The judgment by an English court aginst yesterday in which HP owned EDS was told to pay broadcaster Sky TV £200m for a failed CRM system, could have significant implications for the IT industry, both in the United Kingdom and globally. It also shows where to go if you want to get your dog an MBA.
In finding that the initial sales process which led to a significant IT services contract involved elements of deceit, the court opened up the service provider to a huge damages exposure, way beyond the value of the contract. CIOs embarking on similar IT or outsourcing services contracts in future will be concerned whether this ruling will affect service providers' view of risk (and, as a result, price) and whether their projects will feel any tangible impacts of more cautious, legally-constrained service provider behaviour.
The background story:
SkyB £200m interim payment" href="http://www.cio.co.uk/news/3211865/hp-eds-ordered-to-pay-bskyb-200m-interim-payment/">HP-EDS ordered to pay BSkyB £200m interim payment
SkyB agreements failed to protect EDS from its own salesman" href="http://www.cio.co.uk/news/3211880/bskyb-agreements-failed-to-protect-eds-from-its-own-salesman/">BSkyB agreements failed to protect EDS from its own salesman
SkyB wins landmark lawsuit against HP-EDS" href="http://www.computerworlduk.com/management/it-business/services-sourcing/news/index.cfm?newsid=18519">BSkyB wins landmark lawsuit against HP-EDS
BSkyB victory over HP-EDS could drive 'coach & horses through all outsourcing contracts'
Also in the future, customers of unsuccessful IT projects may be encouraged to seek similar remedies - and IT service providers on projects partly or wholly delivered in the UK will be wary of conduct which might lead to similar massive liabilities.
On 26 January 2010 - and after a wait of 18 months since the trial ended - the English High Court has finally ruled on the complex, long-running dispute arising out of an IT services contract between SkyB" href="http://www.sky.com/">satellite broadcaster BSkyB and global IT contractor EDS, which is now part of HP. In addition to "ordinary" breaches of contract by EDS, the Court found EDS liable for a deceitful misrepresentation which induced BSkyB to contract with it, exposing EDS to potentially unlimited liability.
Damages claimed were originally over £700 million (US$1 billion) although more recent estimates suggest that the figure may be closer to a minimum of £200 million (US$325 million).
The case, the first IT dispute in the UK in which deceit of this sort has been established, has potentially wide-ranging consequences for the IT and outsourcing services industry in the UK - although the effects could well be felt globally if the large multinational service providers react by adjusting their approach to the contract sales process across their entire operation. In particular, the case will affect the way in which service providers take their services to market and run bids, addressing as it does the circumstances in which:
A: A service provider can be held to account for its pre-contract sales pitches;
B: service providers can rely on, or customers overturn, contractual limitation of liability clauses.
The dispute originated in 2000 when EDS won a £48 million contract to provide SkyB" href="http://www.cio.co.uk/cio100/bskyb/189/">BSkyB with a new customer relationship management (CRM) system. Unfortunately, the project soon ran into trouble and, in 2002, BSkyB brought a claim against EDS alleging that, during the tender stage, EDS had misrepresented its ability to deliver the project. BSkyB said that, were it not for EDS's misrepresentation, BSkyB would have awarded the contract to PwC instead of EDS. EDS countered by arguing that BSkyB had no clear idea of what it wanted from the project and had continually altered its requirements, resulting in delays and other problems (all of which are completely standard defences in claims under IT contracts).
SkyB claimed damages" href="http://www.cio.co.uk/news/3211238/bskyb-wins-landmark-lawsuit-against-hp-eds/">BSkyB claimed damages of over £700 million, an amount far in excess of the maximum exposure that EDS might have contemplated on entering the contract. While the contract capped EDS's liability at a maximum of £30 million, BSkyB alleged that the misrepresentations made by EDS were deceitful (as EDS had made the representations knowing they were false or at least being reckless as to their truth) and, as a result, the contractual liability cap did not apply.
Although the court rejected certain of BSkyB's allegations of misrepresentation (including as to EDS's costing of the project and capability), it found that EDS was deceitful, firstly, when it claimed that it had carried out a proper analysis of the time needed to complete the initial delivery and go-live and, secondly, when it claimed that it held (on reasonable grounds) the opinion that it could and would deliver the project within the promised timescales. The court found that these representations were made dishonestly by EDS's CRM Manager, who knew that there had not been the "proper analysis" and that there weren't "reasonable grounds" for the opinion that the work would be completed on time but who nonetheless made the claims.
BSkyB successfully proved that EDS breached the contract - and the court held in its favour in relation to contract damages up to the liability cap. It also proved that liability for negligent misrepresentations outside the contract were not properly excluded by the contract, but those again were subject to the liability cap.
Key to this case though is the fact that BSkyB successfully proved one deceitful pre-contract misrepresentation by EDS and it is that which blew away the contract liability cap, which everybody agreed could not apply when lies where told.
It's also important that proof of pre-contract deceit rendered redundant (for the purpose of that particular head of claim, at least) issues as to whether BSkyB had brought the project failure upon itself by not delivering on its obligations or by changing its requirements.
The case itself is notable for the fact that judgment came in 2010, 10 years after the original contract. The trial lasted for 110 days, involved 500,000 documents and 70 witnesses. Even the judgment is almost 500 pages and 2,500 paragraphs long. Legal fees are estimated at over £70 million. And, of course, with so much riding on the outcome, an appeal is likely. It illustrates why disputes in big technology contracts/projects rarely come to trial but, when they do, the issues can be very complex to deal with.
The most immediately worrying possible consequence of this decision for CIOs and purchasers of IT or outsourcing services is that it raises the spectre of higher prices as service providers factor extra risk or higher insurance costs into their pricing models. Purchasers should counter this by pointing out that the risk of deceitful sales practices is not one which they should bear - that really ought to be a cost absorbed by the service provider itself. But, in practice, this is a hard cost to identify even where a detailed financial model exists to underpin pricing on a particular project.
More practically, the case is likely to change the way service providers behave in the sales phase. Service providers will be looking at the court decision and assessing how it affects the way they take their services to market and run bids. CIOs and their project teams need to be ready to counter such behaviours.
While the size of BSkyB's claim may have grabbed the headlines, it's the finding of deceit that will have the most far-reaching impact and may force changes to the IT services market. In an industry in which sales have always been the yardstick of success, where promises are made to clinch a deal and then worried about afterwards, in which the concept of "time" has always been taken with a pinch of salt and delays on both sides treated as the norm (and sometimes even relied on), the threat of potentially unlimited liability may force greater bid scrutiny.
In particular, we expect that service providers will become more cautious in order to avoid the risk of misleading their customers. Sales teams will need to ensure that they do not make hasty or ill-considered promises that could sow the seeds of a future deceit claim and will need to ensure that they can deliver on promises going forward. This could slow the bid process to ensure complete alignment between sales and delivery teams. Purchaser CIOs