Indiana is not allowed to collect the $437 million it sought from estranged contractor IBM following a welfare system upgrade, a judge ruled Wednesday, July 18. Neither side deserved to win the dispute, said Marion County Judge David Dreyer in his order.

"Overall, both parties are to blame and Indiana's taxpayers are left as apparent losers," Dreyer wrote. The judge attributed the ordeal to “misguided government policy and overzealous corporate ambition."

IBM Senior Vice President and General Counsel Robert Weber supported the court’s decision. "This case was all about whether the state would fulfill its clear and explicit contractual promises," Weber said in a statement released Wednesday. "The court's decision is an important one for all companies who do business with the state because it makes clear that the state is not above the law."

IBM’s claims for damages were also denied, although they were granted $12 million for equipment kept by the state. "They owe us for servers, hardware, automated processes and software that they're using today and they're not paying for," an IBM spokesman told Govtech.com two years ago. IBM was also awarded $40 million in a summary judgment before the trial.

Indiana plans to appeal the ruling, local TV station WISH reported.

“We’ll seek and expect a reversal, and either way, it’s all been well worth it to solve the problem we set out to fix,” Indiana Gov. Mitch Daniels said in a statement about the judge’s decision.

Once recognized by Daniels as worst-in-the-nation, Indiana’s welfare-to-work system was to be improved by IBM as part of the state’s modernization plans. But Daniels canceled IBM’s nearly $1.4 billion contract in 2009, just three years into a 10-year upgrade plan. The state contested that the contractor did not live up to its promises, a claim supported by the judge’s decision but hedged by his comments that placed blame on both sides.

The plan, wrote Dreyer, was to “fix Indiana’s poorly performing welfare system by inserting an untested theoretical experiment, and substitute personal case workers with computers and phone calls.” The intentions of both parties were good, the judge wrote, but “the competence of the parties in this project is sometimes open to question.”

Contributing to the judge’s decision, was evidence supporting IBM that included the characterization of the system as a definite improvement over the state’s previous system, if not unconditionally meeting the state’s expectations of the vendor.

According to the Indiana Family and Social Services Administration (FSSA,) there were problems when citizens needed to update their information in the system. For example, if someone submitted a change of address or phone number, IBM tended to be slow to transmit that change into the database used by the eligibility determiners. Consequently paperwork was sent to wrong addresses and phone calls were made to incorrect phone numbers.

Despite the huge amount of money at stake in the proceedings, it’s not a total bust for Indiana. Daniels said Indiana will retain electronic document technology, fraud prevention measures and other improvements developed by IBM.

"The fraud which was rampant in the Indiana welfare system has apparently stopped," Daniels said three years ago. "There hasn't been a single allegation — let alone conviction — whereas there were dozens before. And official reports say more than $100 million was stolen in the last year before we began to try to make this change.

The 10-year system modernization plan showed signs of problems as early as June 2008, when the FSSA’s secretary said the project had to be halted due to regional flooding. Initial hiccups — like glitches and technical problems — from the outset were dismissed as typical problems found at the beginning of every big project.

Indiana IBM Decision

Colin Wood  |  Staff Writer

Colin has been writing for Government Technology since 2010. He lives in Seattle with his wife and their dog. He can be reached at cwood@govtech.com