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Audit Slams California's Oracle Contract

A six-year enterprise licensing agreement signed last year is drawing fire.

SACRAMENTO, Calif. -- In May 2001, California officials signed a six-year enterprise licensing agreement with Oracle that authorized up to 270,000 state employees to use Oracle database software. The contract, worth almost $95 million, also stipulated that the company would provide maintenance support.

According to a report just released by the California Bureau of State Audits, however, the contract is not in the state's best interests and should not have been signed in the first place.

"By broadly licensing software, an entity comprised of many users can potentially achieve significant volume discounts and reduce its overall administrative costs," the BSA said. "However, a preliminary survey by the Department of Information Technology (DOIT) of 127 state government departments two months earlier strongly suggested that relatively few state workers might need or want any new Oracle Corporation (Oracle) products. Although only 21 departments responded to this survey, DOIT made no further efforts to assess the State's need for Oracle software."

The BSA's report also said the other two state departments charged with oversight of large IT projects -- the Department of General Services and the Department of Finance -- also failed to assess California's actual need for the contract.

A hearing of the Joint Legislative Audit Committee was scheduled for Thursday to review the BSA's report.

The BSA's report argues that none of the departments responsible for approving contracts thoroughly examined the recommendations made by the consulting company that recommended the state enter into the contract.

"DOIT and [the] Department of Finance could have reviewed the contract and, perhaps, saved the state from making a flawed decision, but neither did so, citing a lack of specific procedures and inadequate time," the BSA said. "Also, [the Department of] General Services' unprepared negotiating team agreed to a contract that left the state unprotected against numerous risks."

The BSA said its review of the data presented to California by Logicon Inc., Oracle's reseller, found that the company overstated the cost savings of the contract.

"[The Department of] General Services, DOIT, and [the Department of] Finance approved the enterprise licensing agreement without taking the time to validate Logicon's data, which our review shows to be significantly overstated," the BSA said. Lacking an in-depth understanding of whether the ELA might fill a legitimate need for state departments, and without knowing the true costs and benefits of the contract, the state committed millions of taxpayer dollars to a questionable technology purchase."

The BSA's report did say that the Department of Finance's Technology Investment Review Unit (TIRU) -- responsible for reviewing IT proposals and making sure that IT expenditures are prudent investments and meet the needs of the state -- expressed concerns about the Oracle contract and recommended postponing it until the next year; but the TIRU's concerns and recommendation went unheeded.

The BSA said its legal consultant is advising the agency that a court could rule that the ELA contract with Oracle is not a valid state contract because it may not fall within an exception to competitive bidding requirements.

The BSA also recommended that before pursuing future enterprise licensing agreements, California should consider the following:

- The DOIT and the departments of Finance and General Services should seek legislation that establishes authority to enter into an ELA that protects the state's interests and defines each department's respective role and responsibility in the process;

- The DOIT and the Department of Finance should develop policies and procedures on how to evaluate future ELAs. To be effective, one state department needs to take responsibility for developing and justifying the ELA proposal.

- The Department of Finance should complete its survey and develop a method to allocate the ELA's cost to state departments.

- The Department of General Services should ensure its negotiating team possesses all the types of expertise necessary to protect the state's interests.

If the state does decide to take legal measures, the BSA recommends:

- The Department of General Services should study the contract's validity in relation to the disparities identified in Logicon's projections of costs and savings and consult with the attorney general on how to protect California's best interests.

- The Department of General Services should also work with the state's attorney general to analyze the ELA contract; all amendments -- including documents pertaining to the side agreements between Oracle and Logicon; and the laws and policies relating to the ELA -- including the potential legal issues identified by the BSA's report.

- If the contract is found to be valid, the Department of General Services should renegotiate the contract to add and clarify the terms and conditions necessary to better protect California.

- The Legislature should consider requiring that all IT contracts above a specified dollar amount receive a legal review by the Department of General Services.