Item - 2020.GL19.2

The General Government and Licensing Committee recommends that:

1. City Council authorize the Controller to negotiate and enter into an amending agreement with Ernst and Young LLP to continue supporting Purchasing and Materials Management Division's Category Management and Strategic Sourcing initiative by increasing the value of the contract from $1.0 million gross ($1.018 million net of Harmonized Sales Tax recoveries) by an additional $8.985 million gross ($9.143 million net of Harmonized Sales Tax recoveries) to a potential upset limit of $9.985 million gross ($10.161 million net of Harmonized Sales Tax recoveries) broken down by:

a. adding $3.485 million gross ($3.546 million net of Harmonized Sales Tax recoveries) for consulting services related to developing category governance, improving reporting, strategic sourcing support and the development of a supplier relationship and contract management framework;

b. including a 5 percent success fee for Ernst and Young LLP's support in obtaining an estimated 110 million in benefits from category management and strategic sourcing events for an upset limit for a success fee of $5.5 million ($5.597 million net of Harmonized Sales Tax); and

c. extending the term of the agreement to May 31, 2022.

The purpose of this report is to request approval for a non-competitive contract with Ernst and Young LLP for continued support of Purchasing and Materials Management Division's Category Management and Strategic Sourcing Unit. 

The continuation of these services with Ernst and Young LLP is a cost mitigation strategy to help with the City's financial situation by realizing financial benefits through the strategic sourcing of procurements within the City's top 6 categories of spend:  Construction and Maintenance, Technology, Facilities Management, Fleet, Professional Services, Refuse and Waste Management which contribute to the $20 million in year savings target.  Purchasing and Materials Management Division, with the assistance of Ernst and Young LLP, has been able to obtain $41 million in benefits to date (between 2019 and April 2020) as part of the implementation of Category Management ("Phase 1").  The City entered into a new contract with Ernst and Young LLP to cover the period of May to October.  This further contract extension ("Phase 2") will deliver additional financial benefits of an estimated $110 million incremental to the $41 million in confirmed benefits to date.

Further to the strategic sourcing opportunities that will be pursued as part of Phase 2, Ernst and Young LLP will also work with Purchasing and Materials Management Division to create the governance framework and operationalize this practice in addition to the creation of category profiles and strategies to incorporate Divisional and City objectives and priorities. 

Ernst and Young LLP was originally retained through a competitive process for Phase 1 and completed their main contract for a value of $4.5 million in April 2020.  Purchasing and Materials Management Division entered into a non-competitive contract to extend Ernst and Young LLP for an additional 3 months for $0.5 million which was subsequently amended for another $0.5 million for a total contract value of $1.0 million.  This proposed further extension would increase the contract value by $3.485 million for consultancy work plus a 5 percent success fee for Ernst and Young LLP to assist the City in completing strategic sourcing events and achieving an estimated $110 million in additional confirmed benefits which will equal an estimated success fee of $5.5 million.  Overall this will increase the total contract value by $8.985 million net of Harmonized Sales Tax (for a total contract value of $9.985 million) and extend the contract until end of March 2022   

This supplementary report is to support the request for the approval of a non-competitive contract with Ernst and Young LLP (EY) for continued support of Purchasing and Materials Management Division's (PMMD).  This contract will enable PMMD to accelerate the adoption of Category Management and Strategic Sourcing strategy which was successfully piloted through the original competitive contract with EY.

This report also considers other staffing options to deliver the proposed strategy using some combination of reorganization, contract or permanent staffing decisions.

This proposed non-competitive contract will deliver up to $110M in annual benefits with an investment of up to $8.9M all while enabling PMMD and the City to continue our transition to be a self-sufficient best in class procurement organization.  This represents a return on investment of over $100M in less than 18 months.  A significant portion of the investment is tied to the achievement of results through a success fee model. Success fee is intended to ensure that EY is incentivized to help the City maximize the benefits.  EY will only be compensated for the success fee if the benefits identified are realized by the City.  Also, the rationale for undergoing this transformation include recommendations from past reports, Auditor General Findings, value for taxpayer’s dollars and to ensure that we are paying fair market value for the goods and services the City procures.

To date, EY has helped us achieving $41M in annual benefits with an investment of $4.5M, for a return of $36.5M in the first 2 years.  For clarity purposes, the report on GL16.4, indicated $41M in annual savings but should have said annual benefits, as the benefits achieved can be a combination of cost avoidance and cost reduction plus other qualitative benefits.  In addition the realization of these benefits will occur over the life of the contract and may change depending on how the contract is utilized. 

The City is still in the midst of developing its capability to execute on procurement more strategically.  The proposed contract is intended to deliver significant additional benefits and build further knowledge and capability in the City. Furthermore, their support is critical to expand existing PMMD resource capacity to operationalize key elements of the procurement transformation that will help unlock further value and sustain the benefits achieved in the process.  

Core components of the transformation include the continued standing up of the CMSS Unit, creation of  processes for Category Management, Supplier Relationship Management and Contract Management as well as the development of all the training material and the delivery of the training, the governance framework and approval processes to ensure visibility and oversight at the right levels of leadership are maintained with respect to categories and the sourcing opportunities and reporting on the benefits of the sourcing projects and category performance.  This occurs while PMMD continues recruiting for both CMSS and PMMD's new Program Support unit.

EY provides access to expertise and resources that the internal City staff does not possess or have access to at this time. Some of the key attributes of EY’s value for the City are the following:

- Local and global resources with subject matter knowledge;

- Subject matter experience on various spend categories, some of which is not readily available in the marketplace;

- Proprietary tools and templates (e.g. Compliance IQ, EY Process Benchmarks, etc.);

- Advanced data analytics tools and expertise (e.g. Alteryx modelling and Power BI visualization); and 

- Market intelligence (e.g. leading practice commercial constructs and supplier capability information through EY’s global network).

EY will help us in two key areas:

1. Complete the procurement transformation journey to make the City self-sustainable and best in class procurement organization. This will include developing and implementing processes and strategies that directly relate to the key components of the procurement transformation.

2. Deploy a team of resources on the ground and from around the globe (subject matter specialists) to help complete some of the largest and most complicated procurements at the City that will deliver an annual benefits of $110M. This includes a success fee component such that part of EY fees are held back until benefits are confirmed by the City staff. This will help incentivize EY to generate higher benefits for the City as noted above, PMMD will continue to recruit for positions as part of the overall reorganization journey PMMD has been on.  It is not possible, however, to recruit fast enough, be able to create the deliverables and work with the Divisions on strategic sourcing events in a way that would achieve the benefits within 17 months as it would be to work with EY.