STAFF COMMENTS FINANCE, ADMINISTRATION AND ECONOMIC DEVELOPMENT COMMITTEE September 21, 2011

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1 ACTION ITEM 4. Selection of Financial Institution for Accounts Payable Automation Services. Policy Issue: The FAED committee has oversight responsibility for financial operations of the City. Professional contracts require Governing Body approval. Staff Recommendation: That the FAED Committee recommend to the City Council selection of US Bank to provide the City s Accounts Payable Automation Services and that the staff be authorized to proceed with negotiation a contract with US Bank for these services. Background: In June 2011 the committee approved a process for selection of Accounts Payable Automation (APA) services. An RFQ was issued for APA services and proposals were received on July 22 from the following institutions: Bank of America, BNY Mellon, Commerce Bank, Cyret Technologies, Intelenet, JP Morgan, US Bank, Wells Fargo, and Wright Express. An evaluation committee made up of staff members from both the Finance & Information Technology along with Jim Beasley, City Cash Management Consultant, met and shared comments from their independent reviews of the nine received proposals. The nine proposals were reviewed for compliance with the mandatory criteria included in the RFQ and the top five firms (Bank of America, BNY Mellon, JP Morgan, US Bank, Wells Fargo) were identified as candidates to be interviewed for further consideration. The evaluation committee reviewed the proposals based on the following criteria: 1. Scope of proposed services; 2. Experience, expertise and qualifications of key personnel assigned to the City; 3. Clarity and completeness of information provided for evaluation and; 4. Response exceptions, if any. The top five firms were interviewed and invited to demonstrate their software s capabilities during the week of August 15. As a result of these interviews and demonstrations it was made evident our initial rudimentary understanding of the APA process s full potential realization for cost effectiveness and efficiency was understated. For instance, it is now known that the APA process has the capability to completely digitize paper invoices, implement the creation of paperless purchase orders, advance the workflow approval process, realize the concept and savings from invoice discounting, and digitally archive all resulting records online. The APA process also furthers cost effectiveness and efficiency by encouraging vendors to submit paperless invoices online with the return benefit to the vendors of being able to check their status of payments in real time. Following the interviews and demonstrations of their software, three firms (BNY Mellon, JP Morgan, US Bank) were selected to be issued a Request for Fee Proposals for further evaluation by the committee.

2 These firms were selected based on: Completeness of answers during the interviews and proposed implementation strategy. Demonstrated software functionality, workflow process and the experience of interfacing with JD Edwards E1, the City s accounting software. References checks had good responses on both their software and customer service. The staff evaluation committee conducted the final stage of the review process based on the three finalist s responses to the Request for Fee proposals. An evaluation methodology was adopted in order to review each financial institution s fee proposal on a comparable basis. This methodology estimated how quickly the City would implement APA services internally with departments and externally with vendors. This methodology assumed that by the third year of implementation 30% of the vendors would be paid by electronic payment and would represent 90% of the invoices received by the City. Each financial institution provided the City a rebate rate on vendor payments processed by ghost purchasing cards. (Ghost cards are essentially one-time electronic transactions processed in a manner similar to using a purchasing card.) For evaluation purposes it was assumed that 11% or $15 million dollars of the total City annual expenditures (excluding payroll, existing electronic payments and purchase card payments) would be processed via ghost cards. Request for Fee Proposals Findings: The following chart compares the cost of banking APA services as proposed by BNY Mellon, JP Morgan and US Bank. BNY Mellon *** Fixed Costs $ 74,000 $ - $ - Variable Costs $ 106,086 $ 109,682 $ 113,278 Grand Total Costs $ 180,086 $ 109,682 $ 113,278 $ 403,046 Ghost Card Rebate - Revenue $ 210,000 $ 210,000 $ 210,000 $ 630,000 Net savings (Revenue less Costs) $ 29,914 $ 100,318 $ 96,722 $ 226,954 *** Does not include a pricing matrix for the actual payment process of either electronic ACH or paper check payments, only the preparation procedure with the actual payment still to be made by the City s Finance department.

