February 10, 1999

To:Audit Committee

From:City Auditor

Subject:Year 2000 Project Update

Recommendations:

It is recommended that:

1.The Chief Financial Officer and Treasurer develop a contingency plan to provide a backup location for the SAP project office.

2.The SAP Steering Committee closely monitor the progress of the Human Resource and Payroll project and effect a process to facilitate the removal of roadblocks which may compromise delivery.

3.The role and responsibility of the Quality Assurance Manager be redefined to ensure the benefits derived from a quality assurance function are not lost.

Background:

On February 16, 1998, we issued a report to the Commissioner of Corporate Services expressing our concern regarding the City's progress in addressing the management and technical challenge brought about by the Year 2000 date processing problem. This report was subsequently forwarded to the Audit Committee and then to Council. Since that date considerable effort and resources have been and continue to be allocated to implement a strategy and approach to mitigate the adverse impact of this problem.

In addition to an advisory role to the Project Office we are providing, independent of the Project Office, an on-going review of both the process and progress. This effort began with the creation of an audit guideline for due diligence. Areas covered in this guideline included the establishment and role of the steering committee, the project office, the departmental program, the problem identification process, appropriate resourcing and funding, the creation of project plans and schedules, project execution, testing and contingency planning.

The Chief Administrative Officer and the Director of the Year 2000 Project have also requested the City Auditor and Chief Financial Officer and Treasurer ensure due diligence, adequate spending controls and appropriate checks and balances are in place in the administration of the Year 2000 Project Office.

This represents our first report on this project and covers the period February 1998 to December 1998. We have discussed this report with the Project Director, Year 2000 Project and the Chief Financial Officer and Treasurer. Their responses to our recommendations have been included in the body of this report.

Comments:

During the time frame highlighted above the project moved through three phases; the initiation phase, inventory phase, and the assessment phase. Our main focus throughout this period was to ensure an effective Program and Project Management structure was put into place. This includes assurance that executive level support and sponsorship exists, a Year 2000 team (with appropriate roles and responsibilities) is in place, an overall strategy for addressing the issue is in effect, and that there is universal awareness of this business issue.

The Program and Project Management structure includes the following components:

• a Steering Committee compromised of senior staff and a councillor;
• issuance of reports to Council and Committee;
• establishment of a Project Management Office (PMO);
• creation and distribution of Project Standards and Guidelines, etc., and
• is consistent with acceptable management practices for projects of this nature.

At the next level we examined the process implemented to identify core business areas and processes, inventory and analyze systems supporting core business areas and prioritize their conversion. Again this was a review of the reasonableness of the system in place to generate the desired deliverables. No attempt was made to critique individual selections which make up the six citywide corporate initiatives, two initiatives relating to the PMO and administration and seventy-nine priority one systems requiring remedial action.

The next two phases; the Remediation Phase scheduled for January 1998 - April 1999 and the Testing Phase May 1999 - June 1999 are critical to the City's ability to resolve the Year 2000 challenge in time. Over the next few months it is our objective, on a test basis, to examine in detail the reasonableness of individual project plans, measure progress and report the results.

Although we are satisfied with the overall strategy undertaken there are some specific areas that require careful management. The following paragraphs deal with these concerns.

As approved by City Council, the Year 2000 Office is charged with responsibility to ensure that Year 2000 issues are dealt with by Agencies, Boards and Commissions. This includes the co-ordination of the Police Services Board, the Toronto Transit Commission and the Toronto Hydro Commission year 2000 action plans. Interaction with Agencies, Boards and Commissions ranges from full support for the smaller agencies, boards and commissions to notification to authorities with which the City has a special relationship.

We expressed to the Director of the Year 2000 Project the need for clarification as to the delineation of responsibility by the Project Management Office and the various Agencies, Boards and Commissions to avoid a gap in expectations by either party. This will further ensure that items do not fall between the cracks. We also conveyed our concern over the ability of the Project Management Office, as currently resourced, to effectively monitor the activities of the Toronto Transit Commission, the Police Services Board and the Toronto Hydro Commission. Periodic validation of progress reports from these entities is considered to be a prudent step.

The Director of the Year 2000 Project has recognized this weakness and has taken action by hiring an individual in the capacity of a Project Manger to clarify the priorities, monitor the status, and escalate Agencies, Boards and Commissions issues. This individual will have a continued presence within the Agencies, Boards and Commissions.

Contingency plans are the outcome of managing risks, either perceived or real. The remedial action for the Human Resource and Payroll system is to implement the SAP financial system. The SAP project schedule, as approved by Council in December 1998, calls for implementation of the new payroll system for all former Scarborough and Metro employees in various stages beginning in August with a critical milestone occurring in November 1999. In the Year 2000 readiness context this represents only a five week cushion for the project.

In our view the risk of failing to meet the scheduled SAP implementation date is high. In addition to factors of risk inherent in the management of projects, the Human Resource and Payroll system is being developed in an organization still occupied with amalgamation issues, in a year in which negotiations for unionized staff will take place, where key employees are at a premium, etc. As well, it is our understanding that the contract for maintenance staff of the Board of Education has expired and will be the subject of negotiations, the outcome of which are currently not known. Since the project team is housed in the Board of Education building in North York, a location contingency plan is required.

