Indiana's privately run welfare project has so many problems that the state could start taking steps to cancel its $1.16 billion contract with IBM as early as this fall, a state official said Tuesday.

Secretary Anne Murphy of the Indiana Family and Social Services Administration said she asked lead vendor IBM Corp. to submit a "corrective action plan" as part of a process that could result in canceling the 10-year deal if promised improvements don't occur by the end of September. She said she expects to review data from the changes in mid-October.

"We'll allow them an opportunity to start correcting those items, and we expect to see improvement by this fall," Murphy told The Associated Press.

Canceling the contract would set back efforts in some states to outsource and automate welfare systems and move away from cost-intensive, hands-on work by government case workers. The industry and some members of Congress have closely watched the Indiana experiment after a similar one in Texas ended with a canceled contract with Accenture in 2007.

Murphy's comments are the first by a senior member of Gov. Mitch Daniels' administration that IBM and its partners, most prominently Dallas-based Affiliated Computer Services Inc., could lose the contract.

IBM and its partners so far have taken over welfare intake in 59 of Indiana's 92 counties and now handle about one-third of the state's 1.2 million-person caseload. The state so far has paid them more than $315 million under the contract.

Murphy said a 12-week review of their efforts resulted in more than 200 recommended changes to improve training, reduce turnover, add 350 more employees and introduce more technology to speed up approval of welfare applications and reduce error rates. The additional staff, including 40 managers, raises to more than 2,600 the number of private employees working with welfare recipients.

IBM spokesman Jim Larkin...