The Associated Press

INDIANAPOLIS – Indiana’s human services agency says it found problems with IBM Corp.’s (NYSE: IBM) takeover of welfare intake services early in the project and suggested delays, but yielded to the company’s wishes to expand the project.

IBM, meanwhile, claims the Family and Social Services Administration seized more than $9 million worth of its computers, servers and office furniture without paying for them after Gov. Mitch Daniels fired the technology giant last year.

The counter charges are included in filings rebutting and denying claims in the former partners’ lawsuits against each other in Marion Superior Court in Indianapolis.

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The state agency is suing IBM for more than $1.3 billion, claiming the Armonk, N.Y.-based company breached one of the biggest outsourcing deals in state history. IBM wants the state to pay $52.8 million it says it’s owed in deferred payments and equipment costs.

The two sides sued each other May 13 over IBM’s canceled $1.37 billion contract to automate intake for Medicaid, food stamps and other benefits received by more than a million Indiana children, seniors, elderly and disabled residents.

In its July 14 response to IBM’s lawsuit, the state says the social services agency began to observe problems with IBM’s performance soon after the project’s initial rollout to 10 northern Indiana counties on Oct. 29, 2007, and an expansion to the project’s second region was delayed and eventually split into smaller segments.

"FSSA suggested delaying further rollouts until the performance outages could be cured; however, IBM assured FSSA that if the Region 2 rollout was implemented, IBM would recognize some efficiencies and economies of scale that would improve performance. Accordingly, FSSA agreed to the rollout of Region 2," the state’s lawyers wrote.

The filing appears to contradict statements public officials made at the time, in which they expressed satisfaction with the project.

Then-FSSA Secretary Mitch Roob told The Associated Press on March 16, 2008 – eight days before the expansion to 27 more counties – that "we’re going to get this right and we’re not going to do it fast. … We have to do it with great care."

In the court filing, the state says public statements by Roob and Daniels praising IBM’s work were "an effort to be professional and help the Modernization effort succeed … rather than dwell on its continued shortcomings."

IBM spokesman Clint Roswell challenged that explanation.

"You can’t have it both ways. You can’t say two things. Which one is the real one?" Roswell told the AP.

FSSA spokesman Marcus Barlow issued a statement saying, "IBM did not live up to its contract promises, despite receiving hundreds of millions of dollars, the encouragement and cooperation of State officials, and numerous opportunities to correct its mistakes."

The project had grown to 59 of the state’s 92 counties by May 19, 2008. Three weeks later, flash floods swept through central and southern Indiana, putting any further expansions on hold while the FSSA focused on flood relief including emergency food stamps to affected residents. That created more work for IBM’s team of vendors, as did the economic downturn, the court filings say.

Under the contract, "IBM assumed the risk of such natural disasters," the state said. However, the state paid IBM an additional $2 million for disaster relief. Eventually, Indiana paid IBM more than $437 million.

Roob moved on to an economic development position in the Daniels administration in January 2009, and new FSSA Secretary Anne Murphy halted any further rollouts and demanded a corrective action plan from IBM. That led to Daniels canceling IBM’s contract in October, saying he wasn’t satisfied nearly three years into the 10-year deal.

IBM’s contract ended in December, but it did not finish up work until June 13, Roswell said.

It left behind $9.35 million in computer servers and workstations that it had purchased or leased and more than 1,000 desks, chairs and other furniture pieces that it claims the state has seized, continues to use in welfare processing, and owes the company for.

"The State admits that it obtained equipment formerly used by the IBM Coalition," the state said in its response. Barlow declined to elaborate on the matter.

Attorneys for the two sides were scheduled to meet Friday in a case management conference. IBM’s attorneys were seeking a shorter timetable to resolve the case and have proposed it go to trial in less than a year, on July 1, 2011. The state’s attorneys have proposed a Feb. 1, 2012, trial date.

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