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IBM, Indiana Haul Each Other To Court

Big Blue claims state is illegally withholding millions in payments, but Indiana says outsourcing job was botched so badly it should receive compensation.

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At the time, Indiana's welfare administration was overly reliant on outdated client-server technology and time consuming face-to-face meetings with benefits applicants and recipients.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

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