Microsoft won the city of San Francisco’s municipal cloud computing contract, as the city on Wednesday revealed that it will replace its current on-premise e-mail systems with Microsoft Exchange Online and Microsoft Business Productivity Online Services (BPOS).

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San Francisco CIO Jon Walton said the deal runs $1.2 million per year and will move more than 23,000 of San Francisco’s municipal employees from 60 departments to the cloud-based e-mail service. The cloud e-mail system will cost about $6.50 per user per month, he said during a conference call.

Walton said the City by the Bay evaluated Microsoft, Google Apps and IBM Lotus Notes, but Microsoft Exchange Online was the best fit for San Francisco’s five-year technology plan. “We weren’t making the decision just about e-mail,” Walton said, adding that the city’s IT environment already includes Microsoft Office and will soon include SharePoint and Windows Azure.

“We actually considered Lotus, we looked at the Google solution and at the Exchange solutions,” Walton said. “At the end of the conversation it was unanimous among all the CIOs in the city that Exchange was the best solution.”

Walton added that the city is also evaluating Microsoft Office 365 to see if that makes sense.

“It’s more than just a single-point solution, it’s a strategy for us,” Walton said of the e-mail switch. The city expects it to take 12 months to move its employees off of seven disparate e-mail systems: two different Lotus Notes systems and five different on-premise Exchange systems.

According to Walton, the 300-user Microsoft Exchange Online pilot also demonstrated security and disaster resilience that the city requires, while also meeting the security requirements for San Francisco’s public safety agencies, like the San Francisco Police Department, which is also considering making the move to the new e-mail system after more evaluation.

Additionally, scrutiny by San Francisco’s public safety agencies comes as Google struggles to finish its cloud computing project for the city of Los Angeles, which has been plagued by delays due to the Los Angeles Police Department and others fearing it wasn’t secure.

L.A. tapped Google and solution provider CSC in late 2009 to move city employees off of its aging Novell GroupWise system to Google Apps for Government for cloud computing, e-mail and collaboration. In July 2010, the Los Angeles cloud project hit delays and Google and CSC had missed the June 30, 2010 deadline to complete the project. The delay, the city and Google said at the time, stemmed from security concerns from some city agencies, namely the LAPD and other public safety organizations that were concerned with how sensitive data would be handled in a cloud environment.