Gov. Kitzhaber Puts On The Boxing Gloves to Face Down Oracle

Get ready for a fight. If past incidents are any indication, Oregon’s fight against tech giant Oracle—to retrieve taxpayer dollars lost on the Cover Oregon debacle—is about to get serious.

Last week, Gov. John Kitzhaber asked Attorney General Ellen Rosenblum to move forward on a lawsuit to get back the money Oregon paid to Oracle to develop the Cover Oregon health care exchange website. In case you somehow missed it, Oracle spectacularly failed to deliver, despite getting $134 million from the state. Oregon is now ditching Oracle’s unusable mess of zeroes and ones and turning to the federal exchange instead.

Oracle is a gigantic company. How gigantic? The company had $29.6 BILLION in software sales in 2013. It had $37 BILLION in cash reserves in the final quarter of 2013. CEO Larry Ellison made $76.9 million last year, making him one of the highest paid CEOs in corporate America. He also owns about 25% of the company’s stock, worth more than $46 billion.

Déjà Vu

Quick –- what first comes to mind when you read the words “healthcare.gov” and “Cover Oregon”? You probably whispered something to yourself along the lines of “complete mess” (but perhaps in more colorful language). But the word that SHOULD have come to mind was “Oracle.” Unfortunately, the press has been so obsessed with the politics behind the disastrous launch of the federal and state web sites that they have missed the financial scandal that unites the two high-profile failures: each was brought to you by Oracle, who in the end made off with a huge pile of our tax money.

And it turns out that this pattern seems to repeat itself at Oracle. Thanks to a surprisingly good investigative piece by KATU News (the exception that proves the rule), Oracle was sued for breach of contract by Montclair State University in New Jersey in 2011 for failing to build a usable online portal for the school’s Bell Tower Initiative.

The details in the case are staggeringly similar to what Oracle did to Cover Oregon. First, the company claimed that its various “out-of-the-box” software products could be combined in order to meet the school’s tech needs, rather than building something new from scratch. That’s the same thing they told Oregon.

From KATU:

“Oracle represented that 95% of the University’s more than 3,200 business requirements were satisfied by its base system,” the 2011 lawsuit stated. But according to MSU’s legal team, the statement was “intentionally false … in reliance on these misrepresentations, the University chose Oracle over another competitive bidder.”

Oracle would later quote the same 95% compatibility rating to land the Cover Oregon contract.

“A key reason Oracle was selected in 2011 was because it estimated it would need to customize only 5% of its product,” Kitzhaber said, when in reality “the actual customization turned out to be 40%,” which was MSU’s customization ratio as well.

When Oracle failed to actually deliver anything that worked, and MSU sued for breach of contract, the company went on the offense, claiming the school was “motivated by their own agenda and fearful of being blamed for delays.” Last week, after Gov. Kitzhaber announced the state’s intent to sue, Oracle accused him of playing politics: “We understand the political nature of the announcement (he) just made and that the Governor wants to shift blame from where it belongs.”

We’re Sensing A Pattern Here

Two things you can take away from Oracle’s initial response:

1. Oracle has a massive war chest that will enable it to aggressively fight any lawsuit filed against the company for failure to deliver—just as it did to Montclair State University in New Jersey. After MSU sued for breach of contract, Oracle countersued. Both parties reportedly settled out of court for an undisclosed sum.

2. Oracle and Larry Ellison didn’t get to where they are now by prioritizing corporate ethics or the public interest. This highly recommended post by Bill Snyder on InfoWorld dives into the Cover Oregon situation, but places it in the context of other bullying Oracle has reportedly engaged in.

Investing site The Motley Fool, however, wonders if the bad press coming Oracle’s way will hurt its bottom line:

The money spent, and received, is staggering to be sure. But what’s even more staggering is that after all the time, cost, and headaches, the state of Oregon still has nothing to show for its efforts. Oracle, on the other hand, has pocketed over $100 million in fees from the state, despite not delivering a working website. And that’s why Oregon’s governor, John Kitzhaber, is ready to take the dispute with Oracle to the next level.

It all looked so good just a couple of months ago, and frankly, Oracle’s not likely to suffer much in the mid-to-long term because of the Oregon debacle. But don’t be surprised to hear a lot more mud-slinging, from both the state of Oregon and Oracle, in the near future.

Contractor Accountability

The question is, how could the Cover Oregon contract have gone so wrong? In part, it’s because Oracle is apparently really, really good at negotiating terms that give them great leeway to do very little, collect a paycheck, and then go on the offensive if sued for breach of contract.

One big problem is that the Cover Oregon contract paid Oracle for hours worked—not the delivery of product. That meant that the firm could keep billing for hours their developers allegedly worked, despite having nothing to show for it.

Since news of the Cover Oregon debacle broke, Oregon legislators have begun moving forward on reforms to the state’s contractor laws in order to prevent a repeat performance. There’s still clearly more that needs to be done, including a very close look at all of the public services the state has contracted out to private vendors.

While it may be unlikely for another scandal the size of Cover Oregon to come along anytime soon, dozens of smaller infractions from other vendors could end up costing taxpayers even more over time. This massive Oracle mess highlights the need for a system to prevent private vendors from taking advantage of the state and to ensure that taxpayers are getting their money’s worth.

3 Responses to “Gov. Kitzhaber Puts On The Boxing Gloves to Face Down Oracle”

  1. MikeB

    Their are two types of contracts in the IT world, a fixed fee or milestone contract that is based on objectives reached, and a T&M contract that may or may not include milestone objectives.

    The benefit of the first is the customer will have a lower total financial risk, since the contractor is responsible for managing the project. But, the cost often is higher than a well managed Time & Material contract. The benefit of a T&M contract is it often will be delivered at a lower total cost, since the contractor won’t have to budget an error margin into the bid. However, the responsibility is on the customer to manage the contractor and project milestones.

    Cover OR chose the later. Then, CO chose not to manage the contractor. In addition, when the project was completely derailed, CO panicked and wasted MILLIONS in consulting fees in an effort to get the project “back on track” by approving an increase in the # of consultants by 300%.

    The best analogy I can use is, if I estimate that it will take 100 man hours to clean up and remodel a 20×20 room, then I can conclude if I hire 100 laborers it will take 1 hour to complete the project. I hope everyone can see the fallacy in that thinking. It is likely that half the consultants were sitting on their hands getting paid to watch others work, simply because the logistics of the project would not allow that many people on the project at one time. However, this is exactly what CO management approved Oracle to do. In fact, they demanded Oracle to increase the labor resources! Incompetent as CO’s management was, Oracle was equally unethical. Any seasoned IT contractor knows full well that getting a project “back on track” with unplanned additional labor resources is a myth. Oracle knew up front that the additional consulting labor would provide results with diminishing returns and mostly just line their pockets with more revenue.

    This was a joint cluster that will be settled out of court and the State will have to waste another couple of million in legal fees to get a settlement. Incompetence at its best!

    Oh, and here is more good news! Our State has a Department of Revenue IT project equally as large coming up in the near future. I wonder if our brilliant leadership will learn from this last debacle!

    Reply
  2. Michael M.

    I would be delighted to see an actual ‘billing statement’ showing exactly what Oracle DID for $100 million. Hardware? Gold-plated servers? Hours billed for “developers”? 100 developers working a full year (2,000 hours each) at $20/hr (which would be $400K, not a bad salary and certainly triple what they probably paid), would be $40 million. And 100 developers working full time for a year couldn’t produce a website? What did they DO for that much money?

    Reply
    • Michael M.

      Sorry, it should have been $200/hr, of course, to get an annual salary of $400K.

      Reply
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