ISSUE RECOMMENDATION. Date: September 26, California State Lottery Commission. Paula D. LaBrie Acting Director

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Malcolm Barker
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1 Date: September 26, 2013 To: From: Prepared By: Subject: California State Lottery Commission Paula D. LaBrie Acting Director Liz Furtado, Chief of Scratchers Products Sales and Marketing Division Item 9(a) Scratchers Products and Related Services Contracts ISSUE Should the California State Lottery Commission (Commission) approve a primary contract with Scientific Games International, and secondary contracts with Pollard Banknote Limited and GTECH Corp for the production of Scratchers tickets and related services? RECOMMENDATION Staff recommends awarding the primary contract to Scientific Games International (SGI). SGI received significantly exceeds in rated evaluations, had the lowest bid overall across the product portfolio, and offered the best value to the California State Lottery (Lottery) in terms of experience, capabilities, controls, account personnel, and ticket samples and packaging. Staff recommends the award of secondary contracts to GTECH Corporation (GTECH) and Pollard Banknote Limited (PBL) to allow the Lottery to utilize their unique offerings and specialized capabilities. The initial term of the contracts is six years commencing October 1, 2013 and ending September 30, 2019, with the option to extend for up to an additional three years; thereafter, the Lottery may unilaterally extend the contracts up to three additional times for up to one year each.

2 Page 2 The estimated contract value of the primary contract for the initial term of six years is $100 million for SGI, and the combined values for secondary contracts (PBL and GTECH) are $75 million based upon services to be provided. BACKGROUND The Lottery began the solicitation process to identify its Scratchers Products and Related Services contractors in early Staff began by conducting extensive research with other lottery jurisdictions, reviewing recently awarded contracts, and personally contacting lotteries for lessons learned in order to build the most comprehensive Request for Proposal (RFP). In addition, the Lottery invited potential bidders to participate in informal vendor presentations in August of These presentations provided staff valuable insight on innovative services and techniques that are available in the industry that would benefit the Lottery in growing its Scratchers sales. This was especially important due to the nature of the services and the length of the new contracts. The final RFP was issued in February 2013 to solicit vendor intentions to bid. The RFP described the Lottery s intention to award a primary contract to a single vendor who would be the Lottery s business partner in developing the instant product line as part of the greater Lottery business strategy and plan. It also provided the opportunity for bidders to submit a proposal to provide secondary contractor services. Staff envisioned using these secondary contractors to provide services whenever the opportunity arose to take advantage of their unique abilities and products. In their proposals, bidders designated whether they were submitting for primary contractor services, secondary contractor services, or both. The purpose of the procurement was to acquire the best value for the Lottery by weighing such factors as the bidder s experience, capabilities, and personnel more heavily than the bidders price offers. Each primary contract bidder was required to submit a price bid based on a percentage of sales, with sales defined as net settlements which are net of returns but not net of free tickets. Secondary contract bidders were required to submit a price based on cost per 1,000 tickets. All special features and other services were based on either cost per 1,000 or a flat rate. The Lottery received bids from three companies, all submitting a primary contractor proposal as well as a secondary contractor proposal. The evaluation process was conducted by staff representing finance, executive, security, sales and marketing, and information technology services. There were separate groups for the various components in the evaluation. Each team reviewed the sections for each proposal and determined a rating for each bidder.

3 Page 3 All portions not identified as pass/fail were evaluated using ratings of superior, significantly exceeds, exceeds, meets, meets with exceptions, and does not meet, defined as follows: Superior (S) Proposal exceptionally exceeds performance or capability requirements; proposal demonstrates extraordinary strengths that will more than significantly benefit the Lottery. Significantly Exceeds (SE) Proposal significantly exceeds performance or capability requirements; proposal demonstrates exceptional strengths that will significantly benefit the Lottery. Exceeds (E) Proposal exceeds performance or capability requirements; proposal has one or more strengths that will benefit the Lottery. Meets (M) Meets specified minimum performance or capability requirements necessary for acceptable contract performance. Meets with Exceptions (MWE) Proposal demonstrates weak performance or capability standards necessary for minimum contract performance; proposal has one or more weaknesses that offset any strengths. Does Not Meet (DNM) Fails to meet specified minimum performance or capability requirements. Proposals with an unacceptable rating are not awardable. The evaluation team gave SGI an overall rating of significantly exceeds ; PBL received an overall rating of exceeds ; and GTECH received an overall rating of meets. Summary of Overall Evaluation Bidder Scientific Games International Pollard Banknote Limited GTECH Corporation Overall Rating Significantly Exceeds Exceeds Meets Price Proposal Assessment The price evaluation team compared each bidder s proposed pricing in the context of a hypothetical, representative Scratchers product mix of ten different games at various price points. The hypothetical product portfolio included games with the most typical and common special features and included crossword and bingo play styles. The Lottery awards its contracts based on a best value analysis. As part of its best value analysis, the Lottery may establish a competitive range and hold discussions with each bidder to identify weaknesses in proposals and allow each bidder to offer greater

