Financial and HR/Payroll applications. Both of the SAP products were rated highly in the separate evaluations, just slightly behind the 'best of breed" leader in each category. Because of the very good quality of the individual products, along with the integration factor, both SAP Financials and SAP HR/Payroll were shortlisted in their respective categories.

 Implementation and cost/benefit analyses have been conducted on the financial systems products from Computron and SAP, and on the HR/Payroll products from SAP and PeopleSoft, in various combinations, as follows.

a)SAP Integrated Systems: SAP Financials and SAP HR/Payroll, implemented together, with the Etobicoke installation of SAP Financials as the base.

b)Computron Financials with SAP Human Resource/Payroll: Computron Financials would be implemented by building on the existing Metro implementation where possible, although significant reworking would be required. SAP Human Resource/Payroll would be implemented as a new installation. If it were decided at a later date to implement SAP financials, this would allow migration to a fully integrated solution.

c)Computron Financials and PeopleSoft HR/Payroll: As in b) above, but with PeopleSoft HR/Payroll instead of SAP.

d)Computron interim Financials to SAP Financials/Human Resource/Payroll: The Computron Financial system and SAP HR/Payroll is implemented initially, to allow for reduced risk of delays in availability of the necessary financial systems. The full suite of SAP financial products would be implemented after the initial Computron implementation was completed.

  Implementation and Cost Analysis

 With the assistance of consultants LGS Group, a detailed analysis of the costs and benefits associated with each of the options was conducted. The results of the analysis are shown in the table "Cost and Benefit Analysis, Financial/HR Systems", attached as Appendix A.

 Cost analyses are based on information provided by the vendors for licensing and implementation, and upon additional information generated by staff.

 Benefits through staffing efficiency have been calculated using conservative assumptions. All products will provide similar levels of benefits (primarily through staff reductions) within the Finance and HR/Payroll organizations. It is anticipated that reductions of about 80 positions can be achieved within these organizations as a function of implementation of the new systems across the organization.

 Additional savings have been identified from within the Operating organizations, primarily as a function of integration of Finance and HR/Payroll applications. As outlined previously and in Appendix B, an integrated system will provide significant gains in efficiency. We have calculated that about 90 positions (out of a total of about 600 positions involved in these kinds of administrative activities) should be eliminated upon full implementation of an integrated solution. Of the vendors with products providing acceptable functionality, only SAP is able to provide this high level of integration. These savings are shown only in the figures for SAP implementation.

 Net present value uses discount rates appropriate for the products involved. In general, discount rates are higher where risk is higher, and lower where risk is lower. For instance, the initial discount rate for installations involving Computron is relatively low, because the risk of being unable to implement on the projected time-frame is low. The initial discount rate for SAP installations, on the other hand, is moderately high, because of increased on-time risk. However, the long-term Computron risk is high, because of the uncertain future of the company and its product line, and potential associated difficulties obtaining support and upgrades, while the corresponding SAP risk is low.

 Net present value and internal rate of return calculations show that installation of SAP products for the FIS and the HR/P provide by far the best financial return over the life-cycle for product installations of this type. Even though initial capital cost is relatively high, net present value and internal rate of return favor this combination as early as the third year.

 The recommended solution, SAP Financials with SAP Human Resource and Payroll, has the most favorable bottom line over both three and seven year terms. Total capital investment for the SAP solution will be $26.3 million, with operating costs to 2005 of $10.7 million. Total benefits and savings to 2005 will be about $89 million, including reduced staff requirements in the core administrative functions (finance, human resources, payroll) and about a 15% reduction (90 positions) in staff requirements for administrative functions in the operating departments. Over the life of the average installation (seven years), we expect an SAP installation to produce net savings of about $52 million.

 An installation of Computron financials with SAP human resource/payroll would have lower capital and operating costs ($19 million and $4.3 million respectively), but would also have significantly lower downstream benefits ($54.8 million) as a consequence of the reduced efficiencies in administrative systems. The net savings over the life of a Computron/SAP installation are expected to be about $32 million.

 Figures for an installation of Computron financials with PeopleSoft human resource/payroll are similar to those for Computron/SAP, except that costs for PeopleSoft are somewhat higher. An interim installation of Computron financials, with SAP financials and human resource/payroll as the target installation, has significantly higher costs and somewhat lower benefits than a "pure" SAP installation.

