IBM's fight over canceled contract heads to court

The gloves came off this week in an ongoing contract dispute between IBM Corp. and the state of Indiana over whether millions of dollars are owed to Big Blue.

What is not in dispute is that Indiana canceled in October a $1.4 billion contract with IBM to modernize the state’s welfare systems. From there the two sides diverge very quickly.

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Indiana fires IBM from $1.4 billion contract

IBM v Indiana

Indiana v IBM

Both sides filed their lawsuits against the other on Thursday. IBM wants $43.4 million in deferred fees and $9.3 million for hardware and equipment it says the state is still using. Indiana is asking for unspecified damages.

IBM is not disputing Indiana’s right to terminate the contract, but the company wants to be paid for the work and equipment it supplied prior to the termination, according to its filing in the Marion County, Ind., Circuit Court.

Indiana says it paid IBM $437 million between December 2006, when the contract started, and October 2009 when it was terminated. In its filing, the state says in its court filing that it was “left with virtually nothing of value from IBM’s failed performance.”

In a statement Thursday, Anne Murphey, secretary of Indiana’s Family and Social Services Administration criticized IBM for failing to “help our most vulnerable Hoosiers.” She said that IBM’s efforts set the state back in its attempt to fix the welfare system.

Her statements are in contrast to the statements from state officials IBM includes in its lawsuit.

The state praised the infrastructure IBM built as part of the modernization project when it was used to quickly standup benefit processing in the wake of massive flooding in the state, according to IBM’s filing.

On the day, he announced the cancellation of the contract Indiana Gov. Mitch Daniels said welfare fraud had stopped with the modernization project. The year before it started $100 million was stolen.

At the time of the cancellation, Daniels said that IBM had failed to make progress to fix poor service under a corrective action plan put in place in the spring of 2009.

According to IBM, the state wanted the modernized system to have more face-to-face interaction between citizens and that the system use a case-based approach for determining as opposed to task-based approach.

That was a reversal from what the state said it wanted in the request for proposals. IBM was building a system that would allow applicants and recipients of benefits to go online to have transactions with the state, according to its filing.

IBM cites a variety of other factors that led to the termination including political pressure from labor unions and members of the state legislature who were opposed to the outsourcing deal. There also was the economic downturn, which greatly increased the number of applicants using the system, and the severe flooding the state suffered in May and June of 2008. In 2007, the state also created a new public health initiative that was added to the project.

The company also says its relationship with the state changed after Murphey became secretary early in 2009.

According to the state’s filing, in March 2009, Indiana asked for a corrective action plan, which listed 36 categories of deficiencs. IBM also conducted a review and proposed a 360-page plan and a 53-page spreadsheet with action items. Some of the areas in need of improvement included wait times at local offices, high turnover rates for employees, scheduling problems and problems with categorizing imaged documents.

Even if IBM met all the items in the corrective action plan, it would still not be in compliance with the contract. The plan set a deadline of Sept. 30, 2009.

The state said performance did improve by the deadline. Indiana also says that counties that were not moved to the new system were performing better than counties that did move. One measure of poor performance cited by the state was that counties using the moderznized system had a higher appeal rate for denied benefits than the counties that had not moved to the system yet.

The state terminated the contract “for cause,” a point IBM disputes. Indiana’s filing says it doesn’t owe IBM any more money because it is a for cause termination.

For IBM, the dispute isn’t about the $52.8 million it says it is owed, but about the principle, said spokesman Clint Roswell. IBM agreed to the deferred payment approach because it gave the state a set amount it would need to pay each year over the life of the contract, instead of paying larger amounts up front.

“They certainly had the right to fire us,” he said, even though the company disputes Indiana’s charges of poor performance.

Indiana is picking what parts of the contract it wants to comply with. “This is a real strike against business,” Roswell said. “We think this throws the whole procurement process into chaos.”