State Controller’s 21st Century Project

Background

Human Resources Management System. In 2004, the SCO proposed an IT project that would replace existing statewide human resources management systems. Known as the 21st Century Project, the system will enable the state to improve management processes such as payroll, benefits, timekeeping, and position management. The existing systems are old and at risk of failure. In 2005, the Legislature approved the project with an estimated total cost of $130 million.

Two–Phase Procurement. Project staff decided to pursue a two–phase or “unbundled” procurement approach. This meant the state would be looking for two vendors and undertaking two procurements. The first vendor would supply the software package, and the second vendor (the primary vendor) would integrate the software to the state’s business requirements.

Early Issues Delayed Project Development. During 2006 and 2007, SCO experienced multiple problems with the system integrator, the primary vendor hired to integrate the human resources software to the state’s business needs. The vendor asserted that issues with the software package and with SCO were the primary reasons for delays. Eventually, SCO issued the vendor a breach of contract notice in October 2007 after multiple schedule delays. After discussions, the vendor and SCO reached a plan to address project failures and integration continued. These delays extended the schedule by two years and raised total costs to about $180 million.

Vendor Contract Terminated. After several months, the vendor again fell behind schedule, unable to complete project activities and provide deliverables on time. With the project schedule and development in jeopardy, DGS issued a default notice to the vendor on December 3, 2008. The notice stated that the vendor failed to (1) properly manage the project, (2) complete designs in a timely manner, and (3) make progress toward development. The vendor was given 30 days to respond and address the default but failed to do so. On January 6, 2009, SCO formally terminated the vendor from the contract and primary work on the 21st Century project stopped. Currently, the vendor is considering suing the state—arguing the state has terminated the contract for “convenience,” rather than good cause.

Current Status

Project Expenditures. At the time this analysis was prepared, the SCO indicated that the state had spent about $70 million on project development, $25 million of which were primary vendor costs. The total amount expended constitutes nearly 40 percent of the estimated total cost for the project.

SCO Procurement Plans. Project staff are assessing the products completed by the vendor. Although not functional, some software configuration code had been written. Concurrently, based on the lessons learned from their experiences with the initial vendor, they are defining in more detail the business requirements and contractual obligations. Project staff expect to complete a request for proposal (RFP), reflecting these updated requirements, in the next few months and then enter into a roughly five–month procurement process. As part of the procurement process, vendors will be invited to assess the configuration work partially completed by the first vendor. Based on these assessments and the requirements as stated in the RFP, interested vendors would be asked to submit a proposal. Project staff will submit a preliminary project report including cost updates and project status by mid–February.

Budget Proposal. The Governor’s proposal for 2009–10 requests 80 one–year limited–term positions and $9.6 million (General Fund) for the 21st Century Project. This request serves as a placeholder in the budget until procurement is underway and project needs and costs are more definitive. A spring Finance Letter will request additional funding reflecting the SCO procurement plan.

Options for Legislative Consideration

As noted above, the project has terminated its contract with the primary vendor and has expended about $70 million with few tangible deliverables to show for this. The Legislature has a difficult decision before it. Given the problems the project has faced and the money that has been expended thus far, the Legislature may feel that continuing the project would be “throwing good money after bad.” However, the Legislature must also weigh the state’s need for an updated human resources management system. Below, we discuss options that the Legislature could pursue, including halting the project, pursuing SCO’s current plan, and restarting software integration from the beginning.

Halting the Project Not Advised. Halting the project would lead to immediate General Fund savings. However, the state’s need for an updated and integrated human resources management system would be unmet. Additionally, several IT projects are depending on 21st Century implementation for aspects of their own development. For example, the Business Information System (BIS), currently being rolled out by CDCR, planned to interface with 21st Century to handle its human resource management needs. Due to SCO’s delays, BIS now requires an interim solution and is planning around 21st Century for the short–term. Total project costs for BIS have increased. Other IT projects planning to interface with 21st Century could incur increased costs as well.

Concerns With SCO Approach. As described above, the SCO proposes to have a new vendor finish configuration of the software package partially completed by the prior vendor. We find this option holds potentially large risks for the project.

• There may not be enough vendors interested in or, more importantly, able to complete this project. A lack of vendors could lead to a situation where there are no competitive bids and could drive up the cost of the bid.
• Vendors may only be interested in submitting a bid if the state guarantees or holds harmless the new vendor for any bugs in the work already completed. Such a guarantee could also be costly and drive up state costs.
• Accountability issues could arise if the new vendor points to the original vendor as the cause of future failures in the system. This could create further delays and/or lead to litigation.
• California has no track record of a vendor successfully completing an IT project begun by another vendor. Though this does not mean it cannot be done successfully, the fact that it has not been done points to the difficulty of such an approach.

Clean Start on Software Configuration. Given the potential risks noted above, it may be more prudent to look for a new system integrator to begin configuration from the start. While the SCO approach could attract only a small number of qualified vendors, more vendors would likely be interested in a new integration contract when they would not need to rely on the partial work of the failed vendor. A bigger pool of vendors would lead to increased competition for the bid, ultimately giving the state more flexibility to choose a quality vendor and possibly bringing down the total vendor costs as well. Although this approach is less risky, it would probably cost more since the work of the initial vendor has to be redone.

LAO Approach: Require Project to Submit Cost–Benefit Analysis

Given that project staff cannot immediately assess the quality and value of the work completed by the first vendor, we recommend that the Legislature require the project to conduct a detailed cost–benefit analysis of two approaches: (1) hiring a vendor to complete configuration work of the first vendor or (2) starting configuration work from the beginning. This analysis should be part of a special project report available for discussion at budget hearings no later than May 1, 2009.

Please see the following write–up on FI$Cal regarding the possibility of merging 21st Century into FI$Cal.