Texas Officials Await IBM Response to Data Center Contract Warning

Texas Department of Information Resources weighs options for moving forward if IBM outsourcing deal fails.

by / July 27, 2010

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the agency says the company has been removing its personnel from consolidation activities since last fall and has withdrawn from planning activities associated with the project.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

adequate compensation."

New Approach

The DIR implemented governance changes earlier this year designed to give state agencies a stronger voice in the outsourcing project. And the state intends to alter its approach to server consolidation, regardless of how the current dispute ends, according to Swedberg, who manages the Texas data center contract.

Rather than shifting the entire contents of state servers onto new machines in the privatized data centers, the state will evaluate and prioritize each application running on agency servers and come up with an appropriate course of action. "This is very important because it's going to help us better tailor the priorities of what we transform first based on business requirements and technical risks," he said.

In addition, agencies will gain more flexibility to decide the level of service they need - for instance, how much downtime an application can have and how quickly problems must be fixed - for each application they run.

"Every application within the portfolio of an agency isn't alike. They all don't need the same level of service in terms of availability and everything else," said Swedberg. "So by going to an application-based transformation, we can go in and profile that application and, working with agency business executives, understand exactly what level of service each level of application really needs. And give them the tools to better be able to manage their IT budgets for data centers."

But Tieszen said changes implemented by the state fail to address a fundamental problem with the outsourcing plan: the DIR's lack of authority to centrally manage the initiative.

"Let's face it: The DIR is an agency with very little real influence, despite whatever state organizational chart you might look at," he said. "They were given a mandate to centrally manage the agencies and they failed to do that. They failed to get buy-in from the agencies from the very beginning."

Those problems have slowed server modernization and consolidation to a crawl and greatly increased IBM's costs, he said.

Committed to Consolidation

Despite the current problems, Texas remains committed to some form of data center consolidation, DIR officials said, adding that the concept enjoys support from a cross-section of state leaders.

"There's no going back from consolidation," Swedberg said. "We've got the buy-in across the board from the legislators, governor's office and executive directors of agencies. ... Everyone understands that it's the right direction to go."

Robinson characterized the DIR's warning to IBM as an effort to protect state agencies. "This is not a termination notice; this is a notice to cure," she said. "Our goals are to ensure the continued reliability and integrity and availability of the state's information technology resources."


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