Recommendation:

1.The Chief Financial Officer and Treasurer develop a contingency plan to provide a backup location for the SAP project office.

Response:

An alternate site to be readied by SAP for both the City's and School Board's project teams has been secured.

We understand that, subject to the Chief Financial Officer and Treasurer's approval, the recommended contingency plan is to rerun the last pay run of the year for the required period of time if the November 1999 milestone slips. Although this saves the City the cost of making the current Cyborg payroll system Year 2000 ready (approximately $1.3 million) it does have a downside. Payments may be inaccurate in terms of required deductions, the remuneration for services provided may prove to be inaccurate (hourly employees), etc, and requires close monitoring to ensure, for example "final" payments are not released a second time. The administrative effort to rectify exceptions increases exponentially should such a procedure be required for any extended length of time.

The City will also need to be prepared for the possibility of employee dissatisfaction and the effect this may have on the City's public image. It is paramount that progress of the SAP project be closely scrutinized. Within the formal project structure this role falls upon the Steering Committee. The City Auditor will also review progress made on a regular basis.

Recommendation:

2.The SAP Steering Committee closely monitor the progress of the Human Resource and Payroll project and effect a process to facilitate the removal of roadblocks which may compromise delivery.

Response:

The entire SAP project team is committed to the milestones of performance set out in the December report to Council on the project. To date, we have met the delivery of the first two project milestones on both the FIS and HR/Payroll projects on time.

Monthly Steering Committee meetings are set to deal with project monitoring. Weekly Advisory Committee meetings occur to deal with project issues on an expedited basis.

The contingency plan has been prepared and submitted to the Y2K Team. It calls for the retention of current business processes in data entry of hours worked including overtime, shift and other nonstandard payments to an already Y2K ready front end time entry system. If the final SAP milestone is not met, this electronic capture of "extra" data will be stored and will be processed immediately upon cutover to SAP. All employees will receive base paycheques based on a standard work week until SAP cutover. Finance will work closely with Corporate Communications to advise employees if this contingency plan will be activated. Appropriate procedures and policies will be developed to deal with special extraordinary situations where the employee circumstances require attention in the intervening period.

From a financial perspective we performed a preliminary review of the process for approving invoices and issuing cheques for services provided for this project. A centralized process exists. In other words all invoices funnel through the Director of the Year 2000 Office for approval. As well all disbursements related to the Y2K project are counter signed by the Director of Accounting Services.

The organization of the Year 2000 Project includes a Quality Assurance Manager (IBM personnel) for each of the six major departments plus one manager for corporate projects to work with the Project Managers. As the name implies the role of this position is to ensure an acceptable level of quality exists in efforts extended and deliverables presented.

We observed that Quality Assurance Managers in some instances were becoming "doers" at the expense of their consulting review role. Although we admire the willingness to get involved and get the job done it also has a negative element. Foremost it becomes increasingly difficult to objectively provide a quality assurance role if you are part of the creation. Furthermore, it creates an environment in which the Business Unit is less likely to take ownership. Reliance on the efforts of the Quality Assurance Manager to do tasks that should be performed by staff in the Business Unit becomes the norm rather than the exception.

In a recent meeting with the Director of the Year 2000 Project we were informed that independent arm of IBM conducted its own review of the project. They reached a similar conclusion in this area. As a result action is to be taken to redefine the role and responsibility of the Quality Assurance Manager. The goal is to shift back to the intended role of this position.

Recommendation:

3.The role and responsibility of the Quality Assurance Manager be redefined to ensure the benefits derived from a quality assurance function are not lost.

Response:

Agreed. We have already taken steps to reconfirm the definition of the role with the Quality Assurance Managers and with the teams.

Some recent events unfolding at the time of this report are:

• the hiring of legal resources by the City Solicitor to provide support in the area of contracts;
• the use of the firm Environics for proactive public communication and reporting on the City's Year 2000 readiness and for integration of the emergency preparedness planning communication;
• obtaining a signed letter of intent/contract with EDS our significant "mainframe" provider, and
• priority two and three business cases are being developed.

Conclusion

The City has made significant progress since forming the Project Management Office. The PMO continues to be proactive in its attempts to identify problem situations. For example, bi-weekly risk assessment evaluations are performed and on a similar frequency, a review by a Contingency Planning Team is conducted of priority one initiatives.

A major challenge is the competition for resources within the business unit. In addition to the Year 2000 effort other initiatives such as the SAP project reduce the human resource pool.

Although significant progress has been made within a limited time frame the City can ill afford to take a pause. The Year 2000 effort continues to be a formidable challenge. It is our intent over the months ahead to increase our presence on this project. This will be from both an independent review perspective as well as in our role as project consultant.

Contact Name and Telephone Number:

Jerry Shaubel, Director of Audits, 392-8462

Jeffrey Griffiths

City Auditor