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Other Budget Issues

Last Updated: 4/2/2013
Budget Issue: Information Technology Modernization (ITM) Project
Program: Department of Motor Vehicles
Finding or Recommendation: We raise a number of issues for legislative consideration regarding the terminated ITM Project.
Further Detail

Department of Motor Vehicles


Information Technology Modernization Project. In 2005, the Department of Motor Vehicles (DMV) sponsored the Information Technology Modernization (ITM) Project, the information technology (IT) effort to modernize the DMV’s core driver license and vehicle registration system, which is responsible for licensing 26 million drivers and registering 31 million vehicles while collecting $6.8 billion in fees annually. According to DMV, the current system, commonly referred to as the legacy system, is dependent on 40-year old technology which is inflexible and fragmented leading to significant challenges in implementing state and federal mandates and policy changes. The ITM project intended to replace the legacy system with sustainable, scalable, and readily supported technologies. In 2006, the Legislature approved the project with an estimated total cost of $242 million and with full implementation scheduled for May 2013.

Incremental Deployment Approach. The ITM Project intended to incrementally upgrade the DMV’s core system using a series of independent subprojects. The four subprojects sought to (1) update DMV’s database, (2) update DMV’s transaction management system, (3) build new web-based driver license and vehicle registration systems, and (4) update DMV’s code written in a now-obsolete programming language. The subprojects were designed to build on one another while allowing the state to realize tangible benefits throughout the duration of the project. Two of the four ITM subprojects are complete, including an upgrade to DMV’s driver licensing system. The remaining two subprojects were in progress at the time of the overall project’s termination, discussed below. A description of the four ITM subprojects and their current status is summarized below in Figure 1.

Primary Vendor Contract. In 2007, DMV awarded a $76 million contract to Electronic Data Systems (EDS) to update the state’s driver license and vehicle registration systems. EDS was purchased by Hewlett-Packard Enterprise Services (HPES) in 2008. As of the date of this analysis, $50 million of the $76 million contract has been paid to HPES for work on the four subprojects, including the completed upgrade of the driver license system.

Project Costs Update. The project updated the cost and modified the schedule through a Special Project Report (SPR) in September 2008. Updated information received through planning reduced total project cost by a net of $34 million to $208 million. (The project’s development, conversion, and consulting services cost categories were reduced by $50 million. Updated cost estimates for other categories increased, resulting in an overall reduction in cost by $34 million from the previously approved $242 million.) Although the planning and procurement phases took five months longer than expected, the SPR modified the schedule to start project tasks sooner and in parallel so that the full implementation would remain as previously scheduled for May 2013.

2012 Developments

Project Challenges. Over the last year, DMV worked to complete the project on schedule. Disagreement arose between the department and HPES regarding the quantity of vendor staff necessary, and their required experience, to effectively manage the workload and maintain the project on schedule. According to DMV, the disagreements seriously and negatively impacted the project schedule. Given the project’s trajectory during the first half of 2012, it became evident to DMV that the May 2013 completion date was not achievable. The department entered into a discussion with HPES to establish a plan for resetting the project’s trajectory towards a successful completion. The major concerns of DMV were documented in a cure notice, discussed below.

Cure Notice Issued to HPES. On May 7, 2012, DMV issued a cure notice to the primary vendor, HPES, expressing serious concern regarding HPES’s ability to successfully complete the project. According to DMV, HPES failed to provide acceptable and timely work products and was in breach of contact. The DMV specifically raised concern regarding the (1) lack of key vendor staff and inadequate staff experience, (2) vehicle registration replacement system delays and lack of schedule, and (3) programming language replacement delays and lack of schedule. The notice prompted HPES to provide its remedial strategy by May 23, 2012, so that the project could move forward.

HPES Responds to Notice. The HPES submitted a response to the cure notice as required on May 23, 2012. In its response, HPES acknowledged the need to address the issues raised by DMV, offered a description of the actions it would take to resolve DMV’s concerns, and provided a series of recommendations intended to enhance the prospect of successfully completing the project. The DMV and HPES attempted to work towards a mutual agreement for resolving the issues raised by DMV in the cure notice. After eight months of discussion, DMV and HPES had not reached a mutual agreement regarding the cure notice issues, mainly (1) the timeframe for completing the remaining subprojects and (2) the personnel needed and their required level of expertise.

Project Terminated in Early 2013

Project Termination. On January 31, 2013, the California Technology Agency (CTA) terminated the ITM Project pursuant to its authority under Government Code Section 11546, with direction to complete a component of the project that was nearly finished. According to CTA, it had watched for months as DMV and HPES worked towards an agreement on a path forward for the project and remained concerned regarding their lack of progress. The letter notifying DMV of the project’s termination directed the project to immediately suspend all work related to the vehicle registration component of the ITM Project (minimal work had been completed on this component of the project). The CTA also directed DMV to complete the driver license component of the project. At the time of the termination, the driver license upgrade had been implemented in all 170 field offices and call centers. However, deployment of the new driver license system to DMV Headquarters had begun, but was not yet complete.

