Michigan Sues HP Over $49 Million IT Modernization Project

Several deadline extensions beyond 2010, Michigan's Business Application Modernization project remains unfinished.

by / September 22, 2015
Michigan Capitol building in Lansing e.Republic/David Kidd

Michigan is suing Hewlett-Packard (HP) for the company's alleged failure to meet the contract requirements of a $49 million IT modernization project, the Michigan Department of State announced Sept. 18. Michigan joins a growing list of states to face delays on projects for which HP is the main contractor, at least the seventh in the past four years. In Michigan's case, HP disputes the state has grounds for terminating the contract.

“I inherited a stalled project when I came into office in 2011 and, despite our aggressive approach to hold HP accountable and ensure they delivered, they failed,” Secretary of State Ruth Johnson said in a press release. “We have no choice but to take HP to court to protect Michigan taxpayers.”

Michigan issued a termination letter to HP on Aug. 28, stopping work on what the state calls its Business Application Modernization project, an endeavor started in 2005 to replace the secretary of state's mainframe systems used by 131 offices around the state. The state claims that HP failed to meet its deadlines and that the department must continue to rely on its mainframe systems, which were built in the late 1960s. Michigan also claims that HP is required to continue providing support to the state, even in the event of a contract termination, but that HP stopped reporting to work on Aug. 31.

HP, which purchased the contract from the original contractor, EDS, in the late 2000s, denies any violation of contract. An HP spokesperson told Government Technology via email that, "It’s unfortunate that the state of Michigan chose to terminate the contract, but HP looks forward to a favorable resolution in court."

The state claims that after having already paid HP $27.5 million by 2011, not a single new function had been made available to the state. The deadline on the contract had already been extended several times, the state reported, and the termination of contract came after months of fruitless negotiations with HP.

"We're disappointed that this action is necessary," said Fred Woodhams of the Michigan Department of State's Communication Office. "Despite Secretary Johnson's best efforts to ensure to live up to its obligations and deliver the new computer system, the company failed."

HP has had problems on other large projects recently, including a decade-long project to modernize the New Jersey Motor Vehicle's COBOL-based legacy system, which HP inherited after two others had ended their relationship with the state; a $48 million upgrade to the Minnesota Licensing and Registration System, which the state's in-house IT team has since taken over; and DMV projects in Rhode Island and California.

Niam Yaraghi, a fellow at the Brookings Institution's Center for Technology Innovation, says large government IT projects are inherently risky.

"There is going to be so much more complexity and unperceived risk associated with larger projects as compared to smaller ones because you can foresee the next six months much more precisely than the next six years," Yaraghi said. "So when these projects are large, by definition, they are facing unforeseen risks and problems, and they are more likely to fail."

Other examples of such large-scale IT project failures includethe recent Healthcare.gov debacle, California's failed state payroll system overhaul and a defunct welfare system upgrade in Indiana.

Kevin Desouza, associate dean for research at the College of Public Service and Community Solutions, spent the last four years researching large government IT and infrastructure projects at the state, local and federal levels. Desouza agreed that complexity can lead to project failure, but in Michigan's case, the project was not complex. The IT component was straightforward, he said, which means the failure catalyst lies in the social-political environment and the economic incentives provided to the contractor.

"The state of Michigan should have known sooner that this project was at risk of serious failure," Desouza said. "Now this is where I hold the states accountable, because most state governments do a very poor job of regularly evaluating IT projects once the contract has been executed. They do a lot more detailed job in the RFP stage and in the contract negotiation phase, but once that contract is actually executed, there is very little governance and oversight that goes into regularly checking these contracts and dealing with the early warning signs associated with these project failures."

The contractor is also at fault, Desouza said, because they are taking advantage of the state's failure or inability to force project completion.

"In most IT projects, you have what is called a 'cost plus arrangement,' where the incentives for contractors to misbehave is present because the more you build, the more that you can charge," Desouza said. "We've seen that like in the FBI Virtual Case File where the contractors were just writing code that was completely useless, but they were filling the hours. That's where I hold the contractors responsible. In this case, HP, they have not spent enough time or energy to understand the nuances associated with developing IT in the public environment versus the private environment."

Avoiding this problem is largely a function of the CIO's office being more knowledgeable about the financial side of things, Desouza said.

"It's the government's responsibility that the contracts they're entering into are actually worthwhile and have the right checks and balances and controls in place," he said. "This is why I tell CIOs, we need to increase the financial intelligence of our government IT people, because government IT people are some of the least prepared when it comes to financial contracts, financial instruments, and yet they are in the business of recommending these contracts."

Michigan CIO David Behen declined to comment due to the pending litigation.

Colin Wood former staff writer

Colin wrote for Government Technology from 2010 through most of 2016.