July 23, 1998

To:Budget Committee

From:B.H. Gutteridge

Commissioner of Works and Emergency Services

Subject:Business Case Review of the "Works Best Practices Program"

Purpose:

To report on the review of the Business Case for the Works Best Practices Program (WBPP), currently underway in the Water and Wastewater Services Division of Works and Emergency Services, and to seek funding in the amount of $19,433,000 for continuation of WBPP in 1998.

Funding Sources, Financial Implications and Impact Statement:

At its meeting of April 29, 1998, Toronto Council approved the 1998-2002 Capital Works Program, which includes provision for continuing expenditure on the Works Best Practices Program (WBPP) in the Water and Wastewater Services Division of Works and Emergency Services.

The Works Best Practices Program is a four and one-half year plan, with an estimated capital cost of $101,905,000. The two major outcomes of this Program are the substantial replacement of obsolete and aging plant instrumentation, equipment and control systems, and the modernization of work and management practices and procedures, enabled by new information systems, in all areas of operations and maintenance. The operating cost reductions produced by WBPP implementation in Water and Wastewater Services will increase through the implementation period to $37,076,000 per year in 2002, the first full year following completion of the project and will continue at that level thereafter. WBPP is presently on schedule with regard to the overall planned capital expenditure and the achievement of operating cost reductions.

In approving the 1998-2002 Capital Works Program, Council withheld funding approval of expenditures pending a review of the WBPP business case by the Chief Administrator's Office. Of the planned total WBPP cost of $101,905,000, prior financing has been approved totalling $25,377,000 to complete Phase 1 activities.

Of the amount approved, the total spent and/or committed to date is $22,840,000 leaving an uncommitted balance of $2,537,000, which is, however, earmarked for remaining Phase 1 planned activities.

Additional financing in the amount of $19,433,000 is now required for continuation of planned implementation work in 1998, with some expenditures extending into 1999 as major contracted plant detailed design work, under Phase 2 of the Program. Details to the Costing Unit level are shown in Appendix 1.

The Treasurer has advised that funding can be made available from the Water Pollution Control Measures Reserve Fund and the Water Supply Capital Financing Reserve.

The financial impact of implementing WBPP in the former Metro Water Supply and Water Pollution Control functions was analyzed by the Finance Department in 1997. The results of that analysis indicated that the WBPP can be financed through the water rate without adverse impact to the existing rate projections. The consequences of not completing WBPP are significantly higher future water rates as a result of foregoing planned operating cost reductions estimated at $37,076,000 per year.

It should be noted that this program will contribute significantly to resolution of the Year 2000 (Y2K) problem in Water and Wastewater Services. The estimated twelve-to-fifteen million dollar cost of replacing aging, non-Y2K compliant SCADA (Supervisory Control and Data Acquisition) equipment and systems in the water and wastewater treatment plants and in the collection and transmission systems is already contained in the WBPP capital estimates. Further, all new information systems and technologies deployed under WBPP will be certified Y2K compliant as per corporate standards, avoiding the need to repair or replace a host of older, non-compliant systems.

Recommendations:

It is recommended that:

(1)Toronto Council endorse continuance of the Works Best Practices Program, described herein;

(2)funding in the amount of $19,433,000 ($3,063,000 in Water Supply Appropriation WS026 and $16,370,000 in Water Pollution Control Appropriation WPC001) be approved from the Water Supply Capital Financing Reserve and the Water Pollution Control Measures Reserve Fund;

(3)subject to recommendation No. (2) above authority be granted for an expenditure of $19,433,000, after the Municipal Goods and Services Tax Rebate, to continue implementation of the Best Practices Program; and

(4)the appropriate City officials be directed to take the necessary action to give effect thereto.

