Oracle contract scandal spreads

By Dawn Kawamoto and John Borland, CNET News, 28 May, 2002 16:50

NEWS

Oracle's contract fiasco with California has drawn a firestorm of criticism, but some of the more controversial aspects are all too familiar to technology officials in other US government agencies. California awarded a $95m (£68m) software contract to Oracle last year -- a deal the company proposed would save the state millions of dollars. But a scathing state audit found the deal would cost California up to $41m (£30m) more than was needed and give the state more licences than the size of its entire work force. In its wake, some government officials are recounting their experiences with the database giant, while others are expected to start digging into their own contracts to find similarities. "I'm sure there will be other state auditors who will be looking at this California case and their own contracts with Oracle," said Relmond Van Daniker, executive director of the National Association of State Auditors, Comptrollers and Treasurers. The attention on Oracle comes as a decline in private-sector IT spending has forced the company to concentrate even more intensely on landing government contracts. Public-sector business comprises less than 20 percent of Oracle's approximately $10bn in annual revenue, but individual government contracts tend to be larger than commercial counterparts, former Oracle executives say. The predicament has caught the attention of Wall Street. In a research report last week from Jolson Merchant Partners, analyst Patrick Walravens wrote that "criticism of the state's contracting practices...is likely to have a chilling effect on other Oracle deals in the government sector. More broadly, we expect many government employees are now scrutinizing their no-bid and single-source contracts for information technology". Some already have. While Oracle and California have agreed to cancel their contract, city officials in Toronto are trying to extract themselves from their own $11m Oracle contract that auditors estimate is 10 times what the city needed. And in Ohio, officials changed their information technology contracting procedures after some frustrating negotiations with Oracle. To be sure, Oracle has many satisfied customers, and it is not alone in aggressively pursuing such contracts. Government officials across the country note that other major technology companies are often just as likely to pursue high-pressure sales and licensing tactics. One Oracle fan is Tony Herbert, deputy chief information officer for Montana's information technology services division. Herbert, who is pleased with his state's dealings with the company, said, "I guess I might put Oracle on the upside (of aggressive behavior), but I don't see them to be a great deal different." But it's Oracle that is now bearing the brunt of the backlash in California and elsewhere. In California, the state signed a six-year, $95m contract that erupted into controversy last month after a state auditor released a scathing report claiming the deal could unnecessarily cost taxpayers up to $41m. The report also said the contract vastly overestimated the number of software licences needed and had lacked sufficient review by state agencies. The controversy has also embroiled California Governor Gray Davis, who is seeking re-election in November. Davis received a $25,000 campaign contribution from Oracle days after signing the contract. And earlier this month, a California legislator accused Oracle and a business partner, Logicon, of "defrauding the state" after reviewing an email exchange that appeared to discuss withholding information from a state official. While the size of the California contract is unique, officials elsewhere say many details are familiar. In February, a Toronto auditor's report revealed the city had approved an $11.3m contract with Oracle that covered as many as 10 times the number of user seats the city needed. California's problem "does resonate here with our Oracle scandal", said David Miller, a Toronto city councilman who has taken a lead in scrutinizing his city's contract issues with Oracle. "The public is winding up paying for things it didn't need". The agreement, signed with Oracle in early 2000 after two years of sales approaches by the software company, was part of a rush to upgrade Toronto's computers and software. The pact called for a five-year Oracle contract for 10,000 seat licences and was signed by Oracle executives. However, for reasons that city officials and auditors say still aren't clear, the licences were leased through a reseller, MFP Leasing, as part of a larger technology purchasing project. But the contract began unravelling in 2001, when MFP's costs unexpectedly skyrocketed. That prompted the auditor report, which found the city likely needed fewer than 1,000 of the 10,000 user seats Oracle had proposed. Oracle, according to the auditor's report, contends the higher seat count was based on information that had been provided by the city. Since that time, Oracle has helped to provide information about how the original contract was struck and has committed to help "find ways to reduce the city's ongoing commitments", according to the auditor's report. Oracle declined to comment for this story on the California investigation or any other government contracts. An Ontario court has opened an investigation into the contract process. The auditor's office declined to comment, citing the ongoing investigation. Miller is among those calling for more scrutiny over Oracle's role in the deal, although he notes the company is cooperating with the city. "It's pretty clear that Oracle did extremely well out of this", the councilman says. As in California and Toronto, an Ohio official said Oracle claimed the state could save millions of dollars by signing a multi-agency contract, instead of each agency signing its own. Trouble was, Oracle's maths was off, said Jan Crawford, computer acquisition analyst for the state of Ohio. According to Crawford, Oracle said Ohio would spend $12.4m over the next five years on upgrades and new licences. Based on that figure, the company offered a 60 percent discount if officials signed the new statewide contract by 31 May. "That ($12m) figure seemed out of line. So, we talked to the agencies to see what they had said", Crawford recalled. He found Oracle's figures were 15 times higher than the state's own estimate for fiscal 2002 alone. Of the $12m, Oracle estimated the state would spend $2.7m on software for this fiscal year, which Crawford called "total fiction", saying the real figure was closer to $182,000. The bulk of Oracle's software spending forecast came from Ohio's Job and Family Services agency, which Oracle claimed would spend $2.4m for 16,000 named users, as well as cover 7,000 who were out of compliance with their licences. Not so fast, Crawford said. The state decided it didn't need any new licences, and instead switched to just 118 licenses covering processors, not all potential users. "The agency was never under-licensed and, in fact, was over-licensed. I couldn't believe Oracle would propose such a thing," Crawford said. Following Oracle's negotiations, all Ohio agencies must now run their technology purchasing and maintenance requests through Crawford's office for review, he said. To be sure, many of Oracle's government customers are happy with the company and its software. Montana, for example, signed a five-year Oracle contract that resembles California's deal. Signed in May 1999, the statewide Enterprise License Agreement covers 13,500 users -- even though Montana has 11,500 state employees and about 3,000 licences are used. As in many cases, Oracle pushed to have the contract signed by the end of a fiscal quarter. But that doesn't matter, said Herbert, a deputy chief information officer for the state. Montana examined licensing individual seats, but found it cheaper to purchase a statewide licence, he said. Three years through the contract, the state is exceeding early projections it would save $1.3m by using those licence terms, he added. Still, Herbert said the company's sales agent has been pushing the state to renew its licence early, offering discounts of 70 percent to 85 percent. But the state isn't budging, at least for now. The money for new purchases isn't in the budget, and the existing licence is sufficient, Herbert said. "We feel pretty good about it," Herbert said. "It's still pricey...but it was a wise investment."

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