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Wednesday, November 14, 2012

NDP giving SAP to IBM: a deal with the devil

Darrell Dexter's government refuses to make deal details public. And you know who's in the details.

Posted By on Wed, Nov 14, 2012 at 5:19 PM

click to enlarge NDP premier Darrell Dexter as our Photoshop artists imagine him closing the deal to give Nova Scotian SAP jobs to IBM.
  • NDP premier Darrell Dexter as our Photoshop artists imagine him closing the deal to give Nova Scotian SAP jobs to IBM.
The deal outsourcing provincial SAP operations to IBM is a brazen move by the Darrell Dexter government. By handing 73 union jobs to the notoriously anti-union IBM, Nova Scotia's NDP has turned its back on its core support in the labour movement.

On the other hand, the SAP outsourcing has won the government accolades from usually NDP-averse commentators in the Chronicle-Herald. Still, it’s unlikely that cheerleaders fully comprehend just how radical the move was, or what the future implications of it are.

SAP is an acronym for Systemanalyse und Programmentwicklung, a German-created software system that companies, organizations and governments use for planning and managing finances. IBM now sells the software, but many, many IT companies provide SAP service. IBM itself has been increasingly entering the service business, establishing “global delivery centres” that specialize in handling SAP operations.

The Nova Scotia deal says that IBM will establish a global delivery centre in Halifax, using the outsourced government SAP program as its core business while it looks for business from other governments and companies outsourcing SAP operations.

The veil of secrecy

The secrecy surrounding the IBM deal is remarkable, even by Nova Scotia standards. What we’ve been told is this: the province has entered a 10-year deal outsourcing SAP operations to IBM, starting at $8.4 million a year, which is said to be the exact cost to the province of operating SAP with unionized government workers. That annual payment will increase using a “cost of living index” used by the IT industry, says the Finance Department.

The actual contract with IBM, however, is not public record. “The contract contains commercially sensitive information,” Economic Development minister Percy Paris tells The Coast via email. “We would have to process the contract through the normal FOIPOP channels and I expect that would take some time.” We dutifully filed the Freedom of Information request, but expect a response to be delayed for many months, and ultimately denied. We’ll appeal that denial, but the FOIPOP review office is currently backed up two and a half years, so if we ever get a copy of the contract, it’ll be in the year 2016 or so.

Additionally, the province has promised to give IBM $12.4 million in payroll rebates. Payroll rebate deals are worked out by Nova Scotia Business, Inc, but ultimately approved by the premier and his cabinet via what’s known as an “order in council.” In the past The Coast has routinely obtained the details of the payroll rebate deals by politely asking for, and receiving, the detailed arrangements as spelled out in an exhibit attached to the order in council. We’ve never been turned down. Until now. “As with any such request, we reviewed the document and in this particular case, you will be required to make an application under the Freedom of Information and Protection of Privacy Act,” says Jeannine Lagasse with the executive council office.

Tendering rules

Nova Scotia’s procurement policy was adapted after centuries of government-by-spoils, bribes and insider deals made a mockery of the government purchasing process. The rules are not to be taken lightly. Under the rules, any government purchase of goods or services valued over $10,000 must be put out to tender, and the bids are to be evaluated through a public process.

But SAP outsourcing, valued at at least $100 million, was not put out to tender. That’s a decision Percy defends in his email to The Coast:

He [Tim Bousquet from The Coast] asks how is this not in contradiction to the tendering rules and wouldn’t this have required an RFP or a full tender?” Contradicting tendering rules? IBM came to Nova Scotia with game-changing opportunity for our young people, our businesses, and our future. We could have sent them away – but if we had, another province would be celebrating this win today. Transferring government SAP services was not the goal, but it is a part of the opportunity IBM brought to Nova Scotia. That is why we moved forward.

But Percy is clearly conflating two separate issues: the establishment of the global delivery centre with the assistance of payroll rebates, and the outsourcing of government SAP operations. The former is allowed under government rules. The latter, however, is arguably not.

Moreover, while the IBM contract is not public, reportedly the deal includes a provision that IBM will have first right of refusal on half the other IT work the province will contract for over the next decade. It’s incomprehensible how such a provision can meet the procurement policy, especially since the details or value of those future contracts can’t even be imagined at this time.

What costs?

“How will paying [IBM] what we were paying for the service before save us money?” asks one provincial manager who is familiar with SAP operations, rhetorically. “Especially since our number was an all in, and I am betting theirs is not.”

