Indiana and IBM Sue Each Other Over Failed Outsourcing Contract

Last October, the State of Indiana decided to terminate its 10-year, $1.34 billion contract with IBM to privatize the state's welfare system. Among the reasons given was IBM's alleged mishandling of welfare claims; before the contract, the rate was just 4.38% but it had climbed to 18.2% by July of that year.

In its place, the state said it would develop a hybrid system incorporating what it called the "successful elements of the old welfare delivery system" and a "modernized system." This hybrid system would include more face-to-face contact and more localized team-based case management.

At the time, an IBM spokesperson said, "IBM rejects the state's claims [of non-performance] and believes the state's actions are unjustified. IBM will take action as appropriate to protect its rights under its contract with FSSA [Indiana's Family and Social Services Administration] ."

Well, this week both IBM and the State of Indiana decided the appropriate action was to duke it out in court.

According to multiple stories in the Indianapolis Star (here, here, here and here), the state paid IBM $437.5 million of its $1.34 billion, 10-year outsourcing contract, along with an additional $2.64 million in closing costs. The state also says that IBM has submitted over $125 million in additional the company claims it is still owed under the contract.

Indiana has told IBM that not only will it not be paying the $125 million, but it in fact wants its $437 million back and more.

As reported in this Indy Star article,

"Marcus Barlow, a spokesman for FSSA, said the state, in its lawsuit, is seeking reimbursement of every dime it has paid IBM; reimbursement of all overtime state employees incurred because of problems with IBM’s performance; and also wants IBM to be responsible for any federal penalties or damages from any lawsuits filed by others because of the welfare system’s shortcomings."

IBM, in turn, has decided to counter-sue Indiana, claiming that it is owed both the $437 million as well as the $125 million it has billed the state, and that it isn't responsible for any other current or future damages.

You can read Indiana's court filing here, and a redacted version of IBM's here, courtesy of the Indy Star.

What is fascinating to me is how nasty things have gotten.

The state is claiming that IBM's outsourcing efforts were totally worthless, which has gotten IBM more than a little bit miffed.

In fact, a state spokesperson yesterday called the IBM lawsuit nonsensical, and that it was trying to take credit for the success of the new, hybrid system. Quoting from the Indy Star, spokesperson Barlow said,

"How they [IBM] can say with a straight face that they in any way helped the state is mindboggling."

An IBM spokesperson named Clint Roswell was then quoted in the same Indy Star article as saying that IBM "can certainly say with a very straight face that they are using IBM technology; that’s why this program is working. The hybrid is just a matter of adding some more bodies to it."

IBM spokesperson Roswell was further quoted in today's Indy Star article as saying,

"It's our services. It's our hardware. It's our software. It's our databases, our whole system that we set up, and now they're using and they don't want to pay for it."

But the state says in its lawsuit that it "was left with virtually nothing of value from IBM's failed performance and indeed is faced with expending hundreds of millions of dollars in reprogramming and eventually entirely replacing IBM's failed systems."

There's more, but you get the picture.

Ah, there are few things that can match watching an IT-related legal dispute play out in the press for its pure entertainment value.

Risk Factor readers can feel free to set the initial odds on:

1.  the State of Indiana getting all $437 million back;
2.  IBM getting to keep the $437 million and getting paid the $125 million it says it's owed;
3.  the State of Indiana getting some of the $437 million back;
4.  IBM getting to keep the $437 million and gets paid only some of the $125 million it says it's owed;
5.  Indiana and IBM agreeing that $437 million is fair and appropriate, and the $125 million claim being dropped;
6. a compromise being worked out that is kept confidential, with each side saying it won.

I will provide blow-by-blow updates on this dispute as it evolves.