The State of Indiana has canceled a $1.3 billion, 10-year outsourcing contract with IBM saying the company failed to deliver on a welfare modernization effort.

The contract had been under fire for many months, and was terminated despite a corrective action plan created by IBM earlier this year to address many of the system's problems.

"The IBM method had the best of intentions, but it was very flawed in concept. The system wasn't working and it wasn't getting better despite best efforts," Indiana governor Mitch Daniels said in a press conference on Thursday. "It looked good on paper, but did not work in practice."

IBM's system, which planned to revamp case management and significantly reduce face-to-face meeting requirements via more computerized processes, led to incomplete applications and long delays in benefits approval. Daniels conceded that the new system didn't work because welfare requires more substantive face-to-face conversation with case managers. Earlier this year, Indiana forced IBM to make some overhauls to its effort and fined the company $260,000.

Even the federal government had expressed concerns about IBM's efforts,l noting ast year bad and worsening food stamp application processing times during a pilot test. According to a letter from the Department of Agriculture from June 2008, about 75% of food stamp applications were approved within 30 days across the state, but in the pilot region, only about 50% of food stamp applications were approved within 30 days. In that letter, the Department of Agriculture's Food and Nutrition Service urged the state to remedy these problems before rolling out the new systems any further.

Still, an upgrade was and remains necessary for Indiana. The state's old system was the "worst welfare system in the country," according to a document posted online by the state. It was entirely paper-based, and was so slow and rife with fraud and abuse that the federal government levied sanctions on it.

Indiana had already spent $361 million on the IBM contract, though Daniels said in his press conference that the contract has cost Indiana about $40 million less expensive per year than if the state had done nothing.

The new system, which Indiana is calling a "hybrid" system, won't be so entirely digital. Clients will have to do some tasks in person. However, documents will continue to be scanned electronically, and case files will be paperless.

"We're still on track to save taxpayers hundreds of millions of dollars, but the intended service improvements have not been delivered, and that's not acceptable," Daniels said in a statement announcing the termination of the contract. "We'll now take the best parts of the old and new and move ahead with a hybrid system in what amounts to a major mid-course correction."

IBM could not be reached for comment, but has called the state's decision "unjustified," according to a media report.

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