Indiana Threatens to End $1.2 Billion Welfare Contract

Tennessee isn't the only state with major computer problems. Last week, after just two years, the Family and Social Services Administration of the state of Indiana is reportedly contemplating scrapping its 10-year, $1.16 billion contract with IBM and its partner Affiliated Computer Services Inc (ACS) to privatize the state's welfare system. Among the reasons given is the mishandling of welfare claims; before the contract, the rate was just 4.38%, now it is 18.2%.

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

In February of this year, the privatization roll-out was stopped because state welfare officials were not sure that the new system could handle the volume of claims involving eligibility for food stamps, Medicaid and other state benefits. Because of the current deep recession, nearly 20% of Indiana residents - some 1.2 million people - are currently receiving benefits.

According to another report, however, it may be difficult for Indiana to cancel the contract even if it wanted to do so. One reason is that over 1,500 state case workers were turned over to IBM and ACS in March of 2007 when it began the contract. So who would the state use to do the work?

State officials admit that they have no "Plan B" in place to run the welfare system if it has to cancel the contract, and is hoping that it won't need one. Indiana state officials might be wise to recall Ben Franklin's old maxim: "He that lives upon hope will die fasting."

If I were betting on the outcome, given the current situation and Indiana's lack of realistic leverage, I would wager that what happened between the state of Texas and IBM will be repeated here. As you may recall, Texas Gov. Rick Perry suspended the $863 million, seven-year outsourcing deal it had done with IBM (and its partners) late last year for awhile because of serious performance problems. Talk of canceling the contract was in the air.

However, IBM, after its public scolding by Texas officials, credited back $900,000 back to the state for work not performed properly, and received $6 million less than the contract allowed for missing performance targets.

Once IBM paid the financial penalties and made some performance improvements, the contract quietly continued on as before, since doing otherwise would cause Texas government major operational difficulties as well as cause major embarrassment to those state government officials, including the Governor, who approved the contract in the first place.

I expect the same outcome in Indiana after a lot of thrashing about.

I'll let you know what happens.