Nearshore Americas

Indiana vs IBM: A Victory for Big Blue is Seen as a Harbinger for Outcomes-Based Outsourcing Contracts

Two heavyweights have been duking it out in a Marion County, Indiana courtroom since 2006 when the state of Indiana sued IBM for breach of contract. Recently, Judge David Dreyer ruled in favor of Big Blue regarding the Indiana’s attempt to claw back US$ 170 million of a US$ 1.6 billion dollar IT services contract. Like most IT outsourcing lawsuits, it is a messy, legally and complex case involving many thousands of pages of documents, ultimately the judge ruled that IBM did not breach  the contract to overhaul the state’s welfare database systems. In his ruling, however, the judge had harsh words for IBM as he noted that “Neither party deserves to win this case.”

According to analyst Paul Pinto, managing partner at outsourcing consultancy Sylvan Advisory, although the overall goals of the Indiana welfare system overhaul project were not attained, IBM’s legal skills in selecting contract outcome measures exempted IBM from breach of contract. “Even though IBM did not perform in alignment with the intent of the agreement, they were deemed to have satisfied the letter of the law.”

Few would argue that there is not plenty of blame to be assigned to all parties in this case. There were numerous political and bureaucratic barriers to the project from the beginning, as well as very little support from the rank and file welfare department employees for the overhaul. For their part, IBM only managed to deliver 50% to 80% of their overall contracted services, and the first system they designed was so buggy they just canned it and initiated a Plan B.

Additionally, the judge awarded Big Blue US$ 12 million for the cost of the equipment that the state retained after the project, but many analysts see the case as a pyrrhic victory for IBM as it is only going to exacerbate the exhaustive Request for Proposal RFP and Service Level Agreement SLA culture surrounding performance outcomes in IT outsourcing contracts.

“There is no substitute for precise performance definitions and careful-prompt management of departures on both sides.”

The bottom line is that given all of the publicity and rancor defining this case, IBM’s attorneys are likely to face much tougher negotiations in terms of specifying performance outcomes in future contracts.

More Balanced Legal Liability Leading to More Highly Structured Contracts

Until recently, many organizations negotiating contracts with large outsourcing providers were not hyper concerned about the nitty-gritty of performance benchmarks and the like as it was assumed that larger outsourcing providers wanted to avoid bad publicity and would either do a satisfactory job or settle any dispute as they generally did not fare well in the courtroom. A British court’s 2010 ruling against EDS is a typical example.

This case shows that clients cannot count on providers just settling to avoid negative publicity. There is simply too much money on the line and margins are getting thinner and thinner.

According to analysts such as Pinto and Randall Parks of outsourcing firm Hunton & Williams, this case could well be a watershed moment in the sense that the intensity surrounding the insistence on specific performance benchmarks in outsourcing contracts will intensify. Parks elaborates, “There is no substitute for precise performance definitions and careful-prompt management of departures on both sides.”

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Both analysts also pointed out it is likely that Judge Dreyer’s decision will hasten an already growing trend towards breaking up large outsourcing projects into smaller contractual units for easier management or even signing several contracts with different providers (multi-sourcing) so as to not put all your eggs in one basket. All of these developments augur well for the continued growth of “boutique” outsourcing firms, as they offer the specialized expertise in specific areas that businesses planning outsourcing projects are looking for.

Clayton Browne

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