IBM should have been disqualified from Qld Health payroll tender: Report

There were many red flags that should have seen IBM disqualified from tendering, or going ahead with the delivery of the ill-fated Queensland Health Payroll system but they were largely ignored, according to the report from the Queensland Health Payroll System Commission of Inquiry.

The report (PDF) from commissioner Richard Chesterman came from the AU$5 million inquiry that commenced in February looking at why IBM won the contract to build the new payroll system for Queensland Health in 2007.

The bungled payroll system, which was delivered later than expected in 2010, resulted in thousands of staff being underpaid, overpaid, or not paid at all. The Queensland government has estimated that the total cost for the system for taxpayers will be AU$1.2 billion.

The then-Labor government settled with IBM at the time, in exchange for IBM fixing the system which is now expected to be completely replaced.

The inquiry found that during the tender for a prime contractor for delivering payroll services across government, which was agreed to in government without any analysis, a former IBM employee who had won work with the Queensland government reviewing technical operations had "strongly recommended" IBM be awarded the contract over competing parties Logica and Accenture.

At one point, it was found that the former employee, Terry Burns, had also given IBM a "dry run" in their presentation before making their case to be awarded the tender to deliver the payroll system.

In the course of the tender, IBM also managed to get hold of the confidential bid information, including the 'not-to-exceed' price from Accenture that IBM employees had discovered on a public drive on the network of CorpTech, the Queensland government's shared services organisation.

The documents were supposed to be stored on secured servers but the proposals and scoring matrixes were made public for a period of time to anyone with a CorpTech login, which the IBM contractors had at the time.

Chesterman said that this alone should have been enough to disqualify IBM from tendering for the contract.

"The result is that conduct by some of IBM’s employees provided substantial grounds for excluding it from the tender process and the response of those employees in denying wrong-doing, and misdescribing their conduct, provides no basis for not acting on those concerns," he said.

When it came time to award the tender, Chesterman found that in the final report, IBM's score was boosted above Accenture's, after previously being behind Accenture in the scoring. Chesterman said that this came as a result of Burns' pressure on the panel members.

"Mr Burns in the course of his review displayed a marked and indiscreet partiality for IBM. In the process of evaluating the relative merits of the three tenders he intervened, as a result of which the assessment changed to favour IBM's bid," he said.

After IBM secured the contract, Queensland Health's payroll system was prioritised because the existing payroll system, LATTICE, was obsolete and unable to process the 24,000 variations of the payments required for the 80,000 health staff working under two different laws and 12 different industrial awards.

The replacement was initially supposed to be only an interim replacement until the payroll system had been rolled out across government, but after IBM's initial proposal of an AU$98 million system quickly blew out to AU$180 million in 2008, the government decided to only proceed with the replacement for LATTICE.

The report found that the government didn't communicate its business requirements for Queensland Health to IBM that would be able to accomodate the complexity of the Queensland Health payroll system. It ultimately cost four times the contract prices and took three times longer than expected to deliver.

When the system had its disasterous flaws exposed in 2010, the government was advised it could sue IBM for as much as AU$88 million in damages. The government declined and settled, releasing IBM from all claims if it fixed the defects. The report found that even with the fixing of those defects, Queensland Health still doesn't have a fully functioning and automated payroll system.

Chesterman said that the two prinicipal causes that led to the failed system were an unwarranted urgency and lack of diligence on the part of government officials.

"That lack of diligence manifested itself in the poor decisions which those officials made in scoping the interim solution; in their governance of the project; and in failing to hold IBM to account to deliver a functional payroll system," he said.

He recommended that the government should now undertake risk assessments, contingency and succession planning for legacy systems, so that when systems such as the LATTICE payroll system need replacing, decisions to replace those systems are not made in haste.

He said that the government cannot seek to solve all its problems through outsourcing.

"The desire to outsource to the private sector requires the government actively and competently to manage projects and contractors, and apply the necessary skill and expertise to ensure the effective delivery of large projects," he said.

"The state cannot be passive in its oversight of projects in which large amounts of taxpayers’ money are at risk or the welfare of state employees may be affected."

Chesterman also recommended that the government also have appropriate management structures overseeeing large IT projects, and that specific attention be paid to everything that went wrong in the Queensland Health payroll system delivery to ensure that history does not repeat itself.

Finally, he said that planning for the replacement of the payroll system begin now. It is expected to require an upgrade in a year and a replacement in five years. The Queensland government allocated $384.3 million in this year's budget to operate, maintain and enhance the existing system.

Queensland Health Minister Lawrence Springborg today welcomed the reports findings and said the recommendations would "guide future practice in the administration of contracts vital to health and other essential services across Queensland".