8 Outsourcing Lessons From Indiana's Largest Failed Outsourcing Deal

What Can Be Learned From Indiana's $1.4 Billion Failed Outsourcing Contract

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Case studies about outsourcing failures prove helpful in learning what to do and what not to do. An example of this is the $1.3 billion contract between the State of Indiana and IBM.

Indiana and IBM sued each other in 2010, a year after the state pulled out of a 10-year contract with the vendor to provide support processing and automating applications for food stamps, Medicaid, and other benefits. More than seven years remained on the contract when Indiana backed out of the deal, citing problems with the systems IBM had implemented.

After eight years and multiple rounds of appeals, IBM was required to pay Indiana $78 million. Judge David Dreyer, who presided over the original case, said in 2010 that "Neither party deserves to win this case. This story represents a 'perfect storm' of misguided government policy and overzealous corporate ambition. Overall, both parties are to blame, and Indiana's taxpayers are left as apparent losers."

There are at least eight lessons about outsourcing to be learned from the state of Indiana and IBM's contract.

1. Change requires commitment

Change management is successful only if the organization supports change, and in this case, Indiana did not. This contract was intended to transform a welfare system rife with fraud, incompetence, and favoritism while reducing costs with a new service delivery model. To achieve all the goals required Indiana to give IBM absolute and unconditional support, but court evidence shows that state representatives intentionally undermined the program by interfering with IBM’s management of subcontractors.

2. Learn from other examples

Mega-contracts sometimes blind vendors to flaws and limits. As part of the preparation for the Indiana-IBM contract, similar programs in Texas and Florida were examined. Those programs failed or were failing in much the same way that Indiana's eventually would. The problems in Texas were so severe that the rollout of the project was stopped. IBM decided those issues didn’t apply to them or that they would be able to manage them.

3. Mega contracts = mega risk

A single big contract typically is riskier than several smaller contracts. You may choose to take the risk because a single big contract can cost less to manage if it is successful. If not, however, a failed big contract is more expensive. The potential benefits of lower management costs can be compared to the increased risks of failure, and the cost of risk mitigation also can be factored in. Contracts with potentially high risks require in-depth risk analysis and mitigation.

4. Change happens

Outsourcing contracts that are supposed to drive change fail if they do not allow the vendor to make changes. In this case, the client tightly controlled the change mechanism and did not approve most vendor-requested changes. The conditions of the program changed, such as the addition of new programs and an expanded volume of work. Even for client-initiated changes and expansions, they did not allow the vendor to add staff and cost or make other changes.

5. Disputes lead to lawsuits

Lawsuits are time-consuming and costly, but if neither party to a dispute is willing to work out the issues, you’re headed to court. A smaller vendor might hesitate to sue the government or might give in when threatened with a lawsuit, but huge vendors like IBM have equally huge legal departments. Everyone has disputes, but when communication stops, other avenues for resolution are closed and both parties start to think about lawsuits. When communication starts to close down, do everything to keep those communication channels open. Make compromises and be inventive now because a court-ordered solution will be more expensive.

6. Be consistent

In the first three years, Indiana officials repeatedly agreed the program had succeeded and told IBM to move on to the next stage in the program. When the state sued IBM, it said the program had failed and had been in failure for years. This sort of inconsistency seriously undermines credibility inside the courtroom and in the business community. You have a right and duty to change your position when new evidence becomes available, but if you add unsupportable embellishments, you will do more to undermine your credibility than to support your argument.

7. 'Perfect execution' doesn't exist

In real life, assumptions are wrong, conditions change, and the goalposts move. Courts take a similar position. Judges are not interested in defining perfection; they are interested in defining what is reasonable. Unless one party or the other was completely incompetent or malicious, a judge will seek a compromise position that will make neither party completely happy. Going to court doesn't increase your control; it sharply reduces the control of both parties.

8. Both sides can lose

All three parties lost, just as the judge said. Each of the issues was avoidable, but each problem led to the next until the chain of events was too strong to break. Every person who ever ended up in court asks themselves when things started going wrong, and the answer always is long before the lawsuit began. Difficult problems can be overcome, but not without effort and planning. Problems must be identified and resolved when clients and vendors begin to pursue a different agenda. If you wait too long, the momentum of events will reach a point where the matter is past resolution.

Article Sources

  1. Associated Press. "Appeals court affirms ruling that IBM owes Indiana $78M," accessed Jan. 5, 2020

  2. Government Technology. "Nobody Wins in Indiana vs. IBM Lawsuit, Judge Says," accessed Jan. 5, 2020.