Big Blue-U: Did IBM Deserve a No-Bid, $70M Contract with USC?

March 28, 2016

Investigative Reports

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By RON AIKEN

IMB.Horizon

Deal allows USC to finish Innovista project, outsource IT

With a rubber-stamped vote from the board of trustees and an unprecedented exemption from the former Budget & Control Board, the University of South Carolina in November 2014 bypassed state procurement law when it awarded a no-bid $70 million, 10-year contract with IBM.

In return, the company agreed to take over key facets of the university’s IT operations, including the management of sensitive student personal and financial data, hire 70 USC employees from the university payroll, and take over a OneCarolina project already millions of dollars over budget and behind schedule.

That USC was able to perform such a feat without howls of outrage but instead with almost unanimous choruses of approval speaks to how smoothly the wheels of government can turn when the goals of a university president eager to repair past economic development missteps (Innovista) meet the economic interests of both the South Carolina Chamber of Commerce and the state’s most powerful legislator.

Though important voices at the time – notably Rep. Brian White (R-Anderson) and Treasurer Curtis Loftis – called the evidence for success “thin,” and despite assurances from the university that it was “paying a reasonable price, comparable to that which would be obtained with competition” (Minutes of the Budget and Control Board, March 5, 2014), the board ultimately was swayed by Senate president pro tem Hugh Leatherman (R-Florence), chairman of the powerful Senate Finance Committee.

Leatherman testified that the benefits of the partnership, which was endorsed at the meeting by USC representative Rick Kelly and S.C. Secretary of Commerce Bobby Hitt, were unique enough for him to “turn his head” and support the exemption.

With his vote and the votes of Gov. Nikki Haley and Comptroller General Richard Eckstrom (who said at the meeting he supported it due to Leatherman’s influence on the language), the board approved an exemption 3-2 for USC to forgo state procurement laws that exist to protect taxpayers from fraud, waste and corruption and start the project immediately rather than endure the lengthy RFP process.

Now, two years later, many of the employees USC shipped to IBM are gone and replaced in large part by H-1B visa workers from India, and the OneCarolina project over which IBM was given oversight continues to suffer from the strain of implementing two competing software systems, thanks to a mid-project vendor switch that alienated on-site technical support, led to the firing of nearly 40 consultants and leadership positions and halted the HR/payroll programs in its tracks with no rollout date as yet on the calendar.

‘A NEW WAY OF DOING BUSINESS’

With the approval of the Board of Trustees on Nov. 21, 2014 – one board member reached for this story who declined to be named said he had no recollection of that meeting or vote (“We do so much, it really doesn’t stand out,” he said) – what followed was a familiar practice in the business world but not so much in academia: outsourcing. At a stroke USC outsourced its entire Enterprise Applications department (approximately 70 employees), and to add insult to injury, told them of the news the Friday before Thanksgiving break as the press release trumpeting the announcement was being sent out by the media relations department.

What that transfer of responsibilities meant was that IBM would now be responsible for the support of:

  • student information systems
  • data warehousing
  • identity and access management
  • application engineering
  • database administration
  • human resources, payroll and finance information systems
  • application support
  • application integration and administration
  • web development

In one move, all that heretofore proprietary information would be managed by a private-sector company that, while a giant in hardware, has only fledgling experience in academic software management and, in fact, is a competitor to the companies (Oracle, Ellucian) whose programs it is supposed to help implement and succeed.

For USC spokesperson Wes Hickman, it’s simply a smart new model for a university in a digital age.

“(It) represents a new way of doing business,” Hickman wrote in an emailed response to The Nerve. “(IBM) has assumed delivery and support for more than 100 enterprise software applications and 59 university employees had the opportunity to join IBM while retaining many of the same privileges available to USC staff.

“This partnership has raised the bar substantially in the quality of services provided to our university through IBM training, processes and access to the latest advancements in IT.”

INNOVISTA, BIG BLUE AND THE BC&B

Critics of USC’s stalled Innovista project point to the facts that (1) putting a new office building up on a college campus is no guarantee of strong private-sector investment, and (2) public universities whose focus is on financing big-picture economic development projects run the risk of diverting resources away from its core mission.

Businessman Daniel Rickenmann was on Columbia City Council from 2004 to 2012 and saw the university develop, pitch, then stumble to deliver its vision for Innovista.

“On city council we struggled a lot with USC being a research campus and the deals they were trying to introduce to get people into Innovista,” Rickenmann said. “There was a big disconnect between what was really being brought to the table versus what was portrayed as growth.

“The Innovista TIF, if you look at what was projected as growth and the jobs it was supposed to create, none of that has yet to come to fruition at all. They’ve spent close to 300 million so far with taxpayer money and we’re just now getting the second Horizon building thanks to the IBM deal.

“A parking garage USC told council was do-or-die for getting business in, all it turned out to be was the public paying for student parking. In my opinion public money has not been used wisely with Innovista and the university’s continuing to throw money at it is troubling to me as a taxpayer.”