Council Reference/ Background/ History:

At its meeting of July 2 and 3, 1997, by adoption of Clause No. 3 of Report No. 13 of Financial Priorities, Metropolitan Council endorsed continuance of the WBPP. The program had been previously established by Metropolitan Council on September 25 and 26, 1996 through adoption of Clause No. 2 of Report No. 14 of the Environmental and Public Space Committee with the objective of implementing the best practices in the utility industry in the areas of work management, technology and organization, to maximize operating effectiveness and efficiency across the Department. The WBPP arose through expanding the structure and scope of the previously existing Process Equipment Replacement and Strategic Information Systems Plan (SISP) project for the former Metro Works Water Pollution Control Division (reference Clause No. 1 of Report No. 15 of Environment and Public Space Committee, adopted by Metropolitan Council at its meeting of September 27 and 28, 1995) to encompass all business functions of the former Metro Works Department.

Comments and/or Discussion and/or Justification:

At its meeting of September 25 and 26, 1996, Metropolitan Council, by approval of Clause No. 2 of Report No. 14 of the Environment and Public Space Committee, endorsed commencement of the Works Best Practices Program in the Works Department. At its meeting of July 2-3, 1997, Council, by approval without amendment of Clause No. 3 of Report No. 13 of the Financial Priorities Committee, authorized expenditures to perform Phase 1 implementation of the Works Best Practices Program (WBPP). In each of these instances, a presentation of the business case for WBPP, in the context of the recommendations being requested at the time, was presented to the Committee. Further, the business case had been reviewed and endorsed by the Metro Chief Administrative Officer, Commissioner of Finance, and Commissioner of Corporate Services.

On May 26, 1998, the Chief Administrative Officer met with staff of the Water and Wastewater Division of Works and Emergency Services, including the Project Manager for WBPP, to review key elements of the Works Best Practices Program business case. In the light of previous business case reviews having been performed by senior Metro officials, and because this Program is both broad in scope and diverse in nature, involving substantial equipment upgrades in seven major water/wastewater operating facilities, the commissioning of a number of strategic information management systems, and the redesign of operations/maintenance work and management practices, the review focused on three key perspectives.

The first perspective is the financial component of the Program, including costs over time, operating cost savings over time, and the implication of the program on water and sewer user rates - related to this would be the impacts on overall service delivery in terms of quality and effectiveness.

The second perspective is the implication on organization and staff, both bargaining unit and management, and the relationship between WBPP and the City of Toronto Amalgamation processes.

The third perspective is the implementation methodology being used to govern the wide range of tasks and activities involved in implementing the Program.

Financial Aspects.

The fundamental objective of the Works Best Practices Program is to ensure business operations continue to be performed to degrees of efficiency and effectiveness that are consistent with modern practices and supporting technologies. One of the first steps in the initiation of the Program was the establishment of a "competitiveness assessment". This exercise utilizes an efficiency benchmarking technique which is essentially identical to those used by the multinational private operators in developing operating contract proposals for major water and wastewater utilities. It is the results of this exercise, backed up by similar conclusions produced in a totally independent, internal "simulated competition", that led to the establishment of a thirty-seven million dollar per year operating cost reduction target for the Works Best Practices Program.

The total cost of the Program, to be implemented over a four and one-half year period, is stated to be $101,905,000. Of the total cost figure, approximately $65,000,000 represents previously planned expenditures for the necessary ongoing replacement and upgrading of existing equipment and control systems in water and wastewater plants and in the collection and transmission systems (these facilities have a combined infrastructure value estimated at $7,500,000,000). It is in fact the remaining investment component of approximately $37,000,000, aimed at new and improved operations and maintenance work practice and organizational redesign, underlying technology development and process control improvements, that generates the bulk of the $37,076,000 in annual operating cost reductions. The $65,000,000 has been effectively "bundled" into the Best Practices budget in order to leverage opportunities for efficiencies through operational improvements and to ensure those investments are coordinated within the broad standards and technology development strategies of the core Best Practices initiative.

In 1997, the full WBPP costs and schedule of planned operating cost reductions were included by Metro Finance in Water Rate Model calculations and it was determined that no rate increase would be required. The Program, even including the bundled $65,000,000 component, is effectively self-funding in that the accumulated operating cost reductions generated exceed the capital costs within the life of the Program implementation. As the table below shows by the year 2002, the program breaks even and is producing savings of $37,076,000 per year. If the Program does not proceed to completion, there will be an increasing effect on water rates.

