Texas Outsourcing Contract To IBM Once More in Jeopardy

Seems like we have been here before - and before.

Last Friday, the Texas Department of Information Resources (DIR) sent an 8-page "Notice to Cure" letter to IBM in essence stating that in the state's opinion, IBM has failed to live up to the IT outsourcing promises it has made to the state since the contract's start.

As you may remember, in October of 2008, the Texas Governor suspended the $863 million, seven-year outsourcing contract that the state awarded to IBM in 2006 due to a variety of operational "glitches" that had, according to state officials, "put state agencies in danger."

The contract was restarted a short time later after IBM promised with hand over heart to make up for its performance shortfalls.

However, by the autumn of last year, the outsourcing contract was still a source of unhappiness.  Once again, Texas and IBM negotiated and then agreed in principle in December to a new operational framework to resolve on-going deficiencies in contract performance, which IBM admitted still existed.

Well, on the 25th of June of this year, the DIR apparently had seen enough. It decided that IBM's promises to fix its on-going performance deficiencies were hollow and that IBM was, therefore, in breach of its contract.

The DIR press release dated 16 July states that:

"The accumulated effect of under-investment by IBM, poor performance, and continual disregard for the protective obligations of the MSA [Master Services Agreement], has resulted in harm to state agencies, exposure to unnecessary risks, and failure to achieve the objectives set and agreed by IBM."

The DIR cure notice goes on to say that IBM "has been unable and unwilling to bring itself into compliance" with the outsourcing contract requirements.

The cure notice lists six material breaches of the contract, along with several other "breaches of IBM's duties and obligations set forth" in the outsourcing contract.

The six major material breaches include:

(1) failing to complete the transformation of the 27 state agencies into consolidated data centers on schedule; (2) failing to perform required back-ups of data for data recovery purposes [BTW, that was the reason for the 2008 contract suspension]; (3) failing to deliver a final interim disaster recovery plan for certain agency applications; (4) failing to provide sufficient and suitably qualified personnel; (5) failing to provide required security administration of IT systems, and; (6) failing to meet agreed to service performance levels.

The DIR says that IBM has 10 days to complete a plan that is acceptable to the DIR for curing the material breaches and correcting the other deficiencies, and that IBM must cure the contract breaches within 30 days.

Good luck with that!

While not explicitly stated, the next step would be for the DIR to begin to withdraw from the contract, although I don't see how this would be very practical this far along into the contract. The DIR had an opportunity to change course a few years ago, but that point has slipped on by. Holding up progress payments to IBM and taking the dispute public once more is probably the state's best - and maybe only - leverage.

In a related story in Government Technology, an IBM spokesperson denied the DIR allegations, saying:

"IBM has fulfilled its obligations under the contract and today's action by DIR was unnecessary and unjustified. .... IBM has worked in cooperation and good faith with DIR to provide benefits and improvements to all citizens of Texas. IBM very much regrets the state's action and will aggressively protect its interests going forward."

This aggressive protection of its interests, no doubt, includes possibly suing the State of Texas as IBM did the State of Indiana when it pulled the plug on IBM's outsourcing contract there.

I suspect Texas will eventually cave like Virginia did with Northrop Grumman in its recent IT outsourcing contract dispute.