Contract Battle Showed Perot’s Skill at Hardball

Anyone looking for clues about how Ross Perot can operate in the corridors of power might consider what he did 12 years ago when Texas officials nearly took away the government data processing contract on which he built his name as a businessman.

Perot was vacationing in London in July, 1980, when the news hit like a thunderclap: Texas officials said they would transfer the state’s four-year, $2-billion Medicaid processing contract from Perot’s Electronic Data Systems to an upstart New York firm.

Three days later, an angry Perot was at home, and the officials were wavering. Twenty-four months after that, Perot still had the contract, two bureaucrats were out of jobs and a frustrated competitor was laying plans to sell its health-care business.

It was a dazzling coup. Perot pulled it off through a blitzkrieg of controversial secret meetings with state officials--detailed in previously undisclosed court records--along with a barrage of allegations against his adversaries and an expensive lobbying campaign like few the state has seen.

It also is an episode demonstrating the traits that are now at the center of questions about how the Texas billionaire, who is planning an independent presidential candidacy, might govern. Perot supporters see them as evidence that Perot is a man who could get things done even in an age of governmental gridlock. But it is also the kind of story that convinces the skeptics that, although Perot was never found to have done anything improper, the diminutive doer sometimes does too much.

It was “an episode that, like a dead mackerel in the moonlight, both shines and stinks,” the Austin American-Statesman editorialized at the time.

However it is interpreted, the story portrays the way Perot often accomplishes his goals: by going to the top, using his network of contacts and media skills and never hesitating to spend his fortune or make blistering personal attacks if he believes they will help him achieve his ends.

“This showed me the man really knows how to play hardball,” says Frank N. Ikard, an Austin attorney who represented Perot’s rival for the contract in the early going. “He orchestrated every political string in the state government. . . . People in Texas always knew you didn’t challenge Perot on his home turf. After this, outsiders knew it too.”

For Perot and his firm, the stakes in the Texas contract fight were considerable: Medicaid, the federal-state health care plan for the poor, aged and disabled, was paying Perot’s company to process claims and handle premiums for 700,000 Texans--the largest such contract in the country. Since 1974, when it first received the business, EDS had used the prestige and profits associated with the contract to help it expand into other states.

When the state put the contract out for bids again, Perot’s company reported that the Medicaid processing work was providing it with profits of $3.8 million a year. But rival Bradford National Corp. of New York City put the figure at $9.6 million a year and submitted a competing bid it said would save taxpayers $20 million to $50 million annually.

After almost a year of study, the staff of the Texas Department of Human Resources and its consultant agreed that the state would be better off switching contractors. They found Bradford’s bid to be cheaper and technically superior, as judged by several criteria.

In addition, it was disclosed later, the state staff sometimes found EDS employees to be difficult to deal with.

The award was announced July 15, 1980, and all hell broke loose in the following months as Perot himself stepped into the affair. Threatening lawsuits and accusing the state staff of purposefully misinforming the human resources agency’s governing board about the relative merits of the bids, Perot mobilized EDS to dig into the background of the contract-award panel, the competing firm and the consultants and experts hired by the state.

Returning from London, Perot began hopscotching across the state in his jet for a series of secret meetings with the three members of the human resources board that oversees the big agency. Between July 18 and July 25, according to his own deposition in a lawsuit he filed to keep Bradford from enforcing the new contract, Perot met secretly with board Chairman Helmar Moore four times, with member Raul Jimenez three times and with member Terry Bray once.

When it was disclosed that the board members were hearing only EDS’s side of the dispute, without giving equal time to the competition, Bradford officials denounced the sessions as a violation of law and all rules of fairness. Lt. Gov. William P. Hobby said that if state law did not forbid such meetings, maybe it should be changed to do so. Two state representatives called for hearings to investigate the situation.

Despite criticism of the secret meetings, the Human Resources Board voted on July 29, 1980, to reconsider its decision awarding the contract to Bradford. Although board members insisted that the move was made entirely on the merits, Chairman Moore acknowledged that other factors came into play.

“This is a state agency, and politics are involved,” Moore said at the July 15 board meeting.

Moore, a rancher, seemed more than a little charmed that Perot, as part of his lobbying effort, had at one point stalked through the East Texas brush to buttonhole him. He had to admire a billionaire businessman who left his suit-jacket on his jet, swapped stories and “insists on being called Ross,” Moore said at the time.

Moore’s four meetings with Perot included a daylong session in which he interrupted a vacation to pick up Perot at the Salt Lake City airport, Perot said in the deposition. The discussions were wide-ranging: Perot used charts and graphs designed to prove, among other things, that the state staff had foolishly added up some numbers to conclude that EDS was the higher bidder.

