Texas IT officials are hoping for the best and preparing for the worst after giving IBM 30 days to fix alleged problems with the state's $863 million data center outsourcing contract.

Texas CIO Karen Robinson sent a seven-page "notice to cure" to IBM on July 16 asserting that the company had abandoned it obligations under the seven-year contract signed in 2006. The notice gave IBM 30 days to fix the shortcomings, or face potential termination of the agreement.

In an interview with Government Technology last week, Robinson and a key deputy said they're optimistic that Texas and IBM can resolve their differences. But they're also making contingency plans if the massive data center consolidation and privatization deal falls apart.

"One option we're looking at is breaking up the pieces of services that are currently being provided and going to market and sourcing them through a number of different vendors," said Ed Swedberg, deputy executive director for the Texas Department of Information Resources (DIR). "But I want to make it very clear that we have not made that decision. And we are giving IBM the full opportunity, as per contract, to fulfill their obligations and to respond to the cure notice."

IBM spokesman Jeff Tieszen said on Tuesday, July 27, that the company would respond to the notice "in an appropriate and timely manner." But he reiterated the company's position that it has met all of its contract obligations. "We disagree with what we believe are unfounded accusations of material contract breaches," he said. "And we disagree that they [the DIR] have the ability to terminate the contract for cause."

The DIR contends that IBM has missed critical deadlines due to poor performance and underinvestment in the project. In addition, the agency says the company has been removing its personnel from consolidation activities since last fall and has withdrawn from planning activities associated with the project. IBM says it's living up to the terms of the contract, but that progress on the massive project has been continually hampered due to poor management by the state.

Frustrating Negotiations

The troubled consolidation plan envisions moving IT operations for 27 Texas state agencies into two new data centers that would be operated by IBM. Transfer of servers from agencies to IBM was supposed to be finished in December 2009, but is less than 12 percent complete, according to the DIR. Just five agencies are completely consolidated, and consolidation efforts are under way in only five more, the department said.

The DIR has tried to negotiate changes to the IBM agreement since late last year, based on recommendations made by outsourcing consultants EquaTerra, according to Robinson. State officials reached an agreement in principle with IBM in December, which included a series of steps designed to speed up the privatization of state servers, prioritize consolidation activities and reduce costs to agencies. But progress stalled on formalizing the plan.

"We've been trying to work through some resolutions for the past nine months," Robinson said. "We continued working closely with IBM to resolve some of those outstanding issues. And their performance continued to degrade and we weren't getting what we expected from them."

The EquaTerra report, commissioned by the DIR and released in November 2009, called the existing agreement between Texas and IBM "unsustainable" and recommended a series of revisions. The report criticized the contract's service offerings, characterizing them as "a one-size-fits-all solution" that doesn't meet the diverse business needs of state agencies. In addition, the consultants said governance provisions spelled out in the contract were ineffective and inappropriate for keeping the massive outsourcing deal on track.

IBM's Tieszen said efforts to formally change the outsourcing agreement "didn't get anywhere, primarily because it came down to the DIR making some unreasonable demands of IBM without