School of hard knocks

California starts applying lessons learned from Oracle contact debacle

Having learned the hard way that information technology contracts should be awarded through competition, California officials are moving to strengthen the integrity of the procurement process and reform IT systems management, including shifting some services and operations from contractors to state employees.

Both Gov. Gray Davis and the California legislature are taking immediate steps to improve IT oversight in the wake of a scandal that erupted last year following the no-bid award of a $95 million software enterprise licensing agreement to Oracle Corp. of Redwood Shores, Calif.

The scandal led directly to the demise of the California Department of Information Technology on July 1 when legislators refused to extend the life of the department earlier this year.

Oracle Corp. and Northrop Grumman Corp. of Los Angeles agreed to rescind the deal and relieve the state of any further obligations, the attorney general's office said July 23. Under the terms of the rescission agreement, California has no further financial obligations, including all associated interest and fees.

In the wake of these events, Davis issued an executive order last month that returns state information technology functions to individual agencies and directs the Department of Finance to handle statewide oversight of information technology systems.

The legislature's initial response was to include a provision in the appropriations bill currently under consideration that would provide $2 million for the creation of a new Technology Oversight and Security unit within the Department of Finance.

The initiatives are part of an interim process for IT oversight, which may be altered next year pending the completion of a report by the state auditor outlining recommendations for a new IT governance structure, said Manny Diaz, chairman of the California Assembly's Budget subcommittee on information technology and transportation.

California paid Oracle $6.8 million for products and services through the enterprise licensing agreement before it was rescinded, said Nathan Barankin, a spokesman for the attorney general's office.

Most of the purchases were made before the negotiation of the enterprise licensing agreement and only a few purchases were actually made under the terms of the agreement, Barankin said.

"The state did not pay any fines or penalties or put together a sum of money in order to receive the benefit of Oracle agreeing to rescind the contract," Barankin told Washington Technology.

State agencies will continue to make independent purchases of software to support their projects as they did before and during the licensing agreement, said Shelley Mateo, a program budget manager in the Finance Department involved with technology oversight.

"The enterprise licensing agreement was never fully implemented," she said.

Jim Finn, Oracle's vice president of worldwide corporate communications, said in a written statement that the company was pleased to resolve the matter and that it looks forward to working with the state in the future. The company declined to provide additional comment.

The Technology Oversight and Security unit, if established, would handle statewide IT oversight and security issues but would not make policy decisions like the Department of Information Technology, Mateo said. "The objective will be to help keep projects out of trouble and on the right course," she said.

Davis has ordered the departments of Finance and General Services to play key roles in overseeing IT systems management and projects that affect multiple agencies, such as the state portal.

Davis' executive order was the first attempt by the administration to institute reforms suggested by law professor Clark Kelso, who served as interim director of the Department of Information Technology after Eli Cortez, the state's chief information officer and director of the Department of Technology, was removed in May.

Among its guidelines, the executive order instructed state agencies and departments to immediately assume full responsibility for oversight of ongoing IT projects and procurements within each agency's jurisdiction.

The governor also has instructed the Department of General Services to reduce the number of noncompetitive bids in state government contracting, beginning with the state portal contract held by Deloitte Consulting of New York.

In response to the request, the Department of General Services plans to transfer operations of the state portal from Deloitte Consulting to state employees within the next six months.

The state hopes to substantially reduce and eventually eliminate the role of contractors that maintain and operate the portal and replace them with state employees as well as competitively bid any remaining ancillary portal consultation services.

The state has signed an interim contract not to exceed six months with Deloitte Consulting, during which time the company will train state IT employees to operate state portal functions, the governor's office said.

Deloitte Consulting could not be reached for comment.

The portal eventually will be operated from the Stephen P. Teale Data Center within the Business, Transportation and Housing Agency, the governor's office said.

"The portal is too vital a state service, and it is tied too intimately to basic state operations, for it to be run by outside vendors," Kelso said. "We need to develop these skills in our own employees and get control over the portal and its development."

About the Author

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

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