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By: Audrey B.

The Big Blue is making the state of Indiana and its residents see red. In a series of events that began with the signing of a very profitable outsourcing deal between the state of Indiana and technology outsourcing company IBM, the deal has now ended up with IBM filing a countersuit against Indiana late last week in an affair that began as, well, somewhat good, to bad and now, to worse.

The deal began with the best intentions in mind, from Gov. Mitch Daniels, who envisioned that the deal would make, “America's worst welfare system better for the people it serves.” As early as May 2006, there was already much talk over the proposed deal. IBM and Accenture (NYSE:ACN) were the original contenders and at the time many concerns were raised over the two companies’ “spotty track records”.

IBM and Indiana signed the $1.16 billion deal on December 2006, with IBM leading a group of ten companies, the group included now Xerox (NYSE:XRX) subsidiary, ACS. The contract was a ten year agreement to manage and process the state of Indiana’s applications for food stamps, Medicaid and other welfare benefits for its residents.

What follows is a sordid affair of failed attempts at the automation of the welfare system and software problems that plagued the deal, leading to delays in food stamp processing and loss of benefits. By the time 2009 came, the problems in the implementation of the contract had become so numerous that Sec. Anne Murphy of the Indiana Family and Social Services Administration (FSSA) requested IBM to submit a corrective action plan to address the problems on July 2009. The request called for the cancellation of the deal if and when IBM failed to improve the situation by September 2009. Based on IBM’s report, fixing the problems would cost Indiana almost $180 million more than the initial cost of the deal.

Come October 2009, Indiana announced that they had indeed cancelled the deal with IBM, citing failure to act on the proposed improvements to the satisfaction of the state. Instead Indiana moved on to a “hybrid system” involving the companies that had worked with IBM on the deal, including ACS, eliminating the “middle man” IBM. IBM meanwhile, believed that the state’s moves were unjustified, blaming the recession and high unemployment for the deal’s performance leading up to the cancellation.

The real ruckus however, began just last week as Indiana filed a lawsuit in Marion county Indiana on the 13th of May this year for breach of contract and actions which included denying Medicaid to a cancer patient because she missed her welfare appointment while hospitalized, denying welfare benefits to a deaf person because she could not do a telephone interview, and a nun who lost Medicaid benefits for being ‘uncooperative’ when she missed a telephone interview scheduled on a Holy Day and which the nun had requested to be rescheduled.

IBM, meanwhile, was quick to counter with a lawsuit against Indiana. The company is “seeking payment owed by the State of Indiana for IBM's work to revamp and modernize Indiana's antiquated and highly inefficient welfare eligibility system.” IBM cited that; although Indiana could cancel the contract, the state was still required to reimburse IBM for deferred fees and equipments costs arising from the deal. Indiana is seeking more than $1.3 billion in damages from IBM, while IBM’s countersuit is asking for $52.8 million.

IBM is no stranger to government contracts going awry and handling lawsuits. Last year, the company was sued by Philippine company, Government Service Insurance System (GSIS), following a government outsourcing contract, allegedly due to IBM “supplying defective database software” that caused the GSIS pension fund’s computer system to crash. IBM also filed a countersuit against the GISIS.

IBM’s problems have become a sorry state of affairs indeed, with this now hounding IBM; the company certainly has a lot to be blue about.

Disclosure: No position

Source: IBM vs. Indiana: Big Blue Makes Indiana See Red