 All analysis is predicated on an aggressive implementation schedule, which focuses on implementation of the essential financial components by early in 1999. Supplementary financials would be fully implemented by September of 1999, as would be the full suite of HR/Payroll products. Complete installation is required by the end of the third quarter in 1999, in order to avoid Y2K problems in the period leading up to the millennium.

 Degree of product integration has some effect on the implementation scheduling. Meeting the third quarter 1999 deadline for complete installation is most achievable using an integrated system on an accelerated and closely vendor-coordinated schedule. While use of an existing system such as Computron will make achievement of the financial systems target in early 1999 more readily achievable, the creation of custom interfaces to any HR/P product will be difficult to achieve within the target timeframes.

  All vendors have undertaken to meet this schedule. Schedule definition will be an important element of the contracting process with the selected vendor(s).

 Future Partnering Issues

 It has been anticipated that many of the City's Agencies, Boards and Commissions will make use of the new business systems to be implemented. In particular, the Toronto Police are in the process of considering options to address the inadequacies of their existing systems relative to the Year 2000 issues. We have been advised that the Police do not believe that Computron can adequately address their complex needs. The Police are prepared to work closely with the City, towards a joint system, if SAP is selected.

 The police have just recently implemented PeopleSoft products for their HR and Payroll needs, and will have to re-evaluate this strategy if they partner with us on financial applications. They may choose to continue with PeopleSoft HR/Payroll for the time being, pending an evaluation of the costs and benefits associated with migration to an SAP HR/Payroll installation, in partnership with the City.

 In addition, the Toronto School Board has recently opted to pursue a contract with SAP for installation of financial systems. It is anticipated that synergies could be obtained through collaboration with the Board, and initial discussions have been held. In particular, it is possible that joint training ventures could be set up, significantly reducing costs for both parties.

 It is also possible that broader administrative efficiencies could be obtained through partnership with these and other public sector organizations jointly or with an outside agency. Such partnerships are more likely to be possible when the organizations share a systems infrastructure. However, it is felt that such a proposal should be considered once the initial implementation period is complete and when the City has captured the maximum savings itself.

  Conclusions:

 The absolute minimum financial investment required is $19 to $20 million in order to provide a basic solution for the City. After review of the all of the data (functional evaluation, third-party assessments of the companies and applications, cost analysis and partnering possibilities), it has been concluded that SAP applications for Financial and Human Resource/Payroll systems, with a financial investment of $26 million, provide the greatest functionality, best cost/benefit analysis (i.e. most opportunities for staff efficiencies) and most opportunities for partnering, and are the recommended solution. The company is a leader in the field, and is very stable with a well-articulated vision for its product line. In addition, affiliated organizations such as the Toronto Police and the Toronto School Board will be able to partner with the City most effectively if SAP is implemented as the City's business systems. The additional investment of $6 to $7 million will generate savings of almost $6 million per annum on an ongoing basis.

 It is therefore recommended that the City contract with SAP for supply of Financial and Human Resource/Payroll systems.

 Other options have been considered, and are potentially viable. In particular, Computron financials could be implemented more quickly than the SAP application, with a somewhat lower capital and operating cost. However, functionality and potential returns through staff savings would be lower, and it will be more difficult to implement a non-integrated HR/Payroll system within the target timeframe. It is also possible that this option would not allow the Police or the School Board to partner with the City.

 Either SAP or PeopleSoft HR/Payroll applications could be used in association with Computron for a cost of $19 to $20 million. Our analysis suggests that SAP implementation would provide slightly lower costs, and would allow future consideration of an integrated solution, with the associated benefits. These options should be considered only if medium-term net costs are the principle deciding factor.

 A third option (the most expensive at $30 million) is an interim installation of Computron, with SAP Financial and HR/Payroll systems as the target product line. The single advantage of this strategy is that it would somewhat reduce the risk of delayed implementation of the financial applications, relative to an SAP installation. However, costs would be significantly higher, and it is likely that the risk associated with the alternatives can be managed successfully. This option will also preclude involvement by the Police and the School Board, at least until the SAP applications were installed. This option should be considered only if short-term risk reduction is the principle deciding factor.

  Contact Names:

 Alan Deans, Ron Myhr, Al Shultz, Lana Viinamae, Stephen Wong, Ivana Zanardo

 W. Liczyk

Chief Financial Officer & Treasurer

 M. Rodrigues

Commissioner of Corporate Services

 B. Glover

Executive Director, Human Resources

 Appendix A: Cost and Benefit Summary Analysis

Financial/HR Systems

  The figures for Net Present Value and Internal Rate of Return are indicators for how favourable an investment is - the higher the positive numerical value, the more favourable the investment.

