Calif., Oracle set to nix license deal

GCN Photo by Henrik G. DeGyor

Arun Baheti has resigned from his position as California's e-government director.

The scandal surrounding a $95 million sole-source contract California negotiated with Oracle Corp. is layered like an onion. Just when the auditors, state investigators and lawmakers looking into the buy think they've gotten down to the last layer, they find another underneath.

In a dramatic shake-up, Gov. Gray Davis this month accepted the resignation of Arun Baheti, the state's director of e-government, and suspended CIO Elias Cortez in the wake of an audit of the six-year deal with Oracle.

Baheti acknowledged accepting a check for $25,000 for Davis' re-election from an Oracle lobbyist while the deal was being negotiated last year. After Baheti's resignation, Davis said he would return the Oracle donation.

'Our campaign donation to the governor was pledged at a political fundraiser organized by Electronic Data Systems Corp. in April 2001, where some 30 leading technology companies made similar pledges,' Oracle chief financial officer Jeff Henley said in a statement this month.

In the wake of the actions taken against Baheti and Cortez, Davis has appointed interim systems officers. Vin Patel, director of executive information systems, will serve as e-government director. Robert Dresser, the IT Department's chief counsel, will act as CIO.

But the future of the department is in question. Some state lawmakers are suggesting that it be abolished and a new systems shop established.

The Oracle contract faces a similar fate. In a letter sent last week to the Legislature's Joint Committee on Legislative Audit, Oracle vice president Kenneth Glueck noted that the state has expressed interest in rescinding the contract and 'we are working hard with the state to make this outcome a reality.'

Although he noted the company's willingness to break the deal, Glueck said, the 'state could lose from $110 million to $163 million in savings it would have realized under the terms' of the new license.

The state auditor's report that prompted the procurement controversy said the three agencies responsible for the contract'the IT, General Services and Finance departments'failed to verify the cost savings projected by Logicon Inc., a unit of Northrop Grumman Corp. The Herndon, Va., company'now named Northrop Grumman In-formation Technology'is an Oracle resel-ler and helped negotiate the contract.

Signed May 31, 2001, the contract has riled state lawmakers since Aug. 23, when it first came to their attention. Lawmakers said the sole-source contract violated a California law that requires agencies to notify the Legislature before they sign any contract valued at more than $500,000.

According to the report by California state auditor Elaine M. Howle, Northrop Grumman Information Technology officials told the state it would save $111 million by using the Oracle enterprise licensing agreement. Howle and the Legislature examined the company's projected cost savings, supporting data and invoices.

Northrop Grumman Information Technology included some items in its projections that were not eligible for the contract, Howle said. For example, it projected savings accrued by local law enforcement agencies. 'But this is a state contract,' she said, so local law enforcement agencies cannot use it.

When Howle and the Legislature pulled out the ineligible agencies and recalculated the financial data, it showed that California 'would not save money. In fact, it would cost more,' as much as $41 million more than projected.

But Oracle challenged this contention. Henley said the contract was 'designed to save more than $100 million since Oracle software is so widely used throughout California state and local governments.'

Northrop Grumman Information Technology questioned the math in the audit findings. The state auditor miscalculated data on 'historical purchases of Oracle database software and misstated the cost of recurring maintenance fees for licenses previously purchased,' said Gus Gulmert, media relations manager for Northrop Grumman Information Technology.

He added that the price and savings offered were tied to projections of the state's future spending for Oracle databases. The projections were based on the state's spending for Oracle databases over the last three years.

But Howle's report noted that the IT Department ignored survey data showing only five of 127 organizations were interested in using Oracle products. 'By not accurately gauging the state's need for the enterprise database licensure, DOIT allowed millions of dollars in state resources to be committed for a highly uncertain use,' the report said.

The audit also raised doubts about the choice of the software available through the contract: Oracle8i Enterprise Edition. Two weeks after California signed the contract, the company introduced Oracle9i.

'There was a question whether or not the state would have to pay for the additional features and support for the upgraded 9i version,' Howle said. The cost of an upgrade was not automatically included in the contract's $95 million price tag, she said.

Gulmert said every update to the Oracle software would be included.

Even the number of software licenses specified in the contract is in dispute. The contract specified licenses for 270,000 state employees, the audit team said. But California has a total work force of 234,000, not all of whom use or need computers.

'The state did not buy 270,000 individual licenses,' Gulmert said, adding, 'The single enterprise license allowed up to 270,000 users in the state to take advantage of this software without the state owing Oracle another dime.'

As the contract's problems came to light, the situation went from bad to worse. The governor's Legal Affairs Office on May 2 received a report of possible document shredding at the IT Department.

Barry Goode, legal affairs secretary to Davis, directed IT officials to cease any shredding immediately if it was occurring. Goode then asked state attorney general Bill Lockyer to investigate the incident. Lockyer dispatched the California Highway Patrol to secure the department's document shredders and trash.

The attorney general then sent over state Justice Department agents, computer forensic specialists and lawyers. 'We walked out with 12 bags of shredded material, a giant Dumpster-type trash container, some PCs and servers,' said Nathan Barankin, spokesman for the attorney general's office.

Washington Technology staff writer William Welsh contributed to this story.

About the Author

Trudy Walsh is a senior writer for GCN.

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