Procurement scandal puts California IT on ropes

State's CIO, technology projects face troubled future

Calif. Assemblyman Manny Diaz

The California legislature next month is expected to pull the plug on the state's technology department, leaving the nation's most populous state without an organization to coordinate technology initiatives for the foreseeable future.

State legislators said they are disenchanted with the Department of Information Technology and its role in approving a sole-source software contract to Oracle Corp., which the state auditor said was overpriced by as much as $41 million.

State Chief Information Officer Elias Cortez was suspended May 2 as a result of the Oracle controversy, and his tenure as CIO likely will end when the IT department shuts down, said a key state lawmaker.

The legislature will hold hearings to explore different IT oversight models, but any legislation this year is unlikely, said Manny Diaz, chairman of the California Budget Subcommittee on Information Technology and Transportation. For any new approach to be effective, it must have the full support of California's governor, he said.

Although existing technology projects are likely to be unaffected because they already have been funded, the absence of a bona fide IT department means sluggish new business until the legislature decides how to remake the department that oversees an estimated $2 billion in annual spending on hundreds of IT projects.

Moreover, if the Department of Information Technology closes as expected June 30, California is certain to move away from an enterprisewide approach to technology investments, analysts said. Without general direction from a CIO, agencies will be more apt to procure technology solutions that meet their individual needs.

The turmoil in California's IT department is exacerbated by the state's $15 billion debt, which will further disrupt planned technology projects, analysts said.

The administration of Gov. Gray Davis has been embroiled in controversy with the legislature since August 2001, when lawmakers first realized that state officials charged with overseeing procurement and technology strategy had signed a six-year software contract, worth an estimated $95 million, with Oracle of Redwood Shores, Calif. The contract would lock state agencies into purchasing from Oracle.

Oracle Chief Financial Officer Jeff Henley said in a May 8 statement that the company was continuing to work with the state to analyze the contract, which he said was "designed to save more than $100 million since Oracle software is so widely used throughout California state and local governments."

However, the state auditor released a report in April stating that the contract was awarded without competitive bid, and the state could lose $41 million on the deal.

Oracle and its reseller Northrop Grumman Corp. have offered to rescind the contract.

The controversy couldn't have come at a worse time for the California Department of Information Technology. The department was established in 1995 with a sunset provision that would allow the agency to expire in June 2002 unless re-approved by the state legislature.

At the time the controversy broke, California Assembly Bill 1559, which was amended seven times since it was introduced Feb. 23, 2001, would have extended the department's life for another 18 months, with the understanding that it would help set statewide policies and standards for procurement, but not negotiate or sign contracts that would affect agency IT projects.

The state auditor's report prompted a rash of resignations and suspensions. Department of General Services Director Barry Keane resigned April 26. Arun Baheti, who accepted a $25,000 campaign contribution for Davis from Oracle, resigned May 2, the same day CIO Cortez was suspended.

After the audit was released, assemblyman Diaz decided to withdraw language that would have extended the life of the IT department.

"The audit convinced me that [the Department of Information Technology] didn't want the responsibility of IT oversight," Diaz told Washington Technology. Subsequent legislative hearings on the Oracle matter following the release of the auditor's report showed a lack of accountability on the part of administration officials responsible for IT management, he said.

The sunset provision is expected to go into effect without opposition, according to Diaz. He said there should be some form of IT management and oversight of the $2 billion the state spends on IT each year, but he maintains that giving budget authority to the state CIO can lead to a perception of a conflict of interest.

He said several state agencies, such as the departments of Motor Vehicles and Community Colleges, will negotiate major contracts this year, and that some entity should assist them. "It is important that some group work with them," he said.

While the Department of Information Technology was responsible for setting technical standards and statewide policy related to IT, both it and the Department of Finance were responsible for reviewing agency IT projects. With the Department of Information Technology out of the picture, the responsibility for reviewing IT projects will fall on the Department of Finance, according to state officials.

A number of government and industry officials said it would be a mistake for California to weaken the CIO's budget and planning authority.

Former California CIO John Flynn, who served as the state's first CIO from 1995 to 1998 under Gov. Pete Wilson, said a CIO cannot be effective without budget authority.

"It shows a general misunderstanding of the role of the CIO by most state legislators," Flynn said. "You need [to] give the person the resources to get the job done."

The approach suggested by Diaz "goes against the grain of all models of state and local government across the country," he said.

Richard Varn, Iowa's CIO, agreed. He said the prevailing trend around the country is toward expanded, not diminished, authority for state CIOs.

"I don't think there's any question how important the function is," said Rock Regan, Connecticut's CIO and president of the Lexington, Ky.-based National Association of State CIOs.

A fully empowered CIO in California is necessary because of "the sheer volume and magnitude of information technology in the state," Regan said. "You need someone in there with vision and with the authority to make decisions."

Rishi Sood, a principal analyst with the market research firm Gartner Dataquest of Stamford, Conn., said a California CIO without budget authority would face the same kind of problem Tom Ridge faces as director of homeland security. While Ridge can try to influence how federal agencies spend money on technology and homeland defense, he cannot coerce them by threatening to withhold funding, because he does not have budget authority, Sood said.

Dick Callahan, California client executive for Electronic Data Systems Corp. of Plano, Texas, said an organization such as the Department of Information Technology "certainly has a place" in California state government.

EDS has several large IT projects in California, such as the Medicaid program, known as Medi-Cal, and an insurance program for children of families without Medicaid, known as Healthy Families.

Together, these projects bring the company $145 million annually in revenue, company officials said.

It is a huge challenge for a state the size of California to coordinate information technology initiatives, Callahan said.

"They will need to have something, whether they call it the Department of Information Technology or not," he said. "The vision for a [technology] strategy must be there."

While empowering a CIO is a good idea in theory, the authority invested in the position must be balanced with the state procurement process, said John Goggin, vice president for electronic government strategic service at the market research firm Meta Group, Stamford, Conn.

In the case of the Oracle contract, there was "a complete disconnect" between the procurement operation and the politically appointed officials overseeing the state's technology strategy, Goggin said. The event, he said, serves as a warning to state technology officials around the country that they should not be condescending or overbearing toward procurement officials.

"If there's a lesson to be learned, it's that the CIO with a vision should go through with due diligence and look at things up and down the line. ... The procurement people shouldn't be intimidated by the CIO," Goggin said.

Goggin said some CIOs who come from the commercial world are far too quick to dismiss the procurement operation because they are used to overriding objections to their policies and programs in the private sector.

State government has unique laws and regulations, which must be heeded, and state procurement officials can help state technology officials follow the proper procedures.

"Until you see the alliance between CIOs and procurement officials, you're going to see this [kind of] mess again," Goggin said. "There is potential for this everywhere, not just in California."

About the Author

William Welsh is a freelance writer covering IT and defense technology.

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