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IBM's state contract not renewed after botching unemployment benefit system

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Wednesday, July 31, 2013, 1:21 p.m.

Pennsylvania's Department of Labor and Industry will scrap a contract with IBM, potentially squandering $170 million in federal taxpayers' money.

Officials said Wednesday that the technology giant bungled a project to modernize a computer system that doles out unemployment benefits, although the Labor Department said it might be able to use some of the work IBM did.

“The bottom line is that the problems we've identified cannot be solved, and we will not renew our contract with IBM,” said department Secretary Julia Hearthway. The department's top official said moving forward with IBM presented even greater risks.

The decision was a result of an $800,000 Carnegie Mellon University study of IBM's work, officials said.

“We are surprised by today's announcement,” said IBM spokesman Scott Cook. “IBM is fully prepared to continue to bring the benefits of a contemporary unemployment benefits system to the state and its citizens, and we stand ready to work with the state to resolve this matter.”

He added, “In complex information technology implementations, there is accountability on both sides for system performance and service delivery.”

Cook said the company has not seen the CMU study. It made repeated requests to review it with Labor Department officials prior to Wednesday's release, he said. Cook declined to comment further.

CMU said the state “should not continue with the (third and final phase of work),” citing “systemic problems over a sustained period of time.”

The university found software and data processing problems in the first two phases but advised the department to try to resolve defects and continue development work.

CMU said the Labor Department could have done more, adding that its “approach to managing the program from (the time of the) contract award to early 2011 led to a situation in which no one in (the department) was accountable and responsible for the administration of the program.”

The computer system being developed is 42 months behind schedule and more than $60 million over budget, Labor Department spokesman Sara Goulet said. The contract, now approaching $170 million, expires in September. The department withheld $17 million in payments because of what it calls shoddy work but has paid IBM $153 million, Goulet said. IBM's contract was for almost $107 million.

Goulet said the department turned over information to the Department of General Counsel to see whether it could recoup any money.

“It is simply unacceptable for the computer system that serves the state's unemployed to be unreliable. It has to work, and it has to work efficiently,” Hearthway said. “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.”

The Labor Department commissioned CMU's Software Engineering Institute to study IBM's work about a year ago. The IBM project is in the final phase, the most expensive and important part of the project. It deals with developing a system to handle unemployment claims, payments and appeals.

Precise figures were not available, but the state spent at least $75 million on the third phase alone, Goulet said.

Rep. Mario Scavello, R-Monroe County, who chairs the House Labor and Industry Committee, plans to investigate.

“IBM is a pretty reputable company. I don't want to just throw them under the bus. It's obvious what we have is not working, but I wonder how many times in the prior administration and the new one that changes were requested that might have created more problems,” Scavello said.

The current system is outdated but reliable, Goulet said, noting about 89 percent of people received unemployment benefits within 14 days of applying. The biggest hold-up: Because of technological limitations, when someone applies for benefits, the Labor Department must mail a letter to employers to confirm the applicant's employment information and wait for a return letter.

That process would be computerized under a modern system, reducing the time it takes the jobless to start receiving benefits.

It's unknown how much money might be needed to keep the old system running while the Labor Department decides what to do next, Goulet said.

Tom Fontaine is a staff writer for Trib Total Media. He can be reached at 412-320-7847 or

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