July 26, 2012, 1:05 PM — "Neither party deserves to win this case."
So begins the judge's order in the legal outsourcing battle between the state of Indiana and its former IT service provider IBM. While deciding last week that Indiana failed to prove that IBM materially breached its 2006 $1.6 billion contract with the state, Marion County Judge David Dreyer wrote: "This story represents a 'perfect storm' of misguided government policy and overzealous corporate ambition. Overall, both parties are to blame and Indiana's taxpayers are left as apparent losers."
Indiana initially sued IBM for the $437 million it paid the provider for what it said was a failed welfare system overhaul, an amount that was later reduced to approximately $170 million. IBM countersued for $100 million that it claimed it was owed by the state. Judge Dreyer awarded Big Blue $12 million for the equipment retained by the state.
"[It is] surprising that the court found a pox on both houses," says Lawrence J. Bracken II, partner in the commercial litigation practice of law firm Hunton & Williams. "This decision demonstrates these are cases that are very difficult to resolve in court. Not only are the matters and contracts very complex and the evidence comprised of millions of documents and data points, but typically each party shares some of the fault when these projects go off the rails."
It was a rare judgment in favor of an outsourcing provider that should serve as a wakeup call for all IT leaders. "Buyers have a tendency to select big-box service providers, because they feel more secure operating under the notion that if something goes wrong they can always sue [them] and recoup their losses," says Paul Pinto, managing partner at outsourcing consultancy Sylvan Advisory. "Buyers believe that the larger service providers will not be willing to endure the bad publicity associated with a law suit. The result of this case clearly displays the contrary."
More specifically, "the case is a bit discouraging if you write careful contracts hoping that they'll be enforced as written," says Randall Parks, co-chair of the global technology, outsourcing and privacy practice at Hunton & Williams. The court took IBM's achievement of a limited set of service levels metrics along with its delivery of some unexpected benefits--supporting Indiana flood relief in 2008 and a "plan B" welfare system to replace the one that did not work--as evidence of acceptable contract performance, Parks says. "For providers, it is apparently still possible to get an 'A' for effort. In the end, the decision seems to represent rough justice in a complex case."