FIGHTING BACK TEARS last month, Elias Cortez, director of California’s Department of Information Technology (DOIT), sat before the bright lights of a state legislative investigative committee and tried to deflect blame for a state contract to pay $95 million to buy 270,000 licenses for Oracle database software — a deal that some say was unnecessary and that has become a public relations nightmare for California Gov. Gray Davis. For CTOs both in the private and public sectors, the fiasco stands as a case study in what not to do when developing and executing an IT purchasing contract. Davis recently forced the resignation of Cortez and earlier accepted the resignation of two other top officials in the wake of a state auditor’s report, released in April, which found state officials working on the no-bid contract applied little or no due diligence. The auditor found, for instance, that few state agencies wanted or needed the software, projections on possible savings were significantly inflated because the supporting figures were provided by an Oracle partner who stood to make millions of dollars, and that the state bought more licenses than it had employees to use them. Making matters worse, an Oracle executive gave a Davis representative a $25,000 political contribution shortly after the contract was signed. The governor has said he will try to nullify the May 31, 2001, contract and has moved to set up stricter guidelines for purchasing contracts. For its part, Oracle representatives have insisted that the contract will both save the state money and improve its technology operations. While investigations are under way to determine exactly how the state’s contract with Oracle went off course, enterprise CTOs say mistakes outlined in the auditor’s report were easily avoidable if fundamental IT purchasing practices were followed. Lesson 1: Investigate needs An excerpt from the auditor’s report on the California-Oracle contract reads: Besides not knowing the actual need for statewide enterprise database licensure, the State entered the ELA [enterprise licensing agreement] without any formal evaluation of the contract’s technical or business advantages. In preparation for the Oracle contract, California’s DOIT sent out a query about database needs to 127 state government departments and received only 21 responses. Other state agencies charged with oversight of large IT projects did not conduct a “contract needs” assessment, the auditor’s report stated. The state negotiators also relied on statistics provided by the Oracle reseller on the project, Herndon, Va.-based Logicon (now known as Northrup Grumman Information Technology). Those reseller’s stats indicated the state would save $110 million on the project. In fact, the auditor’s report said, the state overspent on the contract by $41 million. Going into any evaluation of possible IT purchases, CTOs must do extensive homework to exactly determine their enterprise needs, says Elayne Starkey, CTO of the State of Delaware, in Dover. In addition, the inclusion of all parties who have a stake in technology operations is a must in determining IT needs, Starkey says. “You need standards to establish how to select vendors. You need to develop a score sheet, and you can do that by bringing in the right people on a selection team from accounting, purchasing, and the like.” Initially, it can be difficult but well worth gathering all parties to evaluate potential purchasing projects, says Johna Till Johnson, CTO of White Plains, N.Y.-based Greenwich Technology Partners, a network infrastructure consulting and services provider. “You need to get everybody in the same room and ask, ‘What do you need?’ It’s a lot of work as a front-end process, but you’ve got to do it.” In addition, the business case for purchase and adoption of the proposed technology should be laid out in detail and well in advance, says Tom Pisello, president of Orlando, Fla.-based IT consulting company Alinean and author of the book Return on Investment for Information Technology Providers: Using ROI as a Selling and Management Tool. “Run the numbers and do your homework,” Pisello says. Anthony Hill, CTO of Golden Gate University in San Francisco, recently signed a contract with Oracle to purchase enterprise-level database software. The CTO says he prepared intensively and followed far different procedures for negotiations than California state government officials involved in the now-infamous Oracle contract. “Ultimately, it comes down to common sense factors of understanding your business requirements. It seems [DOIT and other agencies] didn’t do due diligence with all of their officers to see if Oracle was the right solution,” Hill says. Lesson 2: Leverage your position The auditor’s report also states: By broadly licensing software in an organization, an ELA has potential benefits for both buyer and seller … However, [the] 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 CTO has the advantage in the purchasing negotiations and should use it, CTOs say. Enterprises considering large purchases are in an especially strong position in this economy. Dan Woods, CTO of CapitalThinking, a software provider for the real estate industry in New York, says state negotiators apparently failed to set the tone for developing the contract. “I know the Oracle sales process and their sales people are relentless and extremely well-organized. They knew what they were doing when they took these guys for a ride.” The IT executive has to keep the upper hand in negotiations with vendors. “You’ve got to plan to get the maximum leverage. You could say to Oracle, ‘Look, we are thinking of adopting Oracle as a standard.’ That’s when you have the most leverage to get concessions,” Woods says. Pisello agrees, arguing that large contracts give buyers the leverage to write the contract in terms beneficial to the buyer’s needs. “You need to look at the total life cycle of the cost of the purchase: Do you pay it over time or all at once?” he says. “But they apparently prebought all the licenses in anticipation of projects.” Lesson 3: Play down pressures The report continues: The State had never before negotiated an ELA and let Oracle and its reseller, Logicon, use common vendor negotiating tactics to push through a largely one-sided contract. Several state executives involved in negotiating the contract have said in legislative hearings that they were pressured to approve the contract. The pressure came for a number of reasons, including that Oracle needed to close the deal quickly in order to include the contract in its quarterly earnings statement, and because of the reseller’s projection of cost savings. Political pressure is often a factor in contracts, both in the public and private sectors. Thus, successfully dealing with it is a part of a successful strategy. “If you’re under political pressure, fight back with some quantifiable [arguments],” Pisello says. “You still might succumb to the political process, but at least you’ve done your homework.” But politics might lead to buying IT equipment that is not the CTO’s first choice, Woods says. “There are certain times that CTOs are put under pressure to bring in certain pieces of infrastructure. Sometimes the CTO job description is helping the larger corporate relationship.” Still, there are times when it makes sense to compromise for the sake of corporate partnerships, if it can be done without creating problems, Woods says. “For some larger corporate relationships, inferior technology concerns may be overridden by larger benefits. Nobody in the boardroom has a clue what the CTO is spending money on if he’s getting results.” A tricky trail In the final analysis, the CTO must chart his or her own course to get the right IT equipment at the best price, something California government executives apparently failed to do. “The CTO is left up to his own devices to choose infrastructure, and he’s going to be required to sell the business proposition,” Woods says. Software Development