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Reason Foundation

Texas Gets Tough With IBM Over Outsourcing Deal

Steven Titch
July 21, 2010, 5:07pm

The State of Texas has warned IBM it is in danger of losing an $836-million outsourcing contract if it doesn’t show marked progress on its data center consolidation project within the next 30 days.

News of this type tends to raise questions about the wisdom of IT outsourcing projects, and outsourcing and public-private partnerships in general. Critics, especially the media, tend to see ultimatums such as these as the inevitable failure of the PPP process.

On the other side of the spectrum, those who advocate shifting government operations to the private sector immediately get overly defensive, and sometimes rush to side of the industry partner, whether or not there are valid reasons it’s under fire.

Here’s how Washington Technology reports the situation in the Lone Star State:

The state sent IBM a detailed letter July 16, listing 15 areas where the state says the company has fallen short. The biggest issue is that IBM has not completed the consolidation of the states data centers from 27 to two. The seven-year contract was awarded in 2006 and the consolidation was to be completed by December 2009. To date, less than 12 percent has been consolidated, according to the state.

“IBM promised an investment in people, processes and technology to bring the benefits of data center consolidation to the state of Texas” said Karen Robinson, executive director of the Texas Department of Information Resources. “We have had continual problems with basic service delivery and IBM has failed to deliver on their promises.”

The Department of Information Resources [DIR] issued the warning, known as a “notice to cure,” to pressure IBM to improve. The move “follows months of unsuccessful attempts to find a collaborative solution with IBM,” the state said.

Let’s say here that the DIR is absolutely within its rights to demand project accountability from IBM. The issue here is not political, it’s one of customer-supplier. And far from a failure of the PPP process, if states and local governments can’t feel comfortable playing “hardball” with contractors when they need to, PPPs won’t succeed.

Look at it this way, if a contractor agrees in writing to remodel your kitchen in one week, and three weeks later, you’re still up to your waist in ladders, paint cans and sawdust with no sign of countertops, cabinets and tile, you’ve got a legitimate grievance. On the other hand, despite the headaches and hgassles of the delay, your dispute with contractor is not a wholesale indictment of the idea of turning over a significant construction project to licensed professionals, nor does it prove that the remodeling job would have been faster, easier or less expensive if you had undertaken it yourself.

The DIR’s Notice to Cure is a good model as to how states can push for resolution. The writing is polite, but direct. Most of all, it specifically cites clauses and metrics in the IBM master services agreement that Texas claims has not been fulfilled. This points to another best practice in IT outsourcing: quantify the objectives and create the timetable.  

It’s no secret that Texas state government is sympathetic to free-market policies; it's among the reasons the state is weathering the recession better than many others. Its government understands how PPPs can reduce costs and boost efficiency. IT is no exception. At the same time, faith in the private sector shouldn’t be blind. Big projects can easily go off-track, and states, just as any other client or customer, should be prepared to work closely with their contractors and hold them accountable for their work.



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