IBM and Indiana Suing Each Other Over Canceled Outsourcing Deal

IBM and Indiana sue each other over funds connected to the state's canceled outsourcing deal for maintenance and construction of social services eligibility system.

by / May 13, 2010

Photo: Indiana Gov. Mitch Daniels

Indiana and former outsourcing partner IBM sued each other Thursday, May 13, the latest chapter in an increasingly sour relationship that went bad when the state decided last year to cancel an ambitious social services system.

In October 2009, Gov. Mitch Daniels pulled the plug on Indiana's 10-year, $1.6 billion outsourcing contract with IBM to streamline welfare eligibility in the state. Launched in 2007, the new system let citizens apply for welfare benefits online, in person or via telephone, and it implemented process changes designed to speed up and standardize eligibility determinations. Daniels called the concept -- which drew criticism for high error rates and slow processing of eligibility requests -- unworkable.

In Thursday's developments, Indiana sued IBM for $1.3 billion, claiming breach of contract. The Indiana Family and Social Services Administration (FSSA) claims that processing errors from IBM led to faulty benefits denials that brought harm to needy citizens. The state wants IBM to pay back $437.6 million the company received for running the system through Jan. 31, as well as extra damages to pay for third-party lawsuits, federal penalties and state employee overtime worked in connection with the matter.

IBM countersued the FSSA on Thursday for $52.8 million for the equipment it left in place. The FSSA now uses that equipment, operated by state employees, to determine benefits eligibility.

"They owe us for servers, hardware, automated processes and software that they're using today and they're not paying for," said IBM spokesman Clint Roswell.

The contract between Indiana and IBM stipulated that the state must reimburse IBM for equipment costs in the event of a cancelation for any reason, according to Roswell. The FSSA insists IBM failed to perform its contractual obligations, which constituted a breach and made Indiana able to collect damages.

Each side disputes the other's claim about what caused the system's delays and faulty benefits denials. Indiana says data errors in the IBM system that state workers used to determine eligibility led to backlogs and service denials. Meanwhile, IBM blames the recession and natural disasters that occurred in the state, such as the 2008 Midwest floods, which led to higher than expected social service caseloads.

FSSA spokesman Marcus Barlow said there was never a problem with the number of caseworkers at the FSSA. "There was more staff working on eligibility during IBM's tenure than before IBM came, yet the results show that once IBM put their system in place, timeliness got worse, error rates went higher. Backlogs got larger," Barlow said.

He blamed IBM's "task-based" system for many of the errors and delays. When the FSSA solicited the project in 2006, state officials told IBM they wanted a system that would eliminate the need for assigned caseworkers. In response, IBM offered a task-based process meant to distribute the different workflows of the eligibility process to specialized workers. After they had done their jobs, state workers would then use the data to determine benefits eligibility.

Under the modernization program, 1,500 of the FSSA's 2,200-member work force were transferred to IBM, which was required to offer them jobs for a minimum of two years. FSSA employees still made all final eligibility determinations, but private workers helped citizens through the application process until the application was turned over to a state employee for authorization.

According to the FSSA, problems happened 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, Barlow said. This meant those workers were often stuck with inaccurate information when they needed to determine eligibility.

"They would end up sending documents to the wrong address. For phone interviews, they would end up calling the wrong phone number," he said.

Roswell said delays happened occasionally in the IBM system, but that an inadequate number of caseworkers and high demand were the primary problems.

He also pointed out that the number of applications IBM was hired to process was far higher than what Indiana estimated during contract negotiations. The FSSA requested that IBM be capable of processing 4,200 applications per month. But demand for services surged when the economy tanked. "Instead of 4,200, we ended up having to serve applications of over 10,000," Roswell said.

Barlow contested Roswell's contention that errors and delays due to IBM were minimal. Barlow said that IBM acknowledged serious problems with the system in a corrective action plan it agreed to in 2009.

"They sent an IBM team to our state. The team evaluated their system and came up with more than 200 things they needed to change," Barlow said.

The FSSA has since returned to using assigned caseworkers for welfare recipients. Roswell pointed out that deviating from that model was Indiana's idea, not a proposed solution by IBM.



Andy Opsahl

Andy Opsahl is a former writer and features editor for Government Technology magazine.

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