4 Page 4 value in the specific areas identified by the Lottery. All three bidders were given the opportunity to strengthen their proposals in certain areas to provide better value for the Lottery, and all three submitted timely revisions to the Lottery for review. Primary Contract - Percent of Sales Price Assessment GTECH had the lowest bid over 10% of the With core pricing isolated from other special features, GTECH was the lowest bidder across 0% of the PBL had the lowest bid over 10% of the With core pricing isolated from other special features, PBL was the lowest bidder across 0% of the SGI had the lowest bid over 80% of the With core pricing isolated from other special features, SGI was the lowest bidder across 100% of the Secondary Contract - Price per Thousand Price Assessment GTECH had the lowest bid over 20% of the With core pricing isolated from other special features, GTECH was the lowest bidder across 0% of the PBL had the lowest bid over 10% of the With core pricing isolated from other special features, PBL was the lowest bidder across 0% of the SGI had the lowest bid over 70% of the With core pricing isolated from other special features, SGI was the lowest bidder across 100% of the DISCUSSION Primary Contract Pursuant to the Lottery Act and the terms of the RFP, the primary contract is to be awarded to the bidder that offers the best value to the Lottery. Based on the analysis of all factors below, staff recommends that the primary contract be awarded to SGI. Experience and Capabilities SGI s proposal demonstrated the most extensive list of clients coupled with the highest number of years of experience in the industry. In addition, SGI owns five facilities world-wide and has the ability to print over 45 billion tickets annually. SGI has over 25 graphic designers with an average of ten years of

5 Page 5 lottery-specific experience. SGI was the only bidder to provide a proprietary and comprehensive database, which is extremely beneficial to the Lottery for game planning purposes. SGI also offers exclusive innovative techniques to create and enhance games, and its proven experience in developing successful microsites and mobile apps for the Lottery, as detailed in its proposal, was also taken into consideration. Quality Control Plan, Security Control, Development Security, Information Systems, and Physical Security SGI s proposal contained the highest level of detail for all procedures and was seen as the most complete and thorough of all the bids. In particular, its omit process, multiple internal and external audits, extensive checks on SGI employees, and game generation components provide the Lottery with the highest level of security and quality control measures. Account Personnel SGI s team quality was the best overall, both in terms of the total number of years of experience and also in the quality and level of relevant experience. Its personalized focus on the California market and prior experience offer important benefits to the Lottery. Ticket Samples and Packaging SGI s ticket samples and packaging capabilities demonstrated a high level of quality. Particularly impressive was the high number of samples submitted for special production tickets, which further demonstrated its broad portfolio of unique and proprietary printing techniques. SGI s packaging and dispensing elements met Lottery requirements. Price Assessment - Overall for the primary contract SGI had the lowest bid over 80% of the The lowest bids for SGI were from the $1.00, $5.00, $10.00, $20.00, and $30.00 price point categories, as well as one of the two $3.00 games. Overall, SGI offered the most value in terms of cost savings to the Lottery. Secondary Contracts GTECH and PBL also provided strong offerings, and staff recommends awarding GTECH and PBL secondary contracts. This will allow the Lottery to maximize its sales potential by utilizing their unique offerings and specialized capabilities. These offerings provide a benefit to the Lottery and add value to the overall Scratchers plan by creating a diverse mix that adds to the product portfolio.

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