Texas, IBM spar over IT contract

The state of Texas may be preparing to terminate a contract signed with IBM four years ago to consolidate the state government's IT operations because of missed goals and excessive employee attrition.

The contract, signed in late 2006 , called for IBM to consolidate the state's IT operations as well as reduce the number of data centers from 31 to two and provide specific services.

At the time, the seven-year contract was valued at $863 million, a figure that was only "a snapshot of what it would take to consolidate on that exact day," said Thomas Johnson, a spokesman for the Texas Department of Information Resources (DIR) agency, today.

The state had expected IT efficiencies to save $179 million over the seven-year period.

But late last week, the state sent IBM a lengthy "Notice to Cure" that gave the vendor a 30-day window to fix a long list of problems, little time for what seemed to include some complex problems. The notice didn't threaten an immediate termination of the pact.

"Much of the state's IT systems still reside within legacy data centers and we continue to rely on aging infrastructure for our critical systems and applications - this is clearly unacceptable," Ed Swedberg, deputy director of the state's data center services, told a state legislative committee on Monday.

IBM called the state's action "unnecessary and unjustified."

In an e-mail, company spokesman Jeffrey Tieszen said, "IBM disagrees with DIR's unfounded accusations of material contract breaches or DIR's ability to terminate the contract for cause. IBM has worked in cooperation and good faith with DIR to provide benefits and improvements to all citizens of Texas."

Swedberg called delays in the server consolidation is a key issue for the state. Server consolidation was due to be finished at the end of this year, but as of last week only about 10% had been completed.

He also complained of backlogs for routine work in the project.

The state isn't terminating its contract with IBM, but nor is it explaining exactly how the two sides can resolve the problems.

Among the claims the state is making against IBM is a shortage of qualified personnel.

In the notice to IBM, the state said the company has failed "to reduce the rate of turnover of assigned personnel below the contractual threshold of 15%." The annualized 12-month turnover rate has been 20% to 45% since the contract commencement, the state alleges.

The project costs have gone up, though it's unclear who is responsible.

The state has paid IBM $486 million since March of 2007.

The contract with IBM is "consumption based," meaning that IBM invoices agencies only if an agency consumes its services, such as disk storage. But the economic downturn has apparently increased consumption of IT services by some agencies.

"We've seen the total value of the contract grow over the course of the first three years," Swedberg told lawmakers. He cited unemployment-related services and Medicaid as two reasons for the increase.

For instance, The Texas Workforce Commission has experienced "an unprecedented increase in unemployment claims" in the period covered by the IBM contract, said a spokeswoman at that agency said. In 2008, the state distributed about $1 billion in benefits compared to $4 billion in 2009. Texas officials could not immediately say exactly how much the increased benefits boosted IT costs.

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