Finance committee forwards $6.6 million SAP licensing purchase order to council; upgrade needed before current system end‑of‑life

The Palo Alto Finance Committee on Sept. 16 voted unanimously to recommend that the City Council approve a purchase order, using a GSA blanket purchase agreement through Carahsoft, to procure SAP S/4HANA licensing and related subscriptions for a five‑year term not to exceed $6,600,000.

Darren Nomoto, Director of Information Technology, said the city’s current SAP enterprise resource planning environment has been designated end‑of‑life by SAP as of December 2027 and that moving to SAP S/4HANA is necessary to maintain vendor support, security patches and compliance updates. "SAP has deemed our current version end of life as of December 2027," Nomoto said.

Nomoto and team members explained the purchase order covers the SaaS/licensing and hosting portion; implementation services (consulting and project implementation) will be requested in a separate action after licensing is approved. Jitendra Kulkarni, the city’s IT enterprise manager, said SAP and the hosting provider were offering incentives if the city signed by specified deadlines, including price protection over the five‑year term and an upfront business transformation incentive.

Staff provided a multi‑year cost comparison and said the licensing/hosting arrangement under the incentives would lock price increases and provide pricing protection that staff estimated would yield a net savings relative to expected, unconstrained pricing. Staff said current annual third‑party hosting costs (about $934,000) are included under the SAP subscription model, so the project represents a reallocation of current hosting costs into the new subscription rather than an immediate one‑to‑one savings; staff also said that after year 2 the new subscription model will require an additional recurring budget of roughly $660,000 in years 3–5 that will need to be placed into the technology fund across departments.

Committee members asked about alternatives, integration with third‑party systems and whether the new platform and licensing would make future changes easier. Staff said SAP is used across finance, human resources and utilities (accounts payable, payroll, utility billing and meter reading) and that in 2017–2018 the city determined SAP was the option able to serve the broad mix of business functions. Staff said S/4HANA and the vendor’s current architecture provide better infrastructure support, improved user interfaces, and additional features such as reporting tools and the potential to leverage AI assistance for internal users in the future.

Staff noted the City’s planned budget had anticipated upgrade costs in the near term. Implementation costs (professional services and change management) will be presented to the council separately; staff said some implementation cost savings and pricing incentives were available if the licensing agreement was executed before the incentive deadline.

Action and vote: The committee moved and seconded a recommendation that the council approve the purchase order not to exceed $6,600,000 for SAP licensing and hosting over five years; the motion passed unanimously. Staff said the item would be placed on the City Council consent calendar for the Sept. 29 meeting.

Ending: Staff will return with a separate implementation services request and recommended budget amendments tied to the technology fund; IT staff said they will work with business users on workflow and reporting improvements once the licensing agreement is executed.