An independent audit of California's deal with Oracle found that the contract had been pushed through without competitive bidding and little oversight.
The overhaul came amid political controversy over a state deal with Oracle. An independent audit concluded the deal was hustled through with little oversight, no competitive bidding, and could end up costing taxpayers $41m.
The department's work will be farmed out to other state agencies under an executive order signed by state governor Gary Davis.
California state officials last week said they would cancel the Oracle contract valued at some $95m (£63m).
California is also planning to bring in-house the operation of its state portal after a contract expires with Deloitte Consulting. The proposed changes are aimed at cutting the average monthly cost of portal consulting services by two-thirds, saving California about $300,000 (£198,000) a month.
Officials said the portal was too important to the state for it to be run by outside contractors.