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Pennsylvania Ends Troubled Contract With IBM

IBM unemployment compensation system project won't be renewed after running $60 million over budget and 42 months behind schedule.

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The State of Pennsylvania's Department of Labor & Industry announced Wednesday that it won't renew a seven-year-old contract with IBM to supply an unemployment compensation system after the project ran $60 million over budget and 42 months behind schedule.

The state agency announced the move after an independent study conducted by Carnegie Mellon University's Software Engineering Institute declared problems with the IBM Corp.-developed system to be unsolvable. IBM was awarded a $106.9 million contract to build the system in 2006, and "problems snowballed" as the project progressed. To date, the state has spent $153 million in federal monies on the project, but the last of three phases of the project, which would enable the system to take claims and pay benefits, is incomplete.

"This decision is based on a third-party report that we have not seen, despite repeated requests to the Department of Labor & Industry," said IBM in a prepared statement attributed to Scott Cook, a spokesperson in IBM's Chicago office. "In complex information technology implementations, there is accountability on both sides for system performance and service delivery."

Indeed, Carnegie Mellon's $800,000 study finds fault with both sides. There was instability in IBM's workforce, with the project manager and lead executives both leaving in 2009, the study found. And at the Department of Labor & Industry, "no one was accountable and responsible for the administration of the program," leading to ineffective oversight.

[ Is there more hot water ahead for IBM? Read SEC Investigates IBM Cloud Revenue Reporting. ]

IBM said it "stands ready to work with the State to resolve this matter." But State Labor & Industry Secretary Julia Hearthway said during a press conference on Wednesday that "the bottom line is that the problems we've identified cannot be solved and we will not renew our contract with IBM. The level of risk, combined with the critical nature of the system, demands that the (department) has a system that produces timely decisions reliably and accurately."

This marks a second high-profile IBM contract with a state to run into problems in recent years. In 2009 Indiana cancelled a $1.4 billion outsourcing contract with IBM to modernize the state's aging welfare administration system, which is used to process applications for Medicade, welfare, food stamps and more than 160 other public assistance programs.

Indiana filed suit against IBM seeking restitution of $437 million to make up for its "failed performance." But a court rejected Indiana's claim in June 2012 and instead ruled that the state owed IBM $12 million for computer equipment it kept in service.

Pennsylvania's contract with IBM was up for renewal in September, and it's choosing to simply walk away. Governor Tom Corbett's office declined to comment on the case, but it told the Patriot-News that the state has sought restitution in similar cases.

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