City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: IT Department
Meeting Date: September 29, 2025
Report #:2509-5240
TITLE
Approve Purchase Order C26195416 with Carahsoft, Utilizing a General Services Administration Blanket Purchase Agreement, to Procure SAP S/4 HANA Suite of Products and Corresponding Software and Hosting Services for a 5-Year Term for a Not-To-Exceed Amount of $6,640,429; and Approve a Budget Amendment in the Technology Fund as Recommended by Finance Committee; CEQA Status - Not a Project
RECOMMENDATION
Finance Committee and staff recommend that the City Council:
a. Approve and authorize the City Manager or their designee to execute PO C26195416 with Carahsoft, utilizing a General Services Agreement (GSA) Blanket Purchase Agreement Contract Number 47QSWA18D008F, to procure SAP S/4HANA suite of products and corresponding software and hosting services for a 5-year term (December 31, 2025 to December 31, 2030), with a total not-to-exceed amount of $6,640,429 (Attachment A).
b. Amend the Fiscal Year 2026 Budget Appropriation for the Technology Fund by [requires a two-thirds approval by the Council]:
a. Increasing the expenditure appropriation for the Enterprise Resource Planning Upgrade 2026 Project (TE-19000) in the Information Technology Department by $1,660,000
b. Decreasing the Technology Reserve by $1,660,000
EXECUTIVE SUMMARY
Approval of this contract and subsequent consulting services will result in the upgrade of the City’s Enterprise Resource Planning (ERP) system, currently SAP, to the most current version.
Support for the version of the SAP ERP platform the City operates on will end on January 1, 2028 requiring the City to either upgrade or replace the system. Alternatively, the City could assume increased risk using an unsupported platform, this is not recommended. In total, the upgrade is estimated to cost $13.3 million over five years, net of incentives estimated to save
the City $3.4 million if contract is signed by the end of September 2025. Once transitioned, this new licensing contract will increase ongoing annual costs, approximately $660,000 above the current $1 million baseline (this is expected in years three through five).
The Finance Committee reviewed this at its September 16, 2025 meeting and unanimously recommended Council approval.
BACKGROUND
The City has relied on SAP as its core Enterprise Resource Planning (ERP) system since 2003, enabling integration and support for key business functions such as Finance, Human Resources, Payroll, Procurement, Budgeting, and Utilities. Over time, the City has continued to invest in the platform—most notably with a major upgrade in 2021 that transitioned the system to SAP HANA, enabled cloud hosting, improved performance, and introduced single sign-on (SSO).
These improvements have delivered meaningful gains in efficiency, accuracy, and user experience.
In 2017, the City evaluated the feasibility of replacing SAP through a formal RFP process.
However, after reviewing vendor proposals, it was determined that the cost of a full system replacement significantly exceeded capacity to procure and support the implementation of a new system. The City chose to continue with SAP and invest in strategic upgrades to extend the value of its existing system.1
SAP has announced that support for the current SAP ERP platform will end on January 1, 2028.
Running the system beyond this date would introduce increased risk, including the loss of vendor support, potential security vulnerabilities, and limited access to future enhancements.
Staff recommends migrating to SAP S/4HANA—SAP’s latest cloud-based ERP platform along with other SAP’s latest components. This next-generation system will preserve existing customizations and enhancements, while offering expanded capabilities such as enhanced cybersecurity, browser-based access, and built-in artificial intelligence and machine learning features. These tools can support further automation, better data insights, and improved service delivery across departments.
SAP will be hosting their S/4HANA ERP system and other related components on private cloud infrastructure. As part of this migration, SAP will now offer support on both software and their associate infrastructure.
To achieve this, staff recommends procuring various SAP ERP components and associated cloud infrastructure through Carahsoft, a vendor leveraging General Service Agreement (GSA) 1 Informational ERP System Status Report
https://www.paloalto.gov/files/assets/public/v/1/agendas-minutes-reports/reports/city-manager-reports- cmrs/year-archive/2019/id-9826-info-report-erp-system-status.pdf?t=49717.34 Contract Number 47QSWA18D008F1.2 A cooperative purchasing agreement allows multiple entities to purchase goods and services at negotiated rates and are created by combining the buying needs of multiple entities to achieve a more economical purchase.
