State Sues IBM Over $170M Contract

The company failed to deliver on a 2006 contract to replace an outdated system.

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HARRISBURG, Pa. (AP) — Pennsylvania Gov. Tom Wolf's administration sued International Business Machines Corp. on Thursday, saying the company failed to deliver on a 2006 contract to replace an outdated system of processing unemployment claims.

The lawsuit said the technology and consulting giant was paid $170 million, but had delivered a failed project by the time the state let the contract expire in 2013. At that point, the project was nearly four years behind schedule and $60 million over budget, the lawsuit said.

IBM had an obligation to ensure that all elements of the project were coordinated well and completed competently and on time, the lawsuit said.

"IBM repeatedly failed to live up to these commitments and made decisions that thwarted successful completion of the project," it said.

For instance, turnover and reassignment of key IBM personnel hampered the project, while IBM pushed to get defect-riddled components of the contract declared complete. At one point, the Pennsylvania Department of Labor and Industry, which manages the unemployment compensation system, could not accurately bill employers for their contributions to the system for over a year, the lawsuit said.

The lawsuit seeks undisclosed damages, and accuses IBM of breach of contract and intentionally misrepresenting or withholding important information. The complaint was filed in Dauphin County by a private law firm representing Pennsylvania.

In a one-sentence statement, Armonk, New York-based IBM said the state's claims have no merit and that it would fight the lawsuit. A spokesman declined to answer questions Thursday.

The contract and the ensuing legal fight have now spanned three governors. The lawsuit comes as Wolf, a Democrat, and Republican senators are fighting over funding the unemployment compensation system, prompting the layoff of hundreds of state employees in December and a spike in wait times for callers.

With the old system still in use, the state mails forms to an employer to check whether someone filing for benefits had been employed and laid off, instead of messaging the employer's online account. Also, the system is built on a 50-plus year-old legacy system that uses software that is no longer taught, a department spokeswoman said.

When IBM submitted its bid in 2005, it marketed itself as having worked successfully on similar projects in Utah, Louisiana and New York, the lawsuit said.

Before the contract ended, the state commissioned Carnegie Mellon University's Software Engineering Institute to review the project. Its report in 2013 identified numerous problems with the design and implementation of the system, and recommended that the state should not go forward with it.

At the time, an IBM spokesman suggested that blame lay with the state.

"In complex information technology implementations, there is accountability on both sides for system performance and service delivery," an IBM spokesman said at the time.

The Carnegie Mellon report did point to failures at the state, saying that no one at the Department of Labor and Industry "was accountable or responsible for the administration of the program" until 2011.

At one point, the state had said it was seeking to recoup payments to IBM, but that apparently failed. Meanwhile, the state has plowed more than $100 million into the system since 2013 to improve its operations.