During his secret discussions with board members, Perot laid out charges that Bradford had failed to disclose serious problems with several of its other contracts, including the huge New York state Medicaid contract. He presented his theory of how Arnold Ashburn, then an assistant commissioner of the human resources department who was supposed to oversee the contractor, was “a disturbed individual” and favored Bradford because of a secret plot to expand his bureaucratic empire.

Ashburn is a veteran public official with a reputation for competence. But in this case, he “felt that everybody was out to get him,” Perot said in his deposition.

In a statement issued Sunday in response to questions, Perot’s organization said Ashburn had been removed as chairman of the panel evaluating the bid one month before the human resources board announced it would give the contract to Bradford. The statement said Ashburn felt EDS had “done things to undermine his position and limit the progress of his career.”

Perot argued that Ashburn’s secret agenda was to give the contract to Bradford with an expectation that Bradford would fail and that Ashburn would be able to make the data processing work a state task, not something for an outside contractor.

Indeed, in court papers, EDS laid out its belief in a far-reaching “conspiracy” that included Ashburn, Human Resources Commissioner Jerome Chapman, a deputy attorney general litigating the related lawsuit Bradford officials and state consultants.

This conspiracy was never proved, and the agency board later adopted a resolution citing the good work of its staff in the contract dispute.

Perot, in his organization’s statement Sunday, said “we don’t know of any formal findings that the allegations were either true or false, although the evidence to support them was strong.”

The conspiracy charges recall other allegations Perot has made through his career about secret machinations against him by adversaries.

After General Motors bought EDS in 1984, Perot accused executives at the giant auto maker of plotting to expand their authority at his expense. When he was working on the issue of whether American soldiers were still being held captive in Southeast Asia in the mid-1980s, Perot charged that Pentagon officials were covering up information suggesting some POWs remained alive.

EDS’ allegations in the Medicaid case were numerous. The company challenged the credibility of three consultants who had been hired by the state to assess how well Bradford was performing in New York. The consultants had judged the company’s work to be good. One of the consultants was Charles McDermott, then comptroller of the Oklahoma Department of Human Services. Perot called his objectivity into question because McDermott allegedly worked for a woman who had once publicly denounced Perot.

McDermott says that the woman, Oklahoma state medical director Dr. Bertha Levy, was in fact not his boss. He said he heard about the charge only by reading a newspaper story.

“I thought it was terrible,” McDermott said. “I never got a chance to defend myself.”

In the course of the lawsuit in the dispute, EDS also alleged that a New York state official who oversaw New York’s Medicaid contract was simultaneously benefiting from a consulting contract with the Bradford firm. And it called attention to the fact that the Navy was investigating the New York company for allegedly incorrect billing practices in a computer-services contract--a charge that eventually led the Navy to impose a multi-million-dollar fine on the company.

Whatever the merits of its various allegations, EDS lawyers pounded away at everything with tremendous force.

“They were going at it the way Geraldo Rivera would,” recalled one attorney who worked on Bradford’s side. “No detail was too small to blow up into some super-secret awful fact.”

The allegations apparently had the intended effect. Two weeks after the Human Resources Board had halted the contract award, the agency’s top two staff members, Commissioner Chapman and Deputy Commissioner Wesley Hjornevik, resigned.

“I felt my credibility with the board chairman had been destroyed by Ross Perot,” Hjornevik, whom Moore once called “a genius,” said in a deposition. Chapman, now a consultant in Austin, testified in a deposition that he quit because the board had “questioned my competency.”

Meanwhile, Perot had done everything he could to bring his gripe to the attention of the state’s highest officials.

He was an old friend of then-Gov. William Clements and was then heading Clements’ anti-drug task force. When word of the board’s decision came down, Perot called the governor one Sunday morning to air his complaint.

Accounts of what was said in that conversation differ. Perot said at the time that the governor told him to talk to the human resources board. But the Republican governor insisted at a press conference that he had given Perot no counsel and that the call was only to inform him of what had happened.

Perot also sought out Texas Atty. Gen. Mark White, who told him he believed Perot should talk directly to the agency board members.

Later, in a formal opinion, White found that Perot’s meetings with the board members did not violate the state Administrative Procedures Act’s prohibition on “ex parte communications.” Although Bradford officials were not there to give their side, the rule applies only to cases in the courts, White wrote.

Countered Peter Del Col, Bradford’s chief executive: “If this isn’t a disputed case, neither was the Alamo.”

