IBM still receiving millions for work on error-riddled Phoenix pay system

Eight years after the initial rollout, the company behind the disastrous Phoenix pay system is still winning millions in government money for work on the project. 

Ottawa has awarded IBM an extra $129 million since the start of 2022 to stabilize the software, the IJF has found.

This brings the total won by IBM for work on the Phoenix project to a whopping $784 million since the company was contracted in 2011 to build the system at an initial contract value of just $6 million.

“Nobody would have thought back then that it would be … still ongoing in 2024,” said Robert Shepherd, a professor of public policy and administration at Carleton University. “It’s a payroll system. We’re not on a policy journey to solve climate change here.”

“It makes me wonder what IBM is working on and what the amendments are for.”

The government began rolling out the Phoenix pay system for civil servants in February 2016. Almost immediately, errors arose. Thousands of government employees began receiving underpayments or, in some cases, no pay at all. Others received repeated overpayments that were only revealed years later, leaving them suddenly indebted to their employer.

An independent audit found that, by June 2017, public servants had reported nearly half a million errors totalling over $520 million in outstanding pay. The audit estimated that 62 per cent of all public servants were paid incorrectly at least once during the 2016-17 fiscal year.

These payment issues caused hardship for many employees, resulting in lost homes, delayed retirements, debilitating debt and severe emotional distress. Anxiety over Phoenix payments has even been linked to the tragic death by suicide of a former civil servant.

“It's eight years right now that we've lived with this,” said Sharon DeSousa, president of the Public Service Alliance of Canada, the largest union representing federal employees. “We knew that there were problems when Phoenix was initially announced and we were worried that the government was jumping in without properly testing it.” 

“We told them that, and they went ahead anyways.”

The government has so far paid some compensation to affected employees, although PSAC says more is needed.

In all, PSPC’s chief financial officer said in November last year that the Phoenix pay system had cost the government about $3.5 billion, a figure that included spending on IBM contracts, compensation to public servants and agreements with other companies. A further $936 million is planned for this year.

Guillaume Bertrand, on behalf of Public Services and Procurement Minister Jean-Yves Duclos, said, “As our government inherited the Phoenix from the Harper-Poilievre government and are currently looking at a better alternative, we have a responsibility to ensure the current system continues to work as smoothly as possible.”

“A large portion of the contract with IBM includes regular maintenance, critical 24/7/365 technical and payroll processing support and software updates to ensure optimal security and performance,” said Bertrand.

Lorraine Baldwin, a senior communications manager for IBM Canada, did not answer the IJF’s questions about why the tech company continues to receive money for Phoenix, saying that IBM does not “typically discuss details of work with our clients.“ However, in an emailed statement, Baldwin said, “We are proud of our work for the Canadian Government and of our unique and leading position in implementing technology solutions, and remain committed to supporting the government in its payroll transformation.”

Today, there are still over 400,000 disputed transactions waiting to be resolved, of which 209,000 are more than a year old, according to government numbers. The government said in July that it hopes to clear that backlog by March 2025, an estimate that PSAC’s DeSousa said she doesn’t see as realistic.

Canada’s top civil servant, Clerk of the Privy Council John Hannaford, admitted the government’s “continued failure to resolve the Phoenix pay system” in his annual report to the prime minister published last month.

Amendments on amendments

Back in 2011, the government department now called Public Services and Procurement Canada (PSPC) awarded IBM a $6 million contract to start building the Phoenix system.

Over the next decade, the contract was modified nearly 50 times, each amendment committing more and more federal dollars to IBM for work on Phoenix.

PSPC signed a second contract, worth over $145,000, with IBM in 2019 for “innovative approaches to processing outstanding pay-related tickets.”

When the initial contract wrapped up in 2021, Public Services and Procurement Canada signed another two contracts with IBM.

In early 2022, media reports found that the contracts awarded to IBM for Phoenix by January 2022 totalled over $650 million.