Assumptions:

 1. Transition plans

CThe business cases use either the transition strategies, plans and resource requirements provided by the software vendors with respect to their products; or the estimates provided by the City staff for "internal" activities such as conversion, internal training, interfaces, etc.

CThe distribution of the costs and benefits for each alternative over the cost benefit period is consistent with the corresponding transition plan for this alternative.

 2. Cost benefit period

CThe life cycle of administrative software is approximately 7 years.

CThe cost benefit models demonstrate the financial impact of the transition alternatives not only after 7 years (2005), but also after 3, 5 and 9 years to demonstrate a shorter-term (capital) expenditure impact and a longer term impact as some "target" solutions are likely to last beyond 2005.

3. Capital costs

CCapital costs can be grouped into three broad categories - hardware, software, and HR costs.

CHR costs include software / hardware configuration, enhancements, conversion, training, etc. The cost benefit models assume that City staff (IT and business) be used whenever possible during the transition.

CAll transition costs except internal HR costs are considered capital.

 4. Hardware costs

CHardware requirements are essentially the same for all alternatives.

CAll cost benefit models use the same transition (capital) and ongoing annual (operating) costs of $4,570,000 and $75,000 respectively, the estimates provided by Sun Systems.

 5. Software costs

CThe business cases use software costs, both licensing and maintenance, as per software vendor quotations.

CThe software licensing costs of SAP and PeopleSoft are accrued once the software is in production, and are capitalised over 3 years. These vendors have indicated that they will be flexible with respect to this issue, but there is no official proposal from either vendor at this time.

 6. HR costs

CThe business cases use external consulting costs as per software vendor quotations.

CConversion and training costs are essentially the same for all alternatives.

CThe estimates for conversion, training and other "internal" costs were based on analysis of the former City's SCT Banner experience, and extrapolated to the other cost benefit models.

CThe business cases use the following City staff rates to calculate the operating HR costs:

*$1,000 per diem for IT staff;

*$500 per diem for business staff.

 7. Benefits

CThe business cases include only additional savings resulting from implementing the considered alternatives, but do not include the projected amalgamation savings.

CIn addition to staff efficiency gains attributed to implementing any of the solutions, the business cases for the SAP alternatives include the following "integrated solution" benefits:

*additional $160,000 per annum, or 15% of IT support, as per Gartner Group research;

*additional $5,400,000 per annum in the Operating organizations resulting from the reduction in the HR/Finance data capture duplication and the management information preparation.

  8. Risk Factors

CThe business cases consider key risk factors associated with the transition to, and the ongoing maintenance of each alternative by applying variable rates of discount to the cash flows in the Net Present Value (NPV) calculation. Higher risks mean higher discounts.

CThe following are the three risk groups and associated discount rates used in the business cases:

*Low - 7.5%;

*Medium - 19%;

*High - 30%.

 9. Transition risks

CThe risk assessment of various transition paths is based mainly on the ability to meet successfully the transition constrains (see Assumption 1 above), and, thus, reflects such factors as:

*use within the City;

*availability of experienced resources;

*scalability.

CThe following is the relative risk assessment of the transition alternatives as used by the business cases:

*Computron / Cyborg - Low;

*Computron / PeopleSoft - Medium;

*SAP - Medium;

 10. Ongoing risks

CThe assessment of ongoing risks of maintaining various software products reflects such factors as:

*vendor's viability;

*vendor's commitment to the City and to the municipal market;

*product's viability;

*product improvement;

*availability of support.

CGartner Group research suggests that

*"best of breed" products are likely to lose their market share to integrated solutions;

*Computron customers "watch" the vendor closely and conduct an annual re-assessment of their relationship and potential buyers consider other alternatives.

*Cyborg is a small vendor with a limited product line, and is high risk

*SAP leads the integrated solution vendor race.

CThe following is the relative risk assessment of the ongoing maintenance of the target solutions considered in the business cases:

*Cyborg / Computron - High;

*PeopleSoft HR / Computron - Medium;

*SAP - Low;

*SAP HR / Computron - Medium.

