State, IBM share cost of ending failed data contract

Enlarge This Image Rodolfo Gonzalez/AMERICAN-STATESMAN State Rep. John Otto, R-Dayton, says agreement lets state move on with project.

AMERICAN-STATESMAN STAFF

Texas and IBM Corp. will basically split the tab in order to walk away from a failed data center contract without going to court, according to settlement terms released Monday.

The settlement suggests the two sides were ready to close the book on the contentious chapter without the finger-pointing and blame-shifting that had marked the later years of the partnership.

IBM signed the $863 million, seven-year contract in 2006 with the promise that it could merge the data centers of 28 state agencies into two upgraded and streamlined facilities, which house the equipment for storing the state's electronic information.

Much of that promise never materialized, and last week the state's Department of Information Resources said that it had hired two new firms to complete the data center consolidation project. The terms of the IBM settlement were not publicly available at that time.

Under the agreement struck March 9, Texas will pay in total about $35 million owed to IBM for the cost of services and equipment.

In turn, IBM will transfer equipment estimated to be worth $15 million to $20 million to the state and forgo $26 million of billings for work it has already done.

As of February, Texas had paid IBM almost $758 million and assessed the company $10 million in penalties for failing to meet certain contract requirements.

"This settlement allows the state to focus on the new business model that offers greater flexibility, agility and more options than were contemplated six years ago when the original data center contract was signed," said Todd Kimbriel, the director of e-government for the Department of Information Resources.

State Rep. John Otto, R-Dayton, said the agreement appears to be in the best interest of the state because it allows the state to move on.

"What we had was not working, so we obviously needed to conclude the agreement we had and try to get out of it with as little litigation as possible," said Otto, who oversaw the contract as a leader of the House Appropriations Committee.

Litigation seemed likely in the summer of 2010 when negotiations to salvage the contract crumbled.

At the time, each side appeared to be building a case to show the other was at fault.

That July, the state warned IBM about several contractual violations and "chronic failures" with the project, which was far behind schedule and had been plagued by equipment failures, service complaints and other problems.

IBM disagreed with the state's accusations of contract violations and laid responsibility for the persistent problems at the feet of the participating state agencies, particularly the Department of Information Resources.

Litigation, however, would have been costly, been time-consuming and prolonged the negative story line for both sides.

"IBM is pleased an amicable resolution concerning the Data Center Services contract with the Department of Information Resources that recognizes the contractual rights of both parties has been reached. IBM will continue to work with DIR to successfully transition the project," IBM spokesman Jeff Tieszen said.

To replace IBM, the state has awarded a Dallas-based unit of Xerox Corp. formerly known as ACS State and Local Solutions the largest of three contracts at a cost of $1.1 billion over eight years. Xerox will also run a smaller piece of the project. Paris-based Capgemini assumes an oversight and service role under a $127 million, six-year contract.

IBM will stay on until April 30 to help with the transition to the new companies, which will take full control July 1.