The province has contracted for a specific set of services, at a price which supposedly matches the current cost to the province for the same services. But the fear is that as technology evolves and as new products become available or desired, IBM will charge more for the delivery of those products and services, far beyond the cost the province would pay by developing them in-house.

“They make all the money on change orders,” says Andrew Younger, a Liberal MLA who criticizes the IBM deal. “That’s how construction companies make their money in government contracts, too."

Younger characterizes the IBM deal as “a huge clusterfuck.”

Of course, the contract might have been written in such a way to anticipate evolving technology and the development of new services and products, but we can’t know—the government won’t make the contract public.

“IBM is a gigantic company,” says Lee Conrad, an organizer with Alliance@IBM, a Communications Workers of America enterprise that purports to represent IBM workers. IBM does not recognize any union, including the CWA.

“IBM has decided it can’t make any money selling its core products,” continues Conrad, “so it has to make money by getting companies to outsource services. They’ve been writing contracts for decades, and know how to get everything they need.”


“They’ll run circles around Nova Scotia’s lawyers,” says another provincial employee.

What jobs?

Since the SAP outsourcing was couched in the rhetoric of “good jobs,” we have to ask: What jobs?

“It looks like we’re giving IBM payroll rebates for jobs we already have here,” says Younger.

Younger’s complaint is that to obtain the payroll rebates, IBM is only required to hire 100 workers the first year, essentially replacing the 73 union members and 40-odd other government employees working the provincial SAP operations.

Payroll rebates and the jobs they supposedly generate have been repeatedly oversold in Nova Scotia: the province will trot out some huge numbers of jobs to be created, but those jobs are rarely actually produced. For example, The Coast has documented that payroll rebates to “financial service” companies almost never resulted in the promised job numbers.

As Younger sees it, while the payroll rebate package promises “up to 500 jobs,” the reality will likely be a huge disappointment.

“Five years from now, the global delivery centre is still here,” he says. “But the jobs go through the floor. As the technology changes, they find efficiencies...there might be 75 or 100 people working there.”

And what will the Halifax IBM workers be paid? The province claims—again, the contract is not public, so we can’t really know—that IBM will offer the government SAP workers jobs at their current rate of pay, but for how long? And what other demands will be placed upon them?

“They’ve promised a lot of stuff,” says Conrad, the CWA organizer. “But you need to get it in writing.”

The message board at Alliance@IBM is full of comments from hundreds of people claiming to work at IBM global delivery centres. They complain about forced time off, no raises, intolerable work conditions and more.

The general theme on the message board, and as expressed by Conrad and other people who have studied the company, is that IBM is slashing labour costs in the US by getting struggling cities—places like Dubuque, Iowa and Poughkeepsie, New York—to give the company tax breaks in return for establishing global delivery centres in their towns. But an even bigger way to slash US labour costs, say critics, is to offshore the jobs completely, placing new GDCs in places like Canada, Romania, India and Costa Rica.

Some years ago, IBM stopped publicizing the numbers of its employees by location, but Conrad says his group has tracked the loss. In 2002, IBM had 160,000 US employees, says Conrad; today there are 92,000.

What about other local jobs?

Both Younger and the provincial manager who is familiar with SAP operations say the IBM deal undermines local companies—or other large Canadian companies with operations in Halifax—that already provide SAP services locally.

“They’re subsidizing the competition,” says the provincial manager, suggesting companies like Grant Thornton, CGI and KPMG won’t be able to compete with an IBM office offering the same services with a huge government contract as its core business.

“IBM might have a few hundred people working here,” says Younger, “but will we have any more IT workers than are here already? They’ll just shuffle them around.”

The Coast called several firms offering SAP support services in Halifax for comment. None returned our calls.

Is the service reliable?

Questions about jobs aside, does the contract with IBM make sense on its own terms?

Earlier this year, the state of Texas and IBM arrived at a secret settlement after Texas cancelled a $863 million contract that outsourced state IT operations to IBM. Back in 2008, the state Department of Information Resources wrote a letter spelling out the problems with IBM's performance, including what the state claimed were insufficient staffing, problems with security and service level breaches.

The state government of Queensland, Australia has likewise had problems outsourcing SAP operations to IBM, including a ballooning cost—from an anticipated $6.19 million to $64.5 million (both figures in Aussie dollars, mate).

No doubt the Nova Scotia government will claim to have done its "due diligence"—just as the Texas and Queensland governments have made the same claim. And there are still more issues related to the SAP outsourcing: Younger points at security concerns. Stay tuned, because we'll get into those in a future post.

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