Appendix B

  City of Toronto

Administrative Systems Evaluation

"Best of Breed" vs. Integrated Applications

 Introduction

The new City of Toronto is working on a complex and pressing task of consolidating its administrative services and systems, a critical element of its overall amalgamation effort. The City is faced with two fundamentally different alternatives in its application system evaluation- an integrated HR/Payroll/Financials and a "best of breed" package. The "best of breed" solution is a combination of HR/Payroll and Financials. Normally, these products are developed (but not necessarily distributed) by different vendors, and are chosen for their relative strength in their respective functional areas, in this case, HR/Payroll and Finance. On the other hand, the integrated solution is a product which is comprised of tightly integrated modules with a common underlying data base and a common access tool set. The functional superiority of "best of breed" components, unquestionable a few years ago, has practically disappeared as leading ERP (enterprise resource planning) vendors have dramatically improved the functionality of their products in all areas, while maintaining their integration focus.

 In this document, we review the business needs of the City and analyze the impact of the aforementioned alternatives on its business operations. We highlight the principal differences between these solutions and illustrate them with a few examples representing some typical City needs. Finally, based on this analysis, we make a recommendation.

 City of Toronto Business Needs

The City has aggressive improvement targets for its administrative services with respect to both staff efficiency and quality. In order to achieve the expected results, the City should consider a holistic approach to change. While technology is a necessary and very important element of change, its alignment with business processes, organization, and culture are extremely important.

 Therefore, prior to reviewing the aforementioned technology alternatives, we consider the business environment the technology solution will have to be aligned with.

 The administrative services will need to reduce cost of transaction processing, and focus on value-added activities (e.g. analysis, planning). According to Gartner Group, the following are some strategic imperatives in transforming these services:

 CFinance - in addition to traditional general accounting, should focus on cost and management accounting and treasury issues; its analytical capabilities should span the entire enterprise, not just focus on financial metrics.

 CProcurement - in addition to processing user requests and contracting with vendors, should focus on negotiating deeper discounts, reducing transportation and other carrying costs;

influencing the vendor's R&D, yield and production capacity, and watching operational, decommissioning and disposal costs of capital goods.

 CHR/Payroll - in addition to administering the organization and its employees, should focus on HR planning which is becoming increasingly complex with the proliferation of business process outsourcing/insourcing options and project-based organizations.

 This shift in focus encourages capturing (with edits and controls), and ensuring quality of information at the source. Capturing information at the source also strongly suggests it should be done once. The fact of (re-)entering the same information into loosely connected systems for different purposes was not obvious before, as it was done by different administrative areas (often based on colourful multi-part documents produced by the originating department), but pushing the activities to the source has exposed the problem. Gartner Group expects 1999 investments in data capture and sharing technologies to deliver a 50 percent better return on investment than those in refreshing transaction-processing capabilities.

 The strategies described above are consistent with the direction the City is taking (New City New Opportunities, Transition Team, December 1997):

 Cbenchmarking against private sector;

Cmove budgets for support services to operating departments;

Cresponsibility for results;

Cbalance centralized and decentralized functions.

 Integrated vs. non-integrated HR/Payroll/Financials

In this section, we discuss how these technology options would function in the business environment described above. There are several key areas of the City's business operations where the alternatives will result in a strikingly different impact on the business users.

 Data Capture

The integrated alternative enables information capture and validation at the source while the non-integrated alternative requires either re-entry of the same information into the software components or maintenance of interfaces which would simulate this re-entry. The interfaces are normally specified and controlled by vendors and represent compromise solutions aimed at satisfying their user group needs.

  The following are a few examples of how the alternatives would impact the City's operations.

1. Create a Position

Normally, creating a new position using a HRMS (HR Management System) first requires checking if the organizational unit has sufficient budget, and, if it does, adjusting the budget upon creation of the position. The integrated alternative allows on-line real time validation, position creation and budget adjustment while the non-integrated alternative, at best, will validate the position budget against financial information captured at some point in the past (FIS-to-HRMS interface) and upon creation of the position will create a transaction to revise the budget (another interface, HRMS-to-FIS). As the validation was not real time, this transaction may be rejected and thus may trigger a manual process of reversing the creation of the position.

2. Process a Salary Increase

Processing a salary increase first requires checking to see if the G/L salary account has enough money in its free balance, and, if it does, adjusting the free balance and salary encumbrance according to the increase.

 The integrated alternative allows on-line real time validation, salary increase processing and free balance adjustment, while the non-integrated alternative, at best, will validate the increase amount against financial information captured at some point in the past (FIS-to-HRMS interface) and upon increasing the salary will create a transaction to revise the free balance budget (another interface, HRMS-to-FIS). This validation will be impossible to perform in the latter case at all if the funds checking rules include both the salary budget and the bottom line budget of the organizational unit. As the validation was not real time, this transaction may be rejected and may trigger a manual process of reversing the salary increase.