Vendor Contract Amendment. On February 25, 2013, DMV signed a contract amendment with HPSE to reduce the scope of work and shorten the duration of the project. As part of the contract amendment, DMV and HPES agreed to a closure plan to complete final activities associated with the upgrade of the driver license system by March 31, 2013. HPES also agreed to provide DMV documentation to assist with the state’s management of this system. Finally, HPES agreed to pay DMV $1 million. (The vendor agreed to refund the state $2.5 million for work that was complete and paid for but no longer usable by the DMV given the termination of the project, while the state had an outstanding balance of $1.5 million owed to HPES for various services delivered by HPES, resulting in the net payment to DMV of $1 million.)

Summary of Project Timeline. Figure 2 below shows the timeline of major events from the start of the project through the termination of the project.

Project Expenditures. As of January 2013, a total of $135 million has been spent on the project including (1) $50 million paid to HPES for work on updating the driver license system, (2) $15 million paid to various other contractors for services including project oversight, (3) $18 million spent on DMV staff working on the project, and (4) $32 million spent on data center services, including data storage.

Developing Strategy to Move Project Forward. The DMV and CTA are collaborating to determine the best way to complete the remaining parts of the ITM Project, including the upgrade to the state’s vehicle registration system. According to DMV, it intends to work with CTA and an independent contractor to (1) assess the challenges of the ITM Project and (2) document possible lessons, before a proposal to complete the remaining components of the project is developed. A timeline for completing this analysis is unknown, but DMV indicates it prefers a thorough evaluation rather than moving forward with a new proposal to complete the vehicle registration and other project components prematurely.

Project Budget

As the project is terminated, no budget proposal is expected in 2013-14. The 25 personnel currently serving the project are limited-term positions and set to expire on June 30, 2013. Personnel positions will not be allocated towards the project in the 2013-14 fiscal year. The appropriation for fiscal year 2012-13 is $16 million. Actual expenditures in 2012-13 to date cover activities in the areas of software customization, project readiness, project management assistance, project oversight support, and IT support costs. At the time of this analysis, the DMV projected that $11 million of the current-year allocation will remain unspent due to project termination and reflect as savings at the end of the fiscal year.

Issues for Legislative Consideration

Legacy System Only Alternative in the Near Term. Although the state’s legacy DMV systems lack a central architecture, including consistent data methodology and programming languages, they have been running the DMV’s business processes for decades. In general, the legacy systems—though outdated, inflexible, fragmented, and difficult to upgrade—seem a credible (and, in practice, the only) alternative for the state to use over the next few years. Given the availability of these still-functioning legacy systems, we suggest that the Legislature prioritize thoroughness over timeliness as it evaluates the shortcomings of the ITM Project and considers new alternatives for replacing California’s legacy vehicle registration systems.

Updating the State’s Vehicle Registration System Still Worthwhile.As the vehicle registration system is a critical component of the state’s traffic safety and revenue collection, investing to ensure accurate and timely management of vehicle registration activities is a worthwhile endeavor. The termination of the ITM Project means that the state’s need for updating DMV’s core vehicle registration system remains unmet. There are numerous functionality and stability issues that justify the continued pursuit of an updated vehicle registration configuration. According to DMV, updating the vehicle registration systems in response to changes in state or federal law has become extremely challenging given the outdated and inflexible legacy technology resulting in longer time frames and thus increased costs.

In addition, the maintenance of the legacy vehicle registration system will remain dependent on state staff that have experience with the existing system. Staff resources with the necessary legacy technical skills, including knowledge of obsolete and no longer taught programing languages, will continue to diminish over time due to retirements. This will likely cause delays to enhancements of the legacy system and may create a higher risk with any future project upgrading the legacy system.Updating the state’s vehicle registration systems would also likely facilitate DMV’s compliance with state and federal laws and reduce the likelihood of significant disruptions in future years.

Legislature Will Likely Face a Difficult Decision. After the termination of the project’s contract with its primary vendor, the state has spent roughly $135 million on the ITM Project with several tangible deliverables, including an upgraded driver license system. As mentioned previously, the DMV intends to work with the CTA and an independent contractor to assess (1) the challenges of the ITM Project and (2) document possible lessons learned, before developing a proposal to complete the remaining components of the project. At the time the Legislature receives this proposal, it will likely face a difficult decision concerning the remaining components of the project, notably the vehicle registration component. While continuing the modernization project is likely necessary at some point, the Legislature may decide that with the state’s fiscal constraints, the project should be delayed and state resources appropriated for higher legislative priorities. The Legislature, on the other hand, may consider that issues such as the shrinking pool of staff resources with the technical skills necessary to maintain and upgrade the current legacy system warrant continuing the modernization project sooner rather than later.

Questions to Ask DMV. As the Legislature awaits the project assessment described above and begins to deliberate how to move forward, there are questions the Legislature may wish to ask DMV at budget hearings.

  • Can you provide more detail on the process you will use to assess the challenges of the ITM project to this point and possible lessons learned? What specific issues will the assessment consider?
  • Can you provide a timeline of when the assessment will begin and be completed?