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California agrees to cancel Oracle contract

California state officials plan to meet this week with Oracle to cancel a $95 million software contract with the software company and its partner, Logicon.

California state officials will meet this week with Oracle to cancel a $95 million software contract with the software company and its partner, Logicon, a spokesman for Gov. Gray Davis said Monday.

Logicon, the Oracle reseller that negotiated the contract, agreed over the weekend to cancel its portion of the deal, clearing the way for the state to end the six-year contract for database management software, according to Davis spokesman Steve Maviglio. Oracle and Logicon executives are meeting this week with Tim Gage, the state's finance director, to cancel the contract and work out the financial details, Maviglio said.

"It's a complicated legal and financial undertaking," Maviglio said, adding that the talks to completely undo the contract could take several weeks. "There are some parts that have already moved forward. We're trying to unwind the whole thing."

Spokesmen at Oracle and Logicon said on Monday that they were unaware that the state had accepted their offers to end the contract. A fourth-party to the deal, Arizona-based Koch Financial Services, which arranged the financing, said Monday it had no comment.

Maviglio said Monday that the state was unaware of any official offer from Oracle last week.

"They said that, but they must have been talking to themselves because we didn't know about it," Maviglio said Monday.

Maviglio said the ongoing talks revolve around money that has already changed hands and sales tax issues. According to a Logicon attorney, Koch has already paid $52.7 million to Logicon, which passed $35.5 million on to Oracle. Logicon also paid $3 million in sales tax.

Maviglio said the state, which signed the agreement last May, has not begun to use the software.

The contract became a political hot potato when it was reported that under the deal, which was not put out for competitive bidding, the state was buying more Oracle licenses than it had employees to use them. Critics accused the state of buying far more in Oracle resources than was needed. Since then three state officials have resigned or been suspended, state legislators have started hearings into the matter, and there are allegations of suspiciously timed campaign donations and calls for a federal investigation.

On Monday two state officials told a legislative panel that they sought to warn superiors about the contract with the software giant but were overruled.

Cynthia Curry, senior staff counsel at the Department of General Services, said she was pressured to approve the deal last May in a last-minute bid to get the contract signed before Oracle's deadline for reporting its fiscal year profits.

Chief Deputy Finance Director Betty Yee testified she also tried to warn her superiors about the Oracle agreement. "We as a staff group continued to raise those concerns," she said. "I was among the staff group that did express continued concern."

While the impact in Sacramento is being measured in polls of the governor's chances this November against challenger Bill Simon, the fallout in Silicon Valley is focused on Oracle and what the deal says about the company.

"While we do not view questions regarding the deal itself as material (i.e., what happens to the revenue booked if the deal is rescinded), we do view the deal as emblematic of a broader issue involving Oracle's perception as a trusted business partner and its relationships with its customers," SoundView Technology analyst Jim Mendelson wrote in a research note Monday.

Oracle has long been known for its aggressive competitive stance, even in the high-stakes, high-pressure world of corporate software sales, which includes such industry giants IBM, SAP and Siebel Systems.

The state's negotiators were no match for the professionals at Oracle, according to a state auditor's report, which highlighted several aspects of the contract that it found objectionable. For example, the report noted that the six-year term was unusually long in an industry with rapidly changing technology, that the state wasn't protected in the event Oracle lowered its prices and that the purchase price didn't include software upgrades.

"General Services' negotiating team was inexperienced and unprepared, with no expertise in software contracts and no in-depth knowledge of Oracle's business and contracting practices," the audit report found. "In short, the state had never before negotiated (a licensing agreement) and let Oracle and its reseller, Logicon, use common vendor negotiating tactics to push through a largely one-sided contract."

There is still disagreement between the parties over the value of the original deal, focused mainly on the cost-savings projections. The state auditor's report found that the contract would cost taxpayers $41 million more than needed, while some state officials and Oracle maintained it would save the state $16 million.

In the last week, an aide to Davis who helped negotiate the Oracle deal resigned after it was reported that he accepted a $25,000 Oracle donation for Davis' re-election campaign shortly after the deal closed. In addition, the state's general services director resigned and the state's chief information officer was suspended because of the deal.

In addition, the Highway Patrol officers were called to the Department of Information Technology to make sure records were not destroyed. Some Republican lawmakers, looking to unseat Davis, a Democrat, demanded a federal probe. The state attorney general's office already has begun a criminal investigation.

News.com's Noel Wilson and Reuters contributed to this report.