Professional expertise is required to successfully implement S/4 HANA and related software solutions. To support this migration the City is looking to enter into an agreement with an SAP authorized professional services provider that will provide technical support for this upgrade, the contract is estimated to be four to five million in one-time costs. Once the business requirements are finalized, staff will return to Council with the contract and necessary budget actions to appropriate funds from the Technology Reserve for this project.
ANALYSIS
The Finance Committee heard staff’s recommendation at its meeting on September 16, 20253 and unanimously recommended City Council approval. The Committee commented on the importance of being on a fully support version and innovations using features such as AI to improve process efficiencies. Department users of the system including human resources and administrative services acknowledged recent improvements and the desire for more improvements and efficiencies to be achieved in the new version. The Committee agreed with taking advantage of the sizeable incentive that would be received by issuing a PO before the end of September.
SAP has offered the City a Transformation Incentive for its cloud services — a cloud credit valued at $1,583,053 as well as no annual cost increase over the term — available through SAP’s partner, Carahsoft. In total, this incentive is estimated to save the City $3.4 million if contract is signed by the end of September 2025. Carahsoft is a technology solutions provider that services the public sector. The agreement includes language allowing the city to cancel for convenience prior to the start date if needed. Savings of $3.4 million cost avoidance is expected if this PO is signed before the end of September 2025 from the following components:
1) Price protection estimate of $1.5 million. No annual contract cost of living adjustment for five years, maintenance will remain flat at $1.66 million annually. 2) Business incentive of $1.7 million. Incentive of one year ”free” of licensing costs from SAP
2 GSA Contract: 47QSWA18D008F
https://www.gsaadvantage.gov/ref_text/47QSWA18D008F/100V5C.3VR800_47QSWA18D008F_47QSWA18D008F- 11-24-2024-565316.PDF
3 FInance Committee, September 16, 2025, Item #3,
https://portal.laserfiche.com/Portal/DocView.aspx?id=223086&repo=r-704298fc&searchid=96d03863-2689-4821- 84f0-a01b93b3e812
3) System maintenance of $318,000. Elimination of dual system maintenance costs if the upgraded system is live before 2027.
Table #1: Cost Summary (December 2025 – December 2030)
Year Annual Cost
Year 1 (2025–2026) $1,659,489
Year 2 (2026–2027) $1,660,107
Year 3 (2027–2028) $1,660,107
Year 4 (2028–2029) $1,660,107
Year 5 (2029–2030) $1,660,107
Cloud Credit ($1,583,053)
Total (5 Years) $6,640,429
FISCAL/RESOURCE IMPACT
The ERP system upgrade is expected to cost the City a total of $13.3 million over the first 5 years, including implementation and transition costs as well as the recommended software and hosting services costs. The recommended agreement will add approximately $660,000 in additional SAP licensing costs on top of the current $1 million baseline in years three through five, upon full implementation. During the initial year, the City must maintain its existing SAP licensing, hosting, and maintenance agreements; total costs in the first year will be higher than in subsequent years. In addition, staff anticipates returning to Council with a separate contract for one-time implementation and migration services associated with S/4 HANA, which will also be funded primarily from the Technology Reserve. Once fully implemented, the legacy licenses, hosting, and maintenance agreements will be retired and no longer required.
Funding for the first and second year, including this purchase order, is available in the Technology Fund, specifically the Technology Reserve. This Reserve is intended to cover system upgrades costs such as these. The FY 2026 forecasted ending balance for the Technology Reserve is $18 million. If this budget amendment is approved, the reserve balance is anticipated to be $16.4 million at year-end. For years 3–5, the costs will be allocated to City departments through the Internal Service Fund process and appropriated annually, subject to Council approval as part of the annual budget process.
The Information Technology (IT) Department is funded by an Internal Service Fund (ISF) that allocates costs across the City to provide technology-related services to other departments and funds. Approximately 49% of services are provided to the General Fund, with the remaining 51% supporting Enterprise, special revenue, and other internal service funds.
STAKEHOLDER ENGAGEMENT
The services were coordinated with internal stakeholders and the service provider.
ENVIRONMENTAL REVIEW
The approval of these contracts is exempt from review under the California Environmental Quality Act (CEQA) under CEQA Guidelines section 15061(c)(3) because it can be seen that there is no possibility that the activity in question may have a significant effect on the environment.
ATTACHMENTS
Attachment A: Purchase Order with Carahsoft – C26195416 for S4 HANA APPROVED BY:
Darren Numoto, Chief Information Officer; Lisa Bolger, Assistant Director Information Technology/CTO