A major factor behind USC shaking hands on the IBM deal was the company’s guarantee that it would occupy the as-yet-unbuilt Horizon II building, which had been a black eye on Innovista and an eyesore to Columbia since USC razed the former Hardee’s location at the corner of Blossom and Assembly streets.

At the same March 5, 2014 Budget and Control Board meeting at which it obtained the IBM exemption, USC also got permission to execute a master lease on the Horizon II building since it had an anchor tenant finally in tow. That approval gave Holder Properties the go-ahead to finally begin construction on the $25 million project.

For Rickenmann and others, USC’s exemption from the requirements and protections of state procurement code was an extraordinary measure for an unnecessary risk.

“If USC was so confident IBM was the best provider, why couldn’t they put it out to bid?,” Rickenmann said. “If it was that critical, what clawbacks exist if IBM doesn’t perform?

“If USC doesn’t want to play by the rules, the reality is that no one knows what’s happening with taxpayer money.

Loftis, one of two votes against the exemption, said he remembers the debate well.

“It was highly unusual,” Loftis said. “They came in and wanted this deal and we exempted from the procurement code so they could get that building under way.

“I was against it because there was not enough information provided about safeguards and not enough information in general for us to make a truly informed decision.

“What I see on the board far too often is that these projects come in and we’re expected to rubber-stamp them for the main reason that they can spread the blame around if something goes wrong. We serve the purpose of assuring that no one in state government is accountable for anything, and when you look at this deal and the things that have happened since, the problems with PeopleSoft, we gave them a blank check? It was crazy.”

A former Budget and Control Board employee with knowledge of the USC-IBM deal who asked to remain anonymous said he did not see enough benefits for the state to justify circumventing procurement law.

There are 120 exemptions as part of state law, and most of them make sense,” he said. “If you competitively buy software, you can buy maintenance for it each year without having to go out and re-bid the software, things like that.

“When you’re making a case to be exempted from the law, you have to have some pretty unassailable reasons to do it, and I didn’t see anything in what USC presented that met that threshold other than they wanted to do it.

“This deal was weird, it was not done with the mindset of protecting taxpayers. This was squeezing a square peg through a round hole.

“If they wanted to they could have done a sole-source contract, they could have made that argument, but it would have meant they could have been audited or reviewed at a later time and had to go before the procurement review panel. Just from a procurement standpoint alone it was highly suspicious.”

PICKING A WINNER

In business deals, both sides expect to gain from a partnership. But also in such deals, one side usually comes out a little better than the other.

For IBM, the benefit was huge: $70 million and a 10-year contract. For a company moving away from hardware to software and cloud storage, the academic market holds great appeal.

With only fledgling experience managing complex academic partnerships and a roster of only two schools (Michigan State and LSU) prior to the USC deal, former UTS employee Whit Ashley, who was one of the employees transferred from USC to IBM, said it’s a sweetheart deal for Big Blue because it adds credibility IBM desperately seeks in a market it’s determined to enter.

“I knew from working in the industry that IBM was divesting itself of much if not all of its hardware operations, so I wasn’t exactly surprised that they were interested,” Ashley said. “IBM was pivoting in the industry to focus on a strategy that was emphasized repeatedly in our IBM on-board materials: CAMSS – Cloud, Analytics, Mobile, Security, Social.

“Running a university’s enterprise application suite as Software as a Service (SaaS) in their Bluemix cloud fit nicely with the CAMSS strategy. There’s a lot of money in education, and IBM wanted a bigger presence in the market.”

So what did USC get for outsourcing its campus-wide IT operations to a company in transition that’s incentivized to maximize profits? It got to fill the biggest hole on campus with Horizon II, jettison some 70 employees from its payroll to IBM’s care while touting  potential job opportunities for students and an “economic opportunity for our state,” according to Hickman.

“At the meeting where we were told we had two weeks to decide whether we wanted to go to work for IBM or find other employment, (USC CIO) Bill Hogue started out the session saying how one day last year (2013), Pastides came to his office and handed him some materials on IBM and said to Hogue, ‘I think you’re gonna like this.’

“Hogue said to us, ‘And so when the President of the University says you’re gonna like something, you say ‘Yes, sir’ – and at this point, Hogue gestured a military salute – and you go look into it.’ He basically indicated that you do what you’re told and learn to like it.

“I’m glad I got out when I did. I feel badly for those who couldn’t. They’re stuck working for IBM not by choice while trying to fix software issues with Oracle and working with temporary H-1B employees from India and consultants who rotate in and out from mutiple vendors when it used to be all handled in-house by people who loved working for USC. It’s a shame.”

Reach Aiken at (803) 254-4411. Email him at ron@thenerve.org. Follow him on Twitter @RonAiken and @TheNerveSC. Sign up for email alerts to receive breaking news at the top right-hand side of the page.

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