February 08, 2013, 4:52 PM — California has terminated its contract with SAP in connection with a $371 million software system that was supposed to overhaul the state's payroll system but instead ended up mired in major delays and cost overruns.
Some $254 million has already been spent on the project, which has now been placed on hold while state officials conduct an assessment to determine whether "any of SAP's work" can be used as part of an ultimate solution, according to a statement from Controller John Chiang.
SAP came onto the MyCalPAYS project in 2010, after the state fired the original contractor, BearingPoint. The first of five phases went live last June but "revealed a significant volume of troubling errors," according to the controller. "Eight months of payroll runs have yet to produce one pay cycle without material errors and have instead exposed a system riddled with grave weaknesses."
The initial phase targeted the controller's office, which includes just 1,300 employees out of the 240,000 working for the state, and their payroll requirements "are the easiest in the state," said Jacob Roper, a spokesman for Chiang. "We're calling it quits at the end of phase one."
"SAP is extremely disappointed in the [controller's] actions," spokesman Andy Kendzie said in a statement. "SAP stands behind our software and actions. Our products are functioning in thousands of government agencies around the world. SAP also believes we have satisfied all contractual obligations in this project."
SAP has also "made every reasonable attempt" to work with the controller's office and also sent a letter asking that the two sides enter mediation, but the state responded with the termination letter, according to Kendzie.
Chiang's office had sent "cure letters" to SAP ordering it to fix the project's issues on two separate occasions, Roper said.
The state has paid SAP $50 million so far, and is withholding about $7 million in additional payments, according to Roper. The rest of the project's price tag so far is made up of software licenses, staff time and other costs, he said.
Chiang's office "will pursue every contractual and legal option available to hold SAP accountable for its failed performance and to protect the interests of the State and its taxpayers," according to the statement released Friday. "This includes contractually required mediation and, if necessary, litigation."