IBM's Pa. debacle: State wants IBM to pay for $170 million system that didn't work

Pennsylvania's effort to get $170 million in damages and costs back from IBM Corp. for a failed computer system survived its first test last month. A dozen preliminary objections from IBM's New York and Harrisburg lawyers were denied by Dauphin County Common Pleas Court Judge Andrew H. Dowling on Nov. 21. He set target dates for discovery and depositions, with the trial set for 2020, barring extra delay.

All that legal artillery will fight to resolve an initial $110 million contract, signed with high hopes in 2005 under Gov. Ed Rendell, that was supposed to be completed by 2010. Or 2011, or 2012, under Gov. Tom Corbett, as the deal was amended and delays, bugs, and added payments proliferated.

Or never, as it worked out.

Pennsylvania had its share of past information-technology failures in its emergency communications, welfare, and tax offices, among others. The IBM lawsuit, filed by Gov. Wolf's administration last spring, gives a window into how big-ticket information-technology contracts can grind on for years, consuming millions of taxpayer dollars, without improving public services.

The state wants IBM to pay for breach of contract, fraudulent inducement, negligent misrepresentation, nondisclosure, and fraudulent concealment. IBM has called the case "without merit." Its lawyers did not respond to calls.

The IBM system was supposed to handle payroll deductions and unemployment compensation payments from nearly 300,000 Pennsylvania employers. Starting in the 1960s, IBM and other contractors had helped the state custom-build separate tax and compensation systems, in hopes of reducing labor costs and speeding production.

By 2005, however, the state recognized it was saddled with an "inefficient," costly, and only partly automated legacy of "increasingly outdated, computer systems," according to the suit. Instead of modern network processing, video-like interfaces and real-time updates, Pennsylvania still used mainframe computers, green-screen terminals, and day-end record-batching.

So the state Department of Labor and Industry called on tech contractors to bid on custom-building a "complete, comprehensive, integrated and fully functioning" unemployment compensation system, meeting 1,500 business requirements, to seamlessly replace its "mission critical" services by 2010.

IBM pitched hard: According to the suit, the company said its long experience with Pennsylvania, its deep pool of experienced software and management talent, and "extensive working knowledge and skills in the unemployment compensation field" would guarantee the job got done right and on time. In June 2006, the state hired IBM.

But "despite being paid nearly $170 million," $60 million over budget, and receiving time extensions beyond the original contact, "IBM never delivered," according to the state.

"IBM had no intention of staffing the project as described," according to the lawsuit. While its salespeople were promising a thorough job, the company's Wall Street-conscious management was moving ahead with plans "to lay off thousands of U.S. employees in favor of outsourcing work to offshore contractors" or "cheaper foreign labor." Facing a new generation of tech competitors, IBM "decided that its share price needed to take precedence over customer satisfaction and proper project delivery."

For example, according to the complaint: IBM sent a team of business analysts to start the project in 2006. In 2008, with their design complete but not yet implemented, the firm pulled them out, creating "a knowledge gap" just as it was time to write software code and design applications.

Soon after, IBM's "day-to-day leads on the project" were moved out. (One, Robert Donaldson, in 2011 became IT chief for the Pennsylvania Department of Revenue.) Untested code piled up. IBM blew past deadlines, then "tried to obscure and whitewash these facts with misleading, deliberately confusing reports."

In 2013, with the IBM project  "45 months behind schedule and $60 million over budget," the state hired Carnegie Mellon's Software Engineering Institute to audit the project. The school found "an abnormally high rate of defects" in IBM's incomplete code. Carnegie Mellon recommended against finishing the program "because of the high risk of failure." The state canceled the IBM project and went back to its aged legacy systems.

Pennsylvania isn't the only state that says IBM ripped it off. In 2010, Indiana sued IBM after canceling a state welfare-processing contract. IBM sued back. A lower court told the state to pay IBM $52 million in 2012. Two years later an appeals court reversed that ruling and said IBM owed Indiana at least $50 million. That case is still in court.

To avoid future software meltdowns, state officials led by Sharon Minnich, the Deloitte Consulting and SAP veteran who heads Pennsylvania's Office of Administration under Gov. Wolf', say they have taken steps to standardize and partly centralize state software procurement and review contracts with additional oversight.

They have also hired a new unemployment-compensation benefits-modernization contractor, Florida-based Geographic Solutions Inc.,a 170-person, 25-year-old private firm with other state clients. Geographic has agreed to update that system for $35 million, a fraction of what IBM charged. Additional project managers could add up to $10 million.

This time, the contractor expects to buy solutions already used by dozens of other states off the rack, instead of building new ones. Whether you credit the state's improved management, or the software industry's evolution toward off-the-shelf (or downloaded) commodity products in the 12 years since the IBM deal was signed, it looks as if taxpayers may finally be in for an IT dividend.