Failed Deals in Outsourcing of State Welfare Benefits Administration: Anatomy of Unsuccessful Business Process Transformation

Posted October 29, 2009 by   · Print This Post Print This Post

In October 2009, the State of Indiana terminated a ten-year $1.34 billion outsourcing agreement with IBM for the administration of the welfare benefits. This followed a 2007 termination by the State of Texas of a similar privatization of State health and welfare benefits administration, including eligibility determinations, food stamps, Medicaid and the Temporary Assistance to Needy Families program.

These failed outsourcing deals offer lessons for public and private enterprises that want to hire outside contractors to automate procedures that are inherently difficult to automate due to the need for ongoing face-to-face customer relationship management for clients or customers who are not able to easily manage self-service and automation of complex programs. In essence, these deals were sold as process improvements with cost savings, but the face-to-face personal touch was lost.

Indiana History. The State of Indiana hired IBM as lead contractor in 2007 to administer welfare benefits programs. Administration of state welfare benefits such as social services and food stamps requires significant ongoing direct contact with welfare clients. When the “business process transformation” of providing IT-enabled welfare benefits confronted welfare recipients who needed personal attention, the State terminated the contract, claiming that IBM failed to maintain documents, delayed approvals of benefits to qualifying individuals and gave “poor service.”

Lessons for Government Outsourcing. Governmental officials seeking to cut costs and improve the quality of service can learn several lessons from these failed deals. Due to the direct customer interfacing, remote computing and automation do not always improve certain customer relationships.

  • Decide whether the function is one that can be improved (such as converting face-to-face interactions with call-center interactions) before being outsourced. In each case, Texas and Indiana were seeking reduced costs through “big bang” transformations of the governmental functions. Officials bought into the notion that software, process automation and self-service for data entry and updates could improve operations. But technology cannot really help where frequent face-to-face meetings are necessary to ensure that individuals qualify for their benefits, that they are evaluated and treated individually, and to see that the individuals comprehend the welfare benefits system. Cost savings can be obtained by using software and process automation, but not for the poor, the undereducated, or those with mental health problems such as bipolar disorder, Alzheimer’s, depression or dysfunctional family circumstances. Rather than outsource the function, perhaps the function of face-to-face “customer” contacts could be improved by using software and IT system management. Providing these tools for face-to-face interaction in such cases offers a less hostile environment to those “clients” with special needs. Full business process transformation and maximum automation will not work in such case. In this case, the customer-relationship function was probably not one that could be automated and outsourced for a fixed price to a for-profit company. Interruptions in Medicaid and Temporary Assistance to Needy Families can impact living conditions.
  • Contract Administration and Relationship Governance. Best practices in outsourcing call for the enterprise customer (here, the State’s agency) to exercise supervision and control of the contract terms to verify compliance with milestones, service level agreements, pricing agreements and internal procedures. Relationship governance sets forth a framework for joint decisionmaking and actions to resolve unforeseen implementation problems. Contract administration and relationship governance are essential to avoiding cost overruns, failed service levels and poor administration.
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