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Spaces Zibi in Gatineau, where the IBM Cloud Modernization Centre is located.Ashley Fraser/The Globe and Mail

The federal government will pay IBM an additional $106-million for a one-year extension to the company’s contract work on the troubled Phoenix pay system, bringing the total cost of Ottawa’s Phoenix-related outsourcing with the U.S.-based tech giant to more than $650-million.

IBM built Phoenix, and has now been working on the system for more than a decade. The initial contract, from 2011, had already been extended multiple times and was set to expire on March 31 of this year. Records show the federal Public Works department recently approved the new one-year contract, which will take effect this month.

Phoenix, a computerized platform that handles payroll for federal employees, was created under the previous Conservative government. The current Liberal government launched the system in 2016. A scathing report from the Auditor General in 2017 found that, at times, more than half of public servants were dealing with errors in their pay that resulted from Phoenix-related malfunctions.

Government records show Ottawa’s 2011 contract with IBM – originally valued at $5.8-million – has been amended 50 times and had grown to $545.2-million before the latest extension was awarded.

And IBM is not the only company whose contract work on Phoenix has lasted longer than Ottawa originally planned. The Globe reported in January that the federal government had recently amended a 2020 contract with McKinsey and Company to address issues related to Phoenix. The change increased the value of that contract to $27.7-million, from the original $4.9-million.

“These endless contract extensions for IBM and McKinsey are just further proof that Phoenix is a runaway train, basically, and it’s exactly why we’re asking for a national public inquiry into this whole Phoenix debacle,” said Chris Aylward, president of the Public Service Alliance of Canada.

Ottawa turns to consulting firm McKinsey to fix Phoenix pay system, doubling spending on outsourcing

Public-sector unions, including PSAC, have negotiated payments to compensate government workers for the stress caused by the ongoing uncertainty over whether their pay statements can be trusted. The Globe reported in December that those payments are on track to exceed $700-million. The unions have served notice that they are seeking a new round of compensation, because the Phoenix issues have continued.

“We’re saying, yes, we need to go back and renegotiate another damage settlement regarding Phoenix, because our members are still going through hell,” Mr. Aylward said. “They’re still going through the anxiety, the stress of, ‘am I going to get paid properly this week because my mortgage is due, the car payment is due,’ that sort of thing.”

While the problems with the system have eased somewhat since their early peak, records show the backlog of pay issues has been climbing again. The number of complaints stood at 141,000, as of January. That figure represents an increase to levels not seen since early 2020.

Public Works spokesperson Michèle Larose said the $106-million, one-year extension for the IBM contract work involves “ongoing services to stabilize the pay system, eliminate the backlog of outstanding pay issues and ensure a smooth transition” to a replacement pay system.

The department awarded the contract extension in December after receiving three responses to a May, 2020, solicitation for bids.

“After evaluation, it was determined that only the response submitted by IBM met the requirements,” Ms. Larose said.

IBM Canada spokesperson Meg Nair provided a statement on behalf of the company in response to questions about its federal contracting.

“We are proud of our work for the Canadian Government and of our leading position in implementing technology solutions,” the statement said. “We remain committed to supporting the government in its payroll transformation and will continue to work closely with the federal government to satisfy the requirements of this contract.”

A Globe review of federal contracts associated with the Phoenix system shows IBM has been the biggest beneficiary by far when it comes to related outsourcing. In addition to the $651.7-million for the main Phoenix work, IBM also received a $2.1-million contract in 2021 for “robotic process automation” services related to pay transactions.

Other companies that have received related federal funding include ITNnet and Systematix, which received a $29.6-million contract in 2021 for IT support, and PricewaterhouseCoopers, which received a $23.7-million contract in 2019 for advisory services.

In addition to maintaining Phoenix, the federal government has launched a plan to replace the system.

To date, this work has led to two outsourcing contracts: one with Ceridian and another with Workday. These contracts are also growing in size through amendments.

A contract with Workday was valued at $4.5-million in September, 2020. Three amendments, the most recent of which happened in February of this year, have increased the value of that contract to $29.3-million.

The government announced a $16.9-million contract with Ceridian in September, 2021. It has since been amended three times. The most recent amendment, on March 16, 2022, brings its value to $39.5-million.

IBM’s challenges in delivering the Phoenix system have not prevented the company from expanding into other areas of federal IT procurement.

Last September, IBM announced it was setting up a “cloud modernization centre” in a modern new Gatineau residential and commercial development called Zibi that is surrounded by federal government office towers.

“Public servants can now work alongside IBM experts in design, architecture, agile development, data science and AI, automation, blockchain, security and more, while tapping into the latest hybrid cloud and AI technologies,” the company’s website says of the new office.

Craig McLellan, chief executive officer of the Canadian tech firm ThinkOn, said global companies like IBM and Microsoft have an advantage over smaller Canadian firms like his, because those companies can afford to hire large teams to build relationships with public servants. His larger competitors, he added, are adept at turning deals for “legacy” projects, like software, into contracts in new business areas, like cloud computing.

Mr. McLellan said some federal contracts – such as the ones for IBM’s Phoenix work – are so large that it can be very difficult for the government to switch firms if they aren’t satisfied with the results. He added that the government is prone to making deals with contractors under the impression that the companies have substantial Canadian subsidiaries, when in fact, he said, those branches are often just sales and marketing operations designed to sell foreign services.

“I think what people fail to understand is how much economic benefit to Canada gets sucked out of the country,” he said.

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