In its statement, Perot’s organization said Perot did not ask either Clements or White to use their influence with the board. Perot and EDS officials “did not seek to use any political influence in (their) visits with board members. Their arguments were all on the merits,” the statement said.

At the same time he was appealing to the top, Perot was employing the best. One of his top litigators was the previous Texas attorney general, John Hill, who in 1984 was elected chief justice of the state supreme court.

State officials insisted they gave Perot no break they would not have given anyone else. But the scene appeared quite different from the vantage point of Bradford, a company founded by three Brooklynites that was one-third the size of EDS.

“They had the whole political Establishment arrayed against us,” says Bradford lawyer Ikard. “We were outmanned and outgunned.”

The EDS team tried other tactics as well. With no notice to Bradford officials, EDS representatives showed up at a meeting of the state purchasing commission, which had some responsibility for procurement by state agencies, to urge that it intervene on its behalf.

One member stalked off in anger at the tactic. But Chairman Robert Dedman, a Clements appointee, promised he would informally call the Human Resources Board to remind its members of the need to follow procurement rules.

Ikard only heard about the meeting in an anonymous call from a state employee. He was furious. The failure to give the other side notice of its intention to appear at the meeting “was a fairly egregious breach of procedure and etiquette,” he said.

Perot and his top lieutenants also launched a publicity campaign. While Bradford officials urged the board to require both sides to remain publicly silent, the EDS team gave a series of interviews that argued their case and accused the other side of incompetence and conspiracy. At that point, Bradford, too, went public, running full-page ads in all Texas newspapers.

Gov. Clements, meanwhile, had gotten involved in the case again by suggesting that Chairman Moore hire an outside specialist to re-examine the contract.

The choice was the Austin office of Touche Ross, the giant accounting firm. Hired in October, 1980, Touche Ross came up with a report in January, 1981, that appeared to give the board the flexibility to do whatever it wished.

The accountants said the Bradford bid might save the state as much as $42 million a year over allowing EDS to continue the Medicaid work. Bradford was judged to have an edge in customer service, and its team might improve on the “less-than-satisfactory” relationship that the EDS team had with state officials, Touche Ross said.

But Touche Ross also concluded that it might be risky to change from an experienced contractor. And it acknowledged that EDS, by using its system to control Medicaid costs, might prove to be the lower-cost contractor.

Touche Ross also criticized the state’s unusual Medicaid insurance program, in which the state maintained a huge and costly cash reserve by paying the contractor to insure each person covered by the program.

When the report was issued, both sides claimed victory. But a week later, the board threw out both bids and said it would restructure the health care insurance system. EDS was given a temporary extension of its contract, and Bradford was paid $3.1 million to compensate it for loss of the contract.

The board ultimately adopted a new system intended to cut the size of the cash reserve and reduce the contractor’s liability if claims exceeded premiums. But the squawking was not over, because of the 700 insurers and computer companies that had been invited to bid on the four-year contract, only one did: EDS. Perot’s firm finally was awarded the new contract in May, 1982.

Some competitors thought Texas had crafted the contract in a way that would guarantee the job to its favorite son.

“There were several points in some of the conditions of procurement that made us think that it wasn’t a free-and-open competition to all comers,” Jim Furlong, a spokesman for Computer Sciences Corp., of El Segundo, Calif., said at the time. (Today, a spokesman says the company was not trying to suggest the contract was fixed.)

Bradford officials cited the potential expense as the reason they did not bid. According to members of their team, they were shocked at what had happened in Texas, but some had expected the outcome as soon as Perot began meeting with board members.

“Our side didn’t get a fair shake, or that’s the way I remember it as an attorney,” says Ikard.

In its statement, Perot’s organization said Sunday that the contract was not written to favor EDS. It said although it is not possible to know why others did not bid for the contract, “there were very few companies with the financial strength and confidence in their ability to perform that it would take to assume that level of risk.”

In December, 1982, Bradford sold its health-care unit to McDonnell Douglas Corp. Some believe the transaction never would have occurred if Bradford had won the Texas contract.

While Perot clearly demonstrated his tenacity in the 1980 contact fight, events of a few years later showed that he does not always get his way. In 1988, when the Medicaid contract was put out to bid again, Perot had sold off EDS to General Motors. His new firm, Perot Systems, tried to underbid EDS for the job. It failed, and EDS still holds the contract.

Indeed, some see the entire 1980 episode as not that unusual for a case in which politics and business mix--and certainly not in a state that reveres money and political rank as much as Texas.

“Ross plays hardball, but so does everybody else,” says George Shipley, a political consultant in Austin. “I’m not aware that playing hardball is a liability for running for President.”