San Jose and Cisco Get a Little Too Cozy

The perils of doing business with friends, relatives or neighbors have been the stock material of sitcoms since Kramden and Norton teamed up to sell a kitchen device called the Handy Housewife Helper on TV.

So it shouldn’t be surprising that when San Jose’s bid specifications for a phone network for its new City Hall required that almost all the equipment be purchased from Cisco Systems Inc., a hometown institution and the city’s largest private employer, high jinks might ensue.

As city investigators have established, Cisco engineers and sales executives largely devised the proposed network themselves, kept in regular contact with city bid managers and produced at least one document that may have minimized the company’s role, helping a city official to misrepresent the situation. (The company contends that the document wasn’t really misleading.) The resulting $8-million contract has been canceled, and will have to be rewritten and rebid.

Meanwhile, two city employees have resigned their high-level posts and a third has been demoted. Three city investigations already have taken place and another is in progress. The Santa Clara district attorney is sniffing around for any scent of criminal wrongdoing. And the completion of the new City Hall may be delayed, prompting some City Council members to consider seeking damages from Cisco.

The investment community, for its part, is starting to wonder about the possible financial fallout from Cisco’s participation in what Samuel Wilson, a senior research analyst at the San Francisco firm JMP Securities, calls “a rocking political quagmire.” Wilson thinks that the damage to Cisco’s reputation could cut into what he pegs as its $600 million to $800 million in annual revenue from government deals.

To be fair, no one has yet accused Cisco of unlawful acts. Nor has any evidence surfaced that the city workers involved did anything for personal gain. The working assumption at City Hall is that the staff, facing a tight deadline to design and install the new network, simply appealed to Cisco for help to shorten the process.

But San Jose city administrators recently have been asking whether Cisco was more than an innocent bystander while city employees broke the rules governing the bidding on public contracts.

“Cisco operates widely and freely throughout California, and they know the bidding rules,” Council Member Dave Cortese told me. “I believe they know they should have said something, and they didn’t.”

Cisco sees it differently. “We believe our interactions with the city were appropriate,” says spokeswoman Elizabeth McNichols. She adds that the company has cooperated fully with the city investigations. San Jose officials agree that the company voluntarily turned over internal e-mails to help auditors piece the story together.

The mess dates to mid-2003, when work began on the phone system for San Jose’s new $288-million City Hall, scheduled to open in 2005. As is appropriate for the capital of Silicon Valley, the city decided to deploy a wave-of-the-future technology known as voice over Internet protocol, or VOIP, which sends calls over data lines instead of conventional phone circuits.

The leading VOIP manufacturer, as it happens, is local hero Cisco. But it’s not the only one. In fact, one virtue of VOIP is that it’s based on a public specification, so any manufacturers’ equipment can be mixed and matched with anyone else’s.

Nevertheless, the city information technology team worked closely with Cisco from the start. Cisco “essentially designed” the system, according to a report last month by the city auditor, which called Cisco’s involvement in the project “significant and pervasive.”

In designing the network, the company produced a parts list of more than 18,000 items, mostly its own products, which the city inserted almost verbatim into its formal request for bids. The city required all bidders to be official vendors of Cisco equipment.

The audit report also says that when an unidentified Cisco manager heard that Nortel Networks Corp., a big competitor, was planning to protest this chummy arrangement, the manager tipped off a city official to help deflect the challenge. When bidders raised technical queries in preparation for submitting their proposals, the city staff forwarded them to Cisco for answers.

Six companies, all major Cisco customers, eventually submitted bids. Unisys Corp. won, but the project was halted after the San Jose Mercury News reported Cisco’s connection in June.

Some people may find it mystifying that Cisco, which almost never seems to make a corporate statement without citing its devotion to “integrity,” hasn’t paid even lip service to the idea that the guidelines for its sales managers might need to be tightened. As for its defense that it had no way of knowing that the city was going to incorporate its network design so completely, a few City Hall denizens find that a tad disingenuous.

Cisco, they say, deliberately cultivates a “we’re-there-for-you” relationship with government information technology officers so the path of least resistance will be to buy Cisco when a system upgrade is in the works.

“Cisco offers pro bono expertise in a lot of IT matters,” explains San Jose Council Member Linda LeZotte. Its familiarity with government procurement, she says, makes it harder to believe that the company didn’t notice the irregularities in San Jose.

“They should have known that the type of information they were getting from our employees violated the process completely,” she says. “That’s what they do for a living.”

Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and read his previous columns at latimes.com/hiltzik.