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IBM, state make closing arguments

Ruling in welfare-system case weeks away

– Hundreds of millions of state taxpayer dollars hung in the balance Tuesday as lawyers for the state of Indiana and IBM Corp. argued over the failed welfare modernization experiment that plagued needy Hoosiers for several years.

Lawyers for the state claimed in closing arguments that IBM failed so severely in its takeover of welfare eligibility services that the company should pay the state $177 million in damages. The judge earlier capped a possible reward at $125 million.

“Were there breaches? Scores and scores and scores,” said John Maley, the state’s primary lawyer. “Needy Hoosiers were not being well served.”

Maley said IBM clearly did not meet its contractual obligations to Indiana and the state suffered substantial damages by having to create a new hybrid system.

“It’s time for IBM to finally be held accountable,” Maley said.

But IBM contends the state reaped benefits from the company’s system and owes IBM $100 million for equipment, termination fees and creation of a workload management system.

Steve McCormick, attorney for IBM, argued further that the state intentionally looked for a way to terminate the contract to get out of paying additional dollars to convert the contract to a new hybrid system.

“This is not about IBM’s performance,” he said. “This is all about saving the state from having to pay.”

The six-week trial before Marion Superior Court Judge David Dreyer included more than 130 hours of testimony and 100 witnesses.

The question is whether IBM breached a $1.37 billion, 10-year contract with the state.

The goal was to modernize the state’s welfare system by moving from a paper-based system to one where Hoosiers seeking food stamps, Medicaid and other public assistance no longer had face-to-face meetings with case managers, instead applying online and through call centers.

That system is known as remote eligibility.

In October 2009, Gov. Mitch Daniels canceled the contract after three years because of service complaints about the automated system.

The state then sued IBM in May 2010, and IBM countersued.

Maley said the case is really just a simple contract case in which IBM did not meet performance metrics. He hammered specifically on IBM’s timeliness failures, or not processing applications within a federal standard.

He said the company could have invested more in the project by hiring more workers to improve the metrics, but IBM executives were focused on profit.

“Shareholders trump a million needy Hoosiers,” Maley said.

The state put IBM under a 90-day corrective action plan in the summer of 2009, but the backlogs and other call center delays continued.

McCormick acknowledged problems with the system, saying it was a matter of changing years of habits for clients and workers. And he said the core concepts of the new system design – including state employees and coalition staff in separate offices working on the same caseloads – as well as remote eligibility, were the basis of the struggles.

“This was a wrenching, difficult transition,” he said. “Everybody understood there were going to be problems.”

He noted that the tenor of the state’s relationship with IBM changed in January 2009 when Anne Murphy took over as secretary of the Indiana Family and Social Services Administration. Within days, she fired off an email asking whether IBM might be in default.

McCormick also said a three-month corrective action plan was just a sham – a ruse to fire IBM when it was up in October 2009.

As proof, he showed an email between Murphy and then-department spokesman Marcus Barlow from the summer of 2009 where Murphy wanted Barlow to say negative things about IBM to the media. He warned it would be the first time to do so and said, “we just need to survive until October. Then we’re going to drop bombs ala Hiroshima and Nagasaki.”

McCormick said of the 22 corrective-action-plan items, all were improved except the four controlled by subcontractor ACS, whose liaison was working in Murphy’s executive office. He reiterated several witness statements that suggested ACS was purposely not trying to improve so IBM would get fired.

The state retained ACS in the hybrid system.

“They engineered that to happen and then come in here to use the failure of the (corrective action plan) against us,” he said. “They terminated this contract because of their budget problems.”

Both sides still have extensive briefs to file in the case, and Dreyer isn’t expected to make a decision for weeks.