The table below summarizes the business case figures. Capital costs are year-by-year, inflated to year of expenditure and after the Municipal Goods and Services Tax Rebate. Operating savings are net, year-by-year, in constant 1997 dollars. FTE reductions are approximate, year-by-year. The Program is presently on target to deliver the planned operating cost reductions within the planned Program cost.

The effects of implementing Works Best Practices on service delivery and product quality are favourable. Present quality levels for potable water production and wastewater effluent production will be maintained, with improved flexibility and cost management relating to legislated or otherwise directed improvement strategies. Service levels will be maintained, providing for better responsiveness and better access to more relevant and timely information. Other benefits include improved asset management and long-range performance, increased facility/infrastructure lifetime, and opportunities for improved receiving water quality.

As a result of delay in proceeding with implementation of certain works, the projected cash flow for the project has been revised from the 1998 Capital Works Program submission as noted below.

Appropriate amendments will be reflected in the 1999 Capital Works Program.

Staffing and Organization.

The findings of the competitiveness assessment, confirmed in the simulated competition, pointed to reductions in operations and maintenance labour costs as the primary source of available cost savings. The "best practices" that have been identified under this Program as most relevant to former Metro water and wastewater operations stress the following as the most significant areas of opportunity:

-more efficiently planned, managed and executed work practices;

-"total productive operations" (TPO), which focuses on maximizing the productive time of human resources; and,

-workforce flexibility, which tackles the issue of separated skills and crafts and its associated inefficiencies.

WBPP therefore emphasizes a broad transition of the workforce, including management, in terms of the jobs people do, the way people are organized, and the work practices they employ. This transition must be orchestrated in conjunction with the replacement and upgrading of process control equipment and systems and the implementation of key computer systems aimed at organizing and managing resources, automating tasks, and managing the performance of the business, its resources and assets.

Activities under WBPP to-date have identified and confirmed a clear need to reduce on a phased basis the size of the overall workforce needed to perform the work and business processes that characterize the present workload. This was evidenced by the competitiveness assessment, and by work done under the Program to-date, particularly in business re-engineering exercises. This should not be surprising, given the rapid pace of change in the industry over the past decade at the global level and the lesser degree of organizational change that has taken place in North America. At the same time, change of this magnitude, regardless of the underlying business and financial logic, cannot be instituted without consideration for its impact on staff at all levels. Included under Works Best Practices are a range of work redesign components, affecting the jobs, responsibilities and skills of front-line staff in operations, maintenance, and general labour areas, as well as the change management skills at the supervisory level. Within that process, some job descriptions need to be revised, and new ones created. WBPP incorporates costs to support staff transition. This includes funds to finance voluntary exit packages and staff training, including training for staff needing new skills to perform new types of work and training for staff who wish to leave, but who require certain skills to assist them in finding new jobs. Both these funding mechanisms are financed out of accruing savings during the implementation period, and have already been netted out of the planned cost reductions.

Senior staff in the areas of Finance, Human Resources and Corporate Services are to be involved in this process to assist in policy areas and to ensure that developed policies are followed. In the area of Labour Relations specifically, senior staff have been involved in this Program from the outset, and continue to play an active role in the process.

At this stage, C.U.P.E. Local 79 continues to support the Works Best Practices Program, and has for the past year maintained an active role in the Program. Local 416 formally "stepped back" from active WBPP participation earlier this year. At this point, formal discussions are under way at the senior level to develop an appropriate working relationship aimed primarily at addressing areas of concern relating to the impact of WBPP on its members. It is a stated goal of the Works Best Practices Program to achieve planned reductions in the workforce through attrition, voluntary exit packages, and an active process of redeployment on a City-wide basis, with layoffs to be considered only on a last-resort basis. Intensive discussions are planned to take place in August for purposes of arriving at a firm set of principles and protocols to govern the implementation of WBPP.

With regard to the relative implications of WBPP and amalgamation, it is clear that this Program is actively performing Phase 3 restructuring work, and will help provide a solid operational foundation for the emerging Works and Emergency Services management structure. Appropriate linkages between the two activities are presently under development.

Implementation Methodology.

