Gazette Investigates: State of Iowa signs $50 million computing contract without typical competitive bidding

In signing a $50 million contract for a new cloud-based computer system, the state of Iowa sidestepped traditional competitive bidding procedures and chose a company with little state government experience whose lobbyist is Gov. Kim Reynolds' former chief of staff.

As one of the first state governments to hire California-based Workday to provide software to execute all its major functions — including payroll, expenses, inventory, financials, recruiting and grants management — Iowa is something of a guinea pig.

And the jury's still out on whether previous Workday projects at Iowa State University and the Iowa Department of Transportation will be successful. Both still are not fully implemented after rollout delays.

What concerns some lawmakers is the way Iowa chose Workday.

Instead of seeking proposals from multiple companies to see which best met Iowa's needs and was most affordable, state officials chose a generic contract Workday had signed in 2015 with a for-profit procurement organization in Texas.

Workday got this multimillion dollar deal after Jake Ketzner, Reynolds' chief of staff for more than a year, left her office and became a lobbyist for the company. A spokesman said Ketzner had no role in Workday's contracts, but there have been further questions.

'You have to admit, it does raise some eyebrows,' said Sen. Pam Jochum, D-Dubuque. 'To me, that is something for government oversight. They need to pull him (Ketzner) in and look at the OCIO's contract and ask some really serious questions to make sure it was all on the up and up.'

What Is Workday?

Workday, founded in 2005 and headquartered in Silicon Valley, lists thousands of customers on its website, including Amazon, Netflix, Bank of America, Kohl's, Overstock and Panera. It also serves school districts and universities, as well as some large cities and counties, but few state governments.

The state of Colorado is a Workday customer, but on a smaller scale than Iowa.

That state has spent nearly $10 million so far to implement some human resources functions, said Doug Platt, communications manager for the Colorado Department of Personnel & Administration. Officials there plan to add a new component each year — paying as they go — to make sure each phase works before spending more money, he said.

'Our mission is to make sure we get things right and we don't get ourselves locked into a path that might be many years down the road,' Platt said. 'What this type of development does is keep all of our options open ahead of us.'

Iowa chose Workday to replace two outdated computer systems for human resources and financial operations. Workday offers software-as-a-service, which means Iowa will get regular updates instead of having to plan ahead for a costly upgrade.

'That gives us a predictable cost cycle,' said Paul Trombino, Reynolds' chief operating officer who's helping coordinate the Workday deal.

Iowa will pay nearly $28 million for deployment of the new systems, which will be implemented in summer 2021 for HR and 2022 for financials. The ongoing software costs are about $21 million over five years.

Iowa is optimistic the system will be simpler, more agile and more affordable over time.

Similar transitions elsewhere haven't always gone smoothly.

The Sacramento City Unified School District sued Workday and another company in 2018, saying they didn't provide a modernized system to increase efficiency and save money, as promised when the district paid $5.2 million for a new computer system, the Sacramento Bee reported in August 2018.

'For approximately two years the project flailed, then ultimately failed,' the district said in a 2018 statement. 'While Workday and Sierra-Cedar got paid, in the end, they put the district right back where it started with nothing to show after over two years.'

The district alleged the companies used the Sacramento contract to market themselves to other districts as experts in K-12 education technology, the Bee reported. That lawsuit continues in San Joaquin County Superior Court.

Workday did not responded to an email or phone messages from The Gazette seeking comment for this article.

ISU And Iowa DOT Choose Workday

Iowa law requires competitive bidding for most public purchases to get the best deal for taxpayers and to provide an open, accountable process. Exceptions exist, such as occasions when a desired product or service is produced only by one vendor or when an emergency requires faster purchasing.

Before ISU signed a $17.7 million, five-year contract with Workday in September 2016, university officials sought competitive bids from companies to provide a cloud-based human resources and finance system as well as a new student platform that includes course registration, grade viewing and on-campus job searches.

'This contract was competitively bid,' Cory Harms, ISU procurement director, said in an email. 'We sent (a solicitation) to 10 companies and posted publicly on our website. We received three bids. Two were chosen for finalist demonstrations.'

The Workday software was supposed to be implemented in fall 2018, but the HR and finance portions were launched July 1, 2019. The student platform rollout schedule has not been announced.

When the Iowa DOT hired Workday in 2017, it piggybacked its $9.4 million, six-year contract on ISU's deal, avoiding competitive bidding.

The system was supposed to go live in fall 2018, but HR and payroll systems started in May 2019 and the finance portion is scheduled to be implemented July 1, said Jon Makovec, director of Iowa DOT's Budget and Business Systems.

'Once I got to see the product, prior to the project starting, I was pretty impressed by what it offers the DOT,' he said.

Outsourcing Competitive Bidding

With new Workday systems going online at ISU and the Iowa DOT, state officials wanted to see if Workday could provide a statewide enterprise solution.

Instead of issuing a request inviting companies to apply, the Office of the Chief Information Officer, led since July 30 by Annette Dunn, used a provision of Iowa Code allowing the office to 'cooperate with other governmental entities in the procurement of information technology.'

'The OCIO utilized a national competitive RFP conducted and awarded by the National Cooperative Purchasing Alliance,' Dunn wrote in an email to The Gazette.

The alliance is a for-profit organization in Houston, Texas, that solicits bids and signs contracts for governmental agencies — like the state of Iowa — to join.

The organization meets the requirement it be a governmental entity by paying the Region 14 Education Service Center in Abilene, Texas, about $840,000 a year to be its 'lead public agency' for the purpose of securing contracts.

The alliance solicited bids for 'cloud administrative solutions' in 2015, advertising in USA Today and on the alliance's website, according to the group. Four companies, including Workday, submitted proposals and the alliance chose two companies — Workday and SHI, a company headquartered in New Jersey.

Cooperative Purchasing

Matthew Mackel, the alliance's director of business development, said it makes sense for government agencies to use cooperative purchasing groups.

'Most agencies, unless they are pretty large, can't leverage this kind of volume,' Mackel said. 'I don't think they (government purchasing departments) were doing a very good job keeping up with procurement. They were recycling contracts. They didn't have time to do the process like they should have done properly.'

Mackel said he got the sense Iowa officials wanted to use Workday. By joining the alliance contract, they were able to get a competitively-bid contract without state politics coming into play.

'They get to use that vendor that they wanted to use. It saves them a lot of time and effort,' he said.

Karam Kang, a Carnegie Mellon University associate professor of economics who studies competition in procurement, notes there may be a conflict of interest.

The alliance makes 2 percent of annual sales up to $30 million for the cloud administrative solutions contracts, and 1.5 percent for $30 million to $50 million, documents show. So the group's profit from the Iowa contract is about $900,000.

'The larger the contract is, the more fee the alliance will receive,' Kang said. 'It may be more profitable to broker high-cost contracts than low-cost ones.'

Information technology contracts tend to be long-lasting and lucrative for the firm that secures the deal.

'Once you have an IT system built, it is costly to build a new IT system, so you just tend to improve what you have,' Kang said. 'Once you have a contract with one contractor you may have to keep going with that one contractor.'

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