IBM, Indiana Haul Each Other To Court

IBM and the state of Indiana on Thursday filed claims and counterclaims against each other in an Indianapolis courthouse over a collapsed outsourcing deal under which IBM was to have modernized the state's aging welfare administration system.

Indiana fired IBM as the primary contractor in October 2009 and now wants Big Blue to pay back hundreds of millions of dollars to make up for its "failed performance," according to the state's complaint.

For its part, IBM says its work to date on the initiative improved service to residents, and saved Indiana millions through operating cost reductions and curtailment of fraud.

IBM said it also brought 1,000 new jobs to Indiana. It wants the state to surrender $53 million it says it's still owed on the contract.

Indiana's Family and Social Services Administration tapped IBM in 2006 for a ten-year, $1.3 billion revamp of the creaky systems it was using to process applications for Medicaid, welfare, food stamps, and more than 160 other public assistance programs. IBM was also to handle a number of back office functions related to the services.

The arrangement called for about 1,500 state employees to be transferred to IBM.

At the time, Indiana's welfare administration was overly reliant on outdated client-server technology and time consuming face-to-face meetings with benefits applicants and recipients.

"IBM proposed a modernized system that included moving away from FSSA's client-based, face-to-face system to a task-based, centralized system, emphasizing IBM technology," the state noted in its complaint, filed in Marion County Superior Court.

"FSSA believed the IBM solution would significantly improve the State's record in reforming welfare and would significantly reduce the errors in the Public Assistance Application Process," the state said.

But problems began when IBM attempted to roll out a pilot program to test certain aspects. The rollout "was delayed multiple times in 2007 and 2008 because of performance concerns, among other things," according to the state.

"By January 1, 2009, only 59 of Indiana's 92 counties were transitioned" to the new system, "falling far short of the original project rollout plan," Indiana stated. Ultimately, Indiana governor Mitch Daniels canceled the contract in October, 2009.

"FSSA was left with virtually nothing of value from IBM's failed performance, and indeed is now faced with expending hundreds of millions of dollars in re-programming and eventually entirely replacing IBM's failed systems, restructuring procedures and client services, and reengineering IBM's 'Modernized' system," the state said.

"FSSA's damages are significant and growing," it added. Indiana is seeking unspecified breach-of-contract damages from IBM that could total in the hundreds of millions.

But IBM countered that a mix of politics and exceptional circumstances were to blame for the project's problems and delays, and it claimed Indiana is now illegally withholding millions in payments required by the contract.

"By refusing to honor certain contract provisions, while at the same time relying on other provisions to remove IBM from the project, the State threatens to undermine the integrity of a public procurement process under which thousands of private companies conduct business with Indiana expecting and depending on the State to fulfill its contractual commitments," IBM said in a statement Thursday.

"The FSSA is in the process of implementing a 'hybrid' system using IBM technology, infrastructure, applications, automated processes and systems," IBM said. "The FSSA has announced that the hybrid system has been so successful that it wants to expand it—underscoring IBM's contributions to an improved welfare eligibility system in the state," the company added.

IBM further maintains that it had no control over many events that, it says, were the root cause of delays and other problems that plagued the system's development.

For starters, IBM contends that political factors resulted in significant changes to the system it originally intended to deploy—to the point where it was almost unrecognizable, even to IBM.

In early 2006, the state, in response to opposition from local labor groups opposed to privatization, commissioned a special review committee to eyeball the proposed project line-by-line.

"For seven months, the Review Committee examined every detail of the Modernization Project and demanded numerous changes to align the project with the Review Committee vision," IBM stated in court papers, also filed in Marion County.

"The final plan was not primarily the IBM Coalition's, but rather was primarily the product of significant Review Committee revisions," IBM stated.

IBM further contends that the severe economic downturn that began in 2007 meant thousands of more Indiana residents than expected were forced onto the welfare rolls during the period as the state's unemployment rate doubled from 4.5% in 2006 to 9% in 2009—further taxing the rollout plan.

The assumption "that there would be no material economic downturn in the State of Indiana was simply wrong," IBM said, in its complaint.

And in early 2007, Indiana introduced a public health benefits program, Healthy Indiana Plan, that more than doubled the expected number of healthcare benefits applications in the months that followed.

Adding to the stress on the system, Indiana was hit by massive flooding and other severe weather in the spring of 2008 that left thousands homeless and without basic services. "The State needed help to screen these new applicants, and it turned to the IBM Coalition," IBM said.

IBM said it acknowledges Indiana's right to remove it from the contract if it wasn't satisfied with the work, but insisted the state has no legal grounds for withholding more than $53 million in deferred fees and equipment charges. IBM is asking the court to order the state to pay up.

A trial date has yet to be set.