The third area of focus is the implementation methodology of the Program - the standards and procedures and methods being applied to enable and achieve the planned results. This is a complex area, and it is evident that much expertise has been applied to the WBPP methodology. The initial design phase utilized external consultants from a wide range of disciplines. This was needed for a number of reasons: the volume of work to be done; the transitional nature of much of that work; the need to apply techniques that are very current and very specific to water and wastewater operations and management; the need for assistance in project management activities relating to several major disciplines including engineering and process control technologies and practices, information systems design and development, and "total productive operations" work practices redesign; and, importantly, the need to apply specially-skilled resources to the Program on a full-time basis through the critical design stages. As the Program moves into its second phase of work this year, new roles are planned for development in Works and Emergency Services to effect the transition of sustaining aspects of the new operation into the hands of staff. The need for consulting support will reduce substantially as key implementations are rolled out in operational work areas, in major process control systems and their networks of equipment and devices, and in underlying information technology applications.

From a project management standpoint, the methodology being applied is well suited to the Program. There is a strong Quality Control and Quality Assurance component, which is separated from the main project body to ensure objectivity. There is a review and approval process for project deliverables which brings to bear the expertise of both consultants and staff and also provides effective knowledge transfer to staff to maximize self-sufficiency in the future.

A benefits tracking program is under development, with the assistance of Finance staff, to capture and report direct WBPP benefits in the areas of energy, chemicals, parts and materials, and savings in labor costs. This system will operate until completion of the Program, and can be adapted to support continuous improvement initiatives on an ongoing basis.

The Performance Management component of WBPP is a computerized business tool which will be used for monitoring business performance, for establishing improvement targets and for tracking the achievement of those targets. This capability is in keeping with emerging corporate strategies for benchmarking and tracking of key business improvements.

Conclusion:

The Works Best Practices Program is an important strategic initiative. It emphasizes the establishment of a continuous improvement business and work environment in a climate of fiscal restraint, public accountability and openness, and global competition. The business case for WBPP is strong - the achievement of ongoing cost reductions in the range of $37,076,000 per year for an investment of $101,950,000, a large part of which is an operational necessity to maintain the operational viability of approximately $7,500,000,000 in infrastructure. The resulting payback ratio of 35 percent represents a solid cost-benefit. WBPP effectively pays for itself within the lifetime of the project.

While the Program will have a significant impact on both management and bargaining unit staff, funding has been built in for transition and training. Communications and staff involvement are firmly entrenched principles of the Program. Corporate labour relations/human resources staff have been involved in our ongoing discussion with the Union and are providing input with respect to transition and training initiatives. The project methodology is well-suited to the needs of this large and complex undertaking. Performance management and benefits tracking are integral to the design of technologies, practices and organization.

This review process concluded that the Works Best Practices Program Business Case is complete and appropriate. The Commissioner of Finance and the Executive Director of Information Technology for the City of Toronto have reviewed the Program and are in concurrence. It is recommended that funding for the Program be provided as set out in Appendix 1 to this report.

Contact Names and Telephone Numbers:

William G. Crowther

Director, Management and Technical Services

Toronto Works and Emergency Services Department

Phone: (416) 392-8256

Fax: (416) 392-2974

E-Mail: william_g._crowther@metrodesk.metrotor.on.ca

Jim Coe

Manager, Works Best Practices Program

Toronto Works and Emergency Services Department

Phone: (416) 392-3141

Fax: (416) 392-8817

E-Mail: jim_coe@metrodesk.metrotor.on.ca

Barry Gutteridge

Commissioner of Works and Emergency Services

Michael Garrett

Chief Administrative Officer

Wanda Liczyk

Commissioner of Finance

jdc/ea:council\cbudget\bpp98723 / File No. 67-008-001

Business Case Review of the "Works Best Practices Program"

APPENDIX 1: Capital Accounts

(in $000's, including GST after Rebate)

* The cash flow indicated in this table reflects that required for for new work to be initiated in 1998 and for which funding is now required. The cash flow for certain elements extends into 1999 because the contracts to be awarded in 1998 will not be completed in 1998.