3 JP Morgan Fixed Costs $ 49,000 $ 24,000 $ 24,000 Variable Costs $ 15,523 $ 19,749 $ 30,835 Grand Total Costs $ 64,523 $ 43,749 $ 54,835 $ 163,107 Ghost Card Rebate - Revenue $ 178,500 $ 178,500 $ 178,500 $ 535,500 Net savings (Revenue less Costs) $ 113,977 $ 134,751 $ 123,665 $ 372,393 US Bank Fixed Costs $ 6,240 $ 6,240 $ 6,240 Variable Costs $ 21,189 $ 24,614 $ 28,038 Grand Total Costs $ 27,429 $ 30,854 $ 34,278 $ 92,561 Ghost Card Rebate - Revenue $ 219,300 $ 219,300 $ 219,300 $ 657,900 Net savings (Revenue less Costs) $ 191,871 $ 188,446 $ 185,022 $ 565,339 Results of Request for Fee Proposals BNY Mellon, JP Morgan, and US Bank are strong established financial institutions with a large assortment of services and leading edge technology. All three financial institutions proposed excellent APA services and any of these financial institutions would meet the City s needs. All three financial institutions also exhibited flexible software packages, excellent references, and equivalent knowledge and experience with Accounts Payable Automation services. US Bank offers the greatest Return on Investment of $565,339 for the City based on lower costs and higher ghost card rebate opportunities over the next three years. Anticipated Overall Cost Savings The anticipated cost savings by the City with the selection of U.S. Bank are that both immediate in nature and sustainable over the long-term are as follows:

4 Three Year Recap of Costs/Cost Savings A/P Automation Costs: Fixed & Variable Costs 1 $ (27,429) $ (30,854) $ (34,278) $ (92,561) Hard Cost Savings: One less A/P position 2 55,000 55,000 55, ,000 Less in mailing, envelopes & check stock 3 4,800 4,800 4,800 14,400 Less in banking fees 4 4,500 4,500 4,500 13,500 Total Hard Cost Savings 64,300 64,300 64, ,900 Soft Cost Savings: Redeployment of A/P staff 5 60,000 60,000 60, ,000 New Revenue : Ghost Card Rebates 6 219, , , ,900 Overall Net Savings $ 316,171 $ 312,746 $ 309,322 $ 938,239 1) Estimated annual fixed & variable costs for implementing the APA services by US Bank. 2) One full-time A/P position at a yearly cost of $55,000 with benefits has become vacant and is not anticipated to be filled due to implementing APA services 3) Cost of materials like envelopes and check stock and a reduction in mailing costs due to the elimination of the manual printing of checks as a result of implementing APA services. 4) Banking fees will be reduced due to fewer processed ACH and paper check transactions and other monthly related miscellaneous banking fees by UMB will be processed by US Bank as a result of the APA services. 5) The estimated cost differential in the City manually processing an invoice at $5.64 versus using the US Bank APA services cost of $3.01 results in savings of $2.63 per processed invoice. During ,814 invoices were processed multiplied by the estimated savings ($2.63) equals $60,000 of cost savings. It is estimated by implementing APA services it will reduce the estimated total time spent in processing an invoice from 12.4 minutes to 6.0 minutes, resulting in over 50% time savings that allows staff to be redeployed to other assignments. 6) Implementing a ghost card program in which the City pays vendors (11% penetration rate of annual expenditures or $15 million) with the use of ghost cards is estimated to result in significant annual rebates.

5 This APA project will require some effort on the City s part to develop, educate and roll out an internal (departments) and external (vendors) implementation plans. In developing these plans it is envisioned that the City would use a phase-in approach over a three year period with City departments and vendors. The first phase will consist of digitizing all invoices into an electronic format that can be automatically routed for approval and the conversion of as many checks as possible to ACH payments. The second phase of the APA process will consist of implementing real time savings through the use of ghost cards (purchase card) payments. Ghost card payments will reduce payment costs further by the creation of opportunities for rebate from their use over other payment options while still giving support to an increased workflow model through automated coding processes and payments. The long-term savings from the APA services cannot be adequately quantified at this time but is fair to say that future savings will also include: Administrative efficiency realized by departments from the enhanced workflow process of routing and approving invoices online. Potential higher rebates from increased vendor payments via ghost cards. Discounts from vendors by faster payments to them. Budget Impact: The APA services will generate savings from lower administrative expenses, decrease in hard costs and revenues from a rebate A/P purchase card program. Attachments: None.