The city's annual costs will increase from $4.6 million to $6.2 million under a new three-year contract unanimously approved Tuesday by the City Council.
The city's overall cost for the three-year deal is $18.7 million, up from $14 million under a previous three-year contract with Dell and Microsoft that expires in October.
City officials said the higher costs will bring new services and innovations that will allow employees to work more effectively and efficiently, whether in the office or remotely.
They said switching away from Microsoft, which controls more than 90 percent of the nation's office software market, would not make sense.
"Although alternatives exist within the market, the extensive integration of Microsoft products within the city would make other alternatives impractical and cost prohibitive," city information technology officials said in a staff report.
San Diego's more than 12,000 city workers rely on roughly 16,000 devices and 800 servers that are all operated by Microsoft software, officials said.
City officials said they negotiated the best rates possible through a partnership with Riverside County that leverages the combined purchasing power of more than 900 government agencies in California. They said only the U.S. Defense Department gets better rates.
Before agreeing to the ongoing three-year deal with Dell and Microsoft, city officials said they shopped around for the best pricing.
They solicited bids from nine licensed service providers, and seven responded, they said. The Dell-Microsoft deal was the lowest bid, 1.8 percent cheaper than the second lowest.
Under the existing three-year deal, the city has been able to modernize its servers, upgrade to Windows 10 and Office 365, add software features, initiate Teams collaborative tools and use more cloud services.
Under the new deal, city officials said they expect to receive some cybersecurity enhancements and other new services.
Those include Microsoft Forms for public surveys, Microsoft Flow to automate workflow processes, Microsoft Planner to simplify task and project tracking and Microsoft Bookings, which allows the city to book appointments with the public using Outlook calendars.
City officials said additional features will also be added to existing Microsoft applications.
Johnathan Behnke, the city's IT director, said the city has already made most of the changes required to allow employees to work from home conveniently since a large portion of the workforce began doing so in spring 2020.
But he said there are still some refinements needed.
"We're still continuing to see demands out there," Behnke said.
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