Indiana Follows Through with Threat: Cancels $1.3 billion Outsourcing Contract

In July, I wrote about the State of Indiana reportedly contemplating scrapping its 10-year, $1.34 billion contract with IBM and its partner Affiliated Computer Services Inc (ACS) 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 a then 18.2%.

Indiana officials warned IBM that it had until September to make performance improvements, and IBM said that it was working with the state to do so quickly.

Well, last weekend, time ran out: Indiana Governor Mitch Daniels terminated the state's contract with IBM.

The Governor's press release said in part that,

"The contract was canceled because the company did not make satisfactory progress to improve services to welfare applicants and recipients under a plan to correct deficiencies."

In its place, the press release went on to say, will be "a hybrid system that will incorporate successful elements of the old welfare delivery system and what is known as the modernized system. The hybrid system will include more face-to-face contact and more localized team-based case management."

The new hybrid system will be run by Indiana's Family and Social Services Administration (FSSA) which has until the 14th of December to develop a detailed go-forward plan.

Whether the FSSA will do a better job than IBM remains to be seen, especially with critics of the original outsourcing contract already saying such an approach will be inadequate.

IBM, which has been paid about $341 million so far on the contract and will be paid for another 60 days or so, protested that the cancellation was "unjustified" and may fight it (or at least try to get some severance package).

An IBM spokesperson said, "IBM rejects the state's claims 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 contract with IBM says "the state may terminate this agreement, in whole or in part, for cause"; the argument will be whether there a legal cause existed.

IBM's partner, ACS, wasn't affected as of yet, mostly because IBM was a bigger target. But it looks like ACS will now get its turn in the barrel.

One Indiana state legislator was quoted as saying, "We're going to be watching closely on ACS, because there is a perception that they are just as bad an actor as IBM."

I don't think we have heard the last of this story.