3. Time and Activity Reporting

An employee working on a project /program(s), reports his/her Time & Activity information to his/her project manager as well as to HR/Payroll for payroll, vacation, benefit and other purposes.

 The integrated alternative allows on-line real time validation and updates both the project/program information and HRMS. On the other hand, very few project management systems have interfaces with HR/Payroll systems and vice versa. Therefore, this example is likely to result in duplication of data entry (following with reconciliation).

Operational Management Information

The integrated alternative provides an integrated information view and allows the end-user relatively easy access to up-to-date cross-modular (e.g. HR and Financials) operational management information. The non-integrated alternative requires development and maintenance of a data warehouse which would serve as a repository for gathering and synchronizing information from various software components, e.g. HRMS and Financials, for reporting and analytical purposes. This information is historical and may not be current enough for tactical purposes. This data warehouse would likely be a product from a niche vendor, and would have a tool set different from the tools supplied by the main software products.

 The following are examples of enquiries which could be satisfied by an integrated solution, but not by a non-integrated one:

 Ability to view departmental salary budget (maintained in FIS) and to "click" on it to view the positions (maintained in HRMS) comprising the budget;

 Ability to view summary payroll actuals (FIS) and to zoom into corresponding employee-by-employee payroll detail (HRMS);

 Ability to view overtime summary payment (FIS) and to see, employee-by-employee, what it is comprised of;

 Ability to view project/program information (FIS-Project Management) and to view HR costs (regular salaries, overtime, benefits) for the project/program or, with proper access clearance, by project member (HRMS);

 The previous example is just an indicator of the value of the integrated project/program and HR information. HR planning (skills, training, competencies) can be driven by project plans, schedules and required skills; and, conversely, employee competency always includes his/her project experiences.

Workflow

Workflow plays a critical role in implementing business processes by gluing operational units and administrative services together. While workflow permeates all functions by enabling employee self-service, routing purchase requisitions, purchase orders and other electronic objects for approval and further processing in all business areas, workflow roles are driven by organizational structure maintained in HR. According to Gartner Group, "If HR is integrated, common workflow definitions … should be part of the integrated design. To reach the same level of functionality, best-of-breed HR implementations must create interfaces to share and manage responsibility information beyond the HR application, across workflow for applications in other business areas. Few HR vendors have made provisions for exporting this information. Conversely, few outside workflow systems (particularly those produced by enterprise application vendors)

have facilities for importing such information. This makes interfaces difficult and often leads to dual data entry and maintenance with no reconciliation of differences in organization structure representations in competing systems. The more cross-business-area-workflow is a requirement, the greater the appeal of an integrated system."

Further Integration Opportunities

Selecting the integrated HRMS/Payroll/FIS/Project Management alternative now will pave the way for further integration. If in the future the City chooses to acquire software to support its fleet and equipment maintenance operations, and implements the modules of the integrated solution that are designed for this purpose, the City will reap further benefits of integration. Imagine preventative maintenance programs triggering automatic ordering of parts, work order information concurrently affecting equipment records and mechanics' HR/Payroll, resource planning capabilities, etc. This list can go on and on. Clearly, the more encompassing the integration is, the more beneficial it becomes, the more interface maintenance and dual data entry headaches can be avoided.

 City Staff Efficiency Gains

In addition to the qualitative benefits described above, selecting the integrated HRMS/Payroll/FIS/Project Management alternative should result in significant staff efficiency gains in various areas of the City. The single most important benefit in this area is the virtual disappearance of the role of "information broker". This role does not easily translate into a position or positions, full- or part-time, on the City's organizational chart. The role includes everyone who is presently involved in:

 preparation, capture and reconciliation of cross-functional information and/or information required by multiple systems (e.g. HRMS and FIS);

packaging and "massaging" the information above to support operational managers;

maintaining system interfaces described above.

 This change should affect HR, Finance, IT and especially operational departments.

 Moreover, IT staff complement dedicated to multi-vendor systems (support and help desk) is expected to be 15 - 20 % higher than for an integrated solution.

 Conclusion

We have reviewed a number of advantages, both short-term and longer-term, of proceeding with the integrated alternative. Based on this analysis, our understanding of the City's circumstances and business needs, our experience in the application of technology to the business needs of private and public organizations, we strongly recommend that the City pursue the integrated alternative as the target solution for the City's administrative system. This path will help the City maximize the benefits of amalgamation, transform its administrative operations and provide the City with a solution flexible to sustain future business improvements and technology advances.