Will courtroom drama bring changes in procurement?
23/04/2010
It was a first class courtroom drama: a year in court and another 18 months awaiting the judgment. But now the two battling giants know the outcome.

Fuente:  www.ft.com   Fecha: 20.04.2010

The scrap began when satellite broadcaster BSkyB sued its supplier EDS, now part of Hewlett Packard, after a project to instal a customer relationship management system initially valued at about £50m went badly awry.
Such cases are rare and, given the size and experience of the organisations involved, this one was surprising: as Douglas Mathie of Brodies Solicitors points out: “Most customers don’t have the nerve to pursue their vendors. And proving the vendor has lied is tremendously difficult.”
Eventually, BSkyB was awarded £200m in interim damages – it was claiming £709m – because EDS had “fraudulently misrepresented” the time it would take to design and build the CRM system.
To reinforce Mr Mathie’s point, however, it was no open and shut case: only a handful of the broadcaster’s claims of misrepresentation were upheld by the court and the judgment ran to 468 pages.
Afterwards, EDS said it would seek leave to appeal against the judgment.
Some of the evidence makes amusing reading but behind the courtroom antics lies an uncomfortable truth – that vendors‘claims in the bidding process can sometimes prove undeliverable, even if they rarely lead to dramas of the above variety.
“My experience is that misrepresentation is very common,” says Mr Mathie, an IT specialist turned lawyer: “I like suppliers who admit they cannot achieve such-and-such a target – it leaves a feeling of honesty.”
Customers must take their share of the blame, too – with poorly thought out strategies and frequent project changes, leaving the supplier trying to hit a moving target.
There are, however, a number of measures which can be taken to reduce the risk of a contract – whether it be an outright sale, outsourcing or a managed service – going wrong. These include:
● The customer must have a clear idea of what it is trying to accomplish. David Howie of Technology Partners International notes: “It is all too easy to drift into discussions.”
● There must be agreement on both sides on due diligence and project governance. “Thrash out the governance regime,” says Mr Mathie. “Agree on meeting and agendas. That way you get to the problems early.”
● Competitive tension between suppliers in the bidding process provides benefits to both sides. “You won’t get the best deal unless the vendor feels competitive pressure to give it,” says Harry McDermott, chief executive of Hudson & Yorke.
● The implementation team should be involved in the bidding negotiations along with the sales team. Kevin Calder from the law firm Mills and Reeve notes: “An important lesson for all procurements is that operational/project teams should be involved before the contract is signed to ensure that the contract reflects actual practice on the ground. Too many projects fail because the delivery teams are presented with a finished contract and find that the people who negotiated it did not fully understand how it would be delivered.”
● The customer must be prepared to consider the supplier’s point of view: “An unbalanced contract is not a happy contract,” says Mr Mathie.
Martyn Hart, chairman of the National Outsourcing Association in the UK, urges a common sense approach: “Be realistic is the watchword,” he says.
“If it seems to good to be true, it probably is too good to be true.”
Be suspicious of any supplier who claims to be able to do the job much cheaper or much quicker than the competition. He points out that while nobody admits that cost is the primary driver, when the NOA runs its monthly evaluation of the reasons for outsourcing, cost is always top of the list.
Daniel Naoum, co-founder of Valueshore, an organisation formed to promote the Spanish IT market, sees significant dangers in an emphasis on cost: “For many organisations, immediate cost savings remain the number one concern when looking to outsource.
“Focusing only on a daily cost approach is dangerous, however, particularly if choosing to outsource IT projects abroad, as businesses will often look to outsource to regions with the lowest costs, ignoring things like quality and business innovation.
“Although it’s easy to see why the initial short-term savings would be attractive, such benefits aren’t necessarily enough to sustain long term success or cost efficiency.”
James Cockcroft of Xanthus Consulting agrees: “One of the biggest pitfalls we’ve seen recently is for a customer to focus purely on the financial aspects of the procurement process when the best supplier for it might not be the cheapest option.
“Projects may last for three, five or seven years. The customer has to be comfortable with the relationship. There are always peaks and troughs in any in-house/supplier relationship.
“Often companies expect supplier energy levels to be high throughout the contact while suppliers naturally put more energy in at the start and towards the last 12 to 18 months as contract renewal becomes a priority. It is important for both sides to recognise, accept and overcome these peaks and troughs through communication.”
Everyone – consultants, lawyers and suppliers – agrees on two issues: first, that client companies have a responsibility to invest time and energy at an early stage to understand exactly what it is they hope to achieve through a project; and second, that all would benefit by taking advice from a specialist.
“This could be seen as self-serving but, as Mr McDermott, chief executive of Hudson & Yorke points out, an independent perspective can be valuable: “If a company is doing a big outsourcing or managed service deal, it is likely they will only do it once every four or five years. Specialist consultancies do it all the time and we have relevant and up-to-date market understanding and metrics.”
He points to the findings of a global survey of telecommunications sourcing sponsored by Hudson & Yorke and carried out by Forrester Consulting.
It points out that internal teams cannot have the experience, skills and tools that are essential to best practice: “The use of external professional assistance in key tasks like the ‘request for proposals’ process, service level agreements and performance metric design and legal drafting results in significantly better levels of satisfaction with outcomes and the costs involved will more than pay for themselves in lower service charges and better service quality,” it says.
Mr McDermott emphasises that a customer must undertake due diligence on its own business – assets, human resources and financial standing – before going to market to seek a deal.
This should ensure that the company understands its objectives in undertaking the project and the support within the organisation for the development: “Due diligence is fundamentally important to the success of contract negotiations. The onus is on the customer to carry out due diligence rather than leaving it to its supplier.”
As well as carrying out due diligence on its own organisation, the customer needs to vet its potential suppliers.
Peter Lumley of PA Consulting Group argues that buyers need to understand the capabilities of the team that is bidding for the work, not the wider organisation to which they belong: “IT suppliers are large organisations: cultures and capabilities vary from department to department and any track record or case study that is cited in a bid means little unless it relates to a project that was carried out by the team that will be delivering the buyer’s contract.
“Access to the wider organisation’s skills is not enough – skills and experience cannot be transferred overnight from one team to another.”
In the end, however, will the BSkyB-EDS case lead to permanent changes for the better in the way contracts are negotiated?
Industry experts are dubious. Procurement departments may sharpen up – for a time. Suppliers will keep their sales teams on a tighter leash – for a while. Lawyers may find extra work – for a bit.
Then it will be business as usual.
 By Alan Cane