Oracle pact calls for big state money

n addition to its assumption of new IT spending, the pact may contain hidden costs

Gov, Kate Brown announced a deal in the Cover Oregon lawsuits, Sept. 15, 2016 (KOIN)
Gov, Kate Brown announced a deal in the Cover Oregon lawsuits, Sept. 15, 2016 (KOIN)

PORTLAND, Ore. (PORTLAND TRIBUNE) — Oregon’s settlement of its long-running legal war with Oracle last week comes with a hidden price tag for the state — hundreds of millions in likely spending for new IT projects.

That’s a big asterisk on a deal that officials last week portrayed as being worth more than $100 million in benefits to the state. The agreement provided a sort of compensation for the more than $300 million in federal funds and tens of millions in state funds wasted on the Cover Oregon website fiasco.

In addition to its assumption of new IT spending, the pact may contain hidden costs and will significantly boost Oregon’s payments to Oracle over time, according to an expert.

“Oracle made out like a bandit with this,” Dave Welch said after reading the settlement. He is chief technology officer for House of Brick Technologies, an Omaha firm considered a leader in advising Oracle clients on license agreements. “I’d love to see the party (Oracle) threw when they settled this thing.”

Craig Guarente, a state consultant whom reporters were referred to by a Gov. Kate Brown spokeswoman, has a different view. The CEO of Palisades Compliance, another leading adviser to Oracle clients, he calls the settlement an “amazing opportunity” for the state to upgrade its systems using Oracle software.

Making sense of the agreement’s purported $100 million-plus in benefits doesn’t take much math.

Oracle supplies cash of $10 million in education grants as well as reimbursement of Oregon’s $25 million legal tab under the deal, which was spearheaded by Gov. Kate Brown with the assistance of Attorney General Ellen Rosenblum.

The remaining value works a bit like a shopper’s coupons in the checkout line. The purported savings can be achieved only by spending money.

Under the “unlimited license agreement” included in the settlement, Oregon has unlimited access to a large, undisclosed menu of ostensibly free Oracle software to choose from. However, the state needs to hire third-party contractors to launch big-ticket projects in order to take full advantage of it, according to Alex Pettit, the top IT official for the state.

The software and support obtained at no cost could “easily exceed” $100 million, but “it will require a substantial investment of effort, time and money to realize its value,” he wrote in an email to Oregon agency directors Friday. The consultant KPMG “estimated that the state would need to spend between $490-515 million to implement a fraction of the software contained in the (Oracle deal),” he added.

The additional spending would upgrade and install Oracle software and replace dozens if not hundreds of smaller systems used by Oregon’s many agencies for things such as personnel management, contracting and budgeting. The state’s antiquated systems are costly to maintain, don’t share information, and soon could be unworkable as companies stop supporting the technology, according to a report by KPMG in January.

Replacing the old systems could save the state millions, and they need to be replaced “one way or another,” according to Pettit, who serves as chief information officer for the Department of Administrative Services.

The offer of free software lasts only six years, so money for the new projects needs to be found and allocated by the Oregon Legislature over the next several years.

Whether the agreement is fully utilized within the deadline is “up to (legislative) leadership,” Pettit said. “A lot of it’s going to depend on how much the legisiative branch is (interested) … It is our hope that we’ll be able to make a great deal out of use out of this software.”

After the six years of “free” Oracle software and support, Oregon will start paying Oracle for what it has acquired.

Continued access to updates, bug fixes and tech support will cost money.

Oracle typically sets its yearly support fees at 22 percent of the value of the software license agreements the client has, which in turn is based on the number of servers operating the software and number of users.

Think of it like buying an inexpensive razor. The cost of replacement blades over the ensuing years is how the company makes its money. Oregon got a razor and six years of blades at no cost — but it’s going to be exceedingly hard to change razor-makers when the free stuff ends.

The settlement gives Oracle a strong foothold in Oregon, potentially boxing out competitors for the next six years. It also gives it an upper hand in selling additional products to Oregon in the future.

But Oregon’s new relationship with Oracle comes with risks. Critics of the company say it’s easy for clients to use Oracle services in what they think is an appropriate way, only to receive a big bill or a demand for unexpected licensing fees later. The aggressive tactics have been called predatory and likened to bullying by industry observers.

“The ‘enthusiasm’ with which (Oracle) pursues undeserved windfalls from previously loyal customers is nearly legendary,” wrote a Texas technology law firm, Scott & Scott, in a blog post last year.

Welch, of House of Brick, says many of his large clients from the public and nonprofit sector are trying to wean themselves from Oracle due to the firm’s business practices. The claims of overbilling made by the state in its just-settled $ 6 billion lawsuit that accused Oracle of fraud and racketeering strike a familiar chord for his clients, he adds.

“A lot of these organizations deem Oracle their No. 1 business risk,” Welch says, adding that once an entity is using Oracle’s proprietary programming language, it’s hard to wean it. “There are many of these organizations that would love to be completely done with Oracle, but can’t.”

His advice to Oregon officials? “Not to touch any of that free software, absolutely none, until after they have done a (cost) analysis that spans at least 10 years.”

Similarly, Guarente’s firm warns Oracle customers on its website of tactics using fear and threats as well as hidden costs. It says the potential unexpected hit to one Oracle-using company reached into the hundreds of millions of dollars.

Guarente declined to say whether his company advised the state during its settlement negotiations with Oracle.

He concedes Oregon could face substantial unexpected costs from the pact if it does not hire a firm like his to help manage its relationship with Oracle and look for hidden pitfalls and costs.

That, too, would cost extra. But, Guarente says, “I will tell you this: Our fees are a lot smaller than mismanaging (an Oracle license deal) and having to buy a new (agreement) at the end.”

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