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Yesterday, Indiana Governor Mitch Daniels announced the cancellation of the state's large welfare modernization contract with IBM after deciding that not enough progress had been made on a corrective action plan to resolve ongoing implementation issues. As Mary Beth Schneider and Bill Ruthhart at the Indianapolis Star report today:

Calling it an endeavor that "just did not work," Gov. Mitch Daniels on Thursday canceled Indiana's 10-year, $1.34 billion contract with IBM to deliver welfare services. In its place, Indiana will develop a hybrid structure that keeps some elements of the modernized welfare system, Daniels said, while restoring the best of the past system: personal contact. [...]

He said taxpayers still will save money under the hybrid system, though less than hoped for under the IBM contract.

Under the hybrid system, instead of being pushed to apply for help through impersonal call centers or computers, clients once again will meet face-to-face with a worker in a county office. State-employed caseworkers will be assigned to assist applicants.

Privately employed workers remain, along with a paperless computerized system for tracking cases. But subcontractors who had been managed by IBM, including those employed by Dallas-based Affiliated Computer Services who take the initial applications, now will be managed by the state.

Even as he yanked its contract, Daniels thanked IBM, which had added employees and more technology this summer in an effort to salvage the contract. "They did try hard," he said. "It wasn't resources. It wasn't effort. It was a flawed concept that simply did not work out in practice."

A separate AP story adds:

Daniels has said repeatedly that he inherited one of the nation’s worst welfare systems, which was troubled by fraud, high error rates, long customer wait times and slow progress in moving people from welfare to work.

He said Thursday some reforms have worked.

"The fraud appears to have stopped, and 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.

IBM officials countered that the state's claims are "unjustified" and that the company was indeed making progress. They cited the external pressures of a national recession that drove Indiana's welfare rolls up 33 percent since the modernization contract began three years ago. It's unclear whether IBM plans to pursue legal action.

This massive privatization effort has certainly been the source of much controversy in Indiana in recent years, and there will no doubt be critics that claim, as Indiana House Speaker B. Patrick Bauer already did, that the contract cancellation represents "a blow to privatization." I suppose that depends on your perspective. I see it differently, for three reasons.

First, it must not be too much of a blow to privatization, since the state plans to work with IBM's current subcontractors to build the hybrid system.

Second, while no one will argue the contract worked out as originally intended, Daniels was quick to acknowledge that some of the reforms worked, most notably addressing the high levels of fraud that helped prompt the state to persue reform in the first place. And on a deeper level, a major thrust of the original initiative was transitioning from a Cold War-era, paper-based welfare benefits system to a paperless, electronic system commensurate with what citizens should expect in e-government. That system, and the contractors who built it, will remain moving forward.

Last, the Indy Star article notes Gov. Daniels response to the question:

Daniels, though, rejected that his decision says anything about the merits of privatization.

"It has nothing to do with private or public. It had to do with a concept," he said. "If you would use the same concept IBM brought, and every worker was a state worker, you would have had the same results, or worse."

I said something similar in my latest column a few days ago on the inherent "trickiness" of major IT transformations, public or private:

With any large-scale privatization initiative, especially those involving complex system overhauls like an IT modernization, you have to expect upfront that there will be obstacles. This would also be the case if government was doing the exact same work in-house—large-scale projects are inherently tricky. It's all about how you deal with the inevitable challenges.

When all is said and done, this privatization initiative wasn't cancelled—it morphed midstream. That happens sometimes on large-scale projects for which there's no proven template. Gov. Daniels and his administration deserve tremendous credit for (a) embracing a bold reform solution (political risks and all), (b) defending it against political attacks after the early setbacks, (c) requiring a corrective action plan and giving the contractor a window of time to implement it, and (d) not being afraid to course-correct and acknowledge shortcomings, while at the same time not abandoning the things that have actually worked in the reform.

So let's be clear—it would be a huge mistake for media and other observers to surmise that Indiana dealt a "blow to privatization" this week. Instead, they're entering "welfare modernization version 2.0." Indiana couldn't have made the improvements its made in the welfare system to this point without privatization (don't forget the horribly broken system the state started with, the "public option" they were desperately trying to dismantle). The state won't be moving forward without privatization either.

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