Legal Issues and Welfare and State Government and Lawsuits and Courts and Government & Economic Development and Government and Law

IBM: Indiana canceled deal because of budget woes

April 3, 2012

The real reason Indiana canceled its nearly $1.4 billion contract with IBM for a troubled welfare automation system was state budget problems, a lawyer for the computer giant argued Tuesday. But the state said IBM was more concerned about profit than getting assistance to needy people.

Both sides traded jabs during five hours of closing arguments before Marion Superior Court Judge David Dreyer, who is considering dueling lawsuits in the case. Gov. Mitch Daniels canceled IBM's privatization contract in 2009 amid complaints about long wait times on calls, lost documents and improper rejections from clients and federal officials.

Indiana had sued for the $437 million it paid the company, but Dreyer capped the damages the state could seek at $125 million. IBM is seeking about $100 million that the company claims it's still owed.

IBM attorney Steve McCormick said the Armonk, N.Y.-based computer company simply gave the state officials what they wanted: Switching from in-person visits at county welfare offices to taking applications online and via remote call centers.

"The problems were inherent in the system that the state chose," McCormick said.

But John Maley, one of the attorneys hired to represent the state, said IBM simply didn't live up to its end of the billion-dollar deal. He said the company repeatedly failed to hit benchmarks that it agreed to meet, then blamed its failures on a surge in applications due to the economic downturn and the floods that displaced thousands of people in 2008.

"IBM said it would be accountable when it sold modernization to the state, but now it offers excuses," Maley said. "It's time for IBM to finally be held accountable."

He said IBM failed to process applications in a timely manner, which he said was its primary obligation under the 2006 contract. He said IBM didn't devote enough resources to provide the service it had promised, and cited a company executive's testimony that IBM couldn't shirk its fiduciary responsibilities."

So the shareholders trump a million needy Hoosiers," Maley said.

McCormick said timeliness wasn't even mentioned in the contract. The main goal, he said, was to free welfare applicants from the chore of traveling to a county welfare office, and a secondary goal was to save the state money in administrative costs. He played audio of Daniels announcing at a 2009 news conference that the automated system had saved the state $40 million.

McCormick said the state never complained until it decided to break off the deal, and he said internal emails showed that state officials were planning behind the scenes to ditch IBM months before Daniels cancelled the contract in October 2009.

That was about the same time Daniels ordered state agencies to cut spending in the wake of multimillion-dollar revenue shortfalls.

"They terminated the contract because of their budget problems," McCormick said.

Dreyer is not expected to rule for several weeks.

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