The IJF has now identified further amendments to the two Phoenix-related contracts originally signed in 2021 that bring the total value of IBM’s contracts to $784 million.

A contract won in December 2021 was the main agreement designed to replace the expired 2011 contract. It was originally worth $107 million. But it was amended in March 2022 for an extra $2 million and in December 2022 for $119 million. With those two amendments, it now totals $228 million.

Another contract, initially worth $2.9 million, was awarded to IBM in January 2021 for “robotic process automation” as part of the government’s “pay stabilization” initiative. Nearly $3 million was added in 2022 and a further $3 million this past January. PSPC also shared with the IJF that an additional amendment was signed this year, yet to be published on its website, adding another $1.2 million. This brings the contract’s current total value to over $10 million.

The IJF contacted PSPC officials for accurate, up-to-date numbers after noticing discrepancies in the publicly disclosed amounts listed on the PSPC and the Treasury Board Secretariat (TBS) websites.

Michèle LaRose, a spokesperson for PSPC, acknowledged the publicly posted numbers were incorrect. The department “is actively working on resolving these issues, and the corrections will soon be made and posted to CanadaBuys,” said LaRose.

Public disclosure of contracts is required under the Access to Information Act. TBS’s website states, “Each government entity is accountable for the completeness and accuracy of the proactive publication of information on contracts.”

The Phoenix system isn’t IBM’s only project with the government. Since 2004, the tech company has secured $6.2 billion in government contracts — both related and unrelated to Phoenix — making it one of the federal government’s top suppliers.

Shepherd said that the issues today stem from the original 2011 contract. He said the government made a critical mistake when it contracted IBM to alter existing off-the-shelf software rather than asking it to craft a custom solution from scratch.

“The original design could not do the job. And so you’re trying to fit a square peg in a round hole and constantly working to fit that peg in the round hole. And this is why you’re seeing cost overruns, of various types, all over the place,” said Shepherd.

Potential replacement possibly repeating ‘same mistakes’

By 2018, the government was looking at replacing Phoenix. In June 2019, it announced that it had shortlisted SAP, Workday and Ceridian as prospective providers for a new system.

In September 2021, Ceridian emerged as the leading contender after the government awarded it a key contract to pilot its Dayforce payroll system across five departments.

The government wrapped up these initial tests this past February, concluding that Dayforce appears to be a “viable option for an integrated [Government of Canada] HR and pay system.”

However, PSPC officials stressed that a new system won’t be ready for several years.

“Over the coming months, the Government of Canada will conduct further, more in-depth testing and adapt the design of Dayforce to its needs, while exploring ways it could simplify HR processes and procedures,” said Minister Duclos’s spokesperson Bertrand, noting that the government’s approach aims to “avoid the failures of the current system.”

Despite a desire to put the Phoenix fiasco in the past, not everyone is feeling optimistic about its potential replacement.

In a statement posted to its website in May, PSAC expressed concern over the government’s lack of transparency around the new system and insufficient testing in departments with more complex pay arrangements than those involved in the Dayforce pilot.

“The lack of clear answers only fuels the skepticism and anxiety among federal public service workers who continue to grapple with pay issues every single paycheque,” reads the statement.

Shepherd has similar concerns. “My fear is they've made the same mistakes again,” he said. “What I'm following with the Ceridian contracts is there's all kinds of inflation and contract amendments with Ceridian now.”

“The concern that I have is that we’ve learned nothing as a federal public service and getting nothing for the millions and millions of dollars we’ve put out for this system that is going to prepare the federal government for the next iteration.”

Alongside IBM and Dayforce, a host of other companies have won contracts to fix and maintain the Phoenix system over the past decade, including McKinsey, PricewaterhouseCoopers, Deloitte, KPMG and Accenture.

Yet, “when we talk about money, the one thing that we cannot cost out is the human factor,” said DeSousa. “We don't want to see that our members are not getting paid accurately, on time, every time.”

“The impact emotionally and mentally on our members is huge. So that's why we're asking PSPC not to make the same mistakes.”