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Texas Warns IBM of Outsourcing Contract Failures

CIO Karen Robinson gives IBM 30 days to fix problems with $863 million data center deal

The Texas Department of Information Resources (DIR) warned IBM on Friday that its $863 million data center outsourcing contract with the state is in jeopardy. A seven-page "notice to cure" from Texas CIO Karen Robinson asserts that IBM has repeatedly underperformed and undelivered on the seven-year contract signed in 2006. The notice gives the company 30 days to fix the problems.

"IBM promised an investment in people, processes and technology to bring the benefits of data center consolidation to the state of Texas. We have had continual problems with basic service delivery and IBM has failed to deliver on their promises," said Robinson, in a statement released by the DIR Friday.

The DIR says IBM failed to deliver on the centerpiece of the agreement: moving IT operations for 27 Texas state agencies into two new consolidated data centers that would be operated by the vendor. The notice gives IBM 10 days to come up with an acceptable plan for solving the problems and 30 days to implement the fixes. If not, the state could begin proceedings to cancel the contract, which is one of the largest state government IT outsourcing deals in the nation.

IBM denied the allegations.

"IBM has fulfilled its obligations under the contract and today's action by DIR was unnecessary and unjustified," said company spokesman Jeff Tieszen. "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."

Slow Transition

The massive data center consolidation, which was expected to be finished in December 2009, 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. There are no schedules in place for consolidation of the remaining 22 agencies, the DIR added.

The notice says IBM began removing its personnel from consolidation activities without the state's approval starting in October 2009. The vendor also has canceled planning meetings and significantly withdrawn from planning activities associated with the project.

"In the plainest terms, IBM has abandoned its contractual obligations to perform transformation services," the notice said. "DIR has repeatedly pressed and requested IBM to resume and complete its transformation obligations."

In the statement issued Friday, the DIR said it "remains committed to data center consolidation" and expects that the notice sent to IBM will trigger "immediate and substantial performance improvements."

Second Notice

Friday's action marked the second time Texas has issued a notice to cure to IBM over problems with the data center initiative. The DIR gave the company a 30-day notice in 2008 after Gov. Rick Perry ordered a temporary halt to consolidation efforts because of concerns about data backup.

At the time, Perry said he was particularly worried about IBM's "apparent failure" to back up data for more than 20 state agencies. IBM and the DIR reported three weeks later that they had made progress on a plan to improve backup and recovery services.

Earlier this year, the DIR implemented changes designed to give individual state agencies stronger representation in -- and more accountability for -- the outsourcing initiative. Those moves came after a study commissioned by the DIR and completed by outsourcing consultants EquaTerra, found that governance provisions spelled out in the IBM contract were ineffective and inappropriate for keeping the massive outsourcing deal on track.

An executive committee of agency leaders was created to guide business direction for the initiative. Another committee of agency IT leaders, DIR representatives and contractors was formed to tackle technology issues. And a handful of working groups were created to focus on specific aspects of the project like service delivery and program management.

Texas officials said the old governance model, where the DIR centrally directed the consolidation project, simply didn't fit the state's highly federated government structure. The new approach, dubbed the "owner-operator model" by the state, was designed to push decision-making authority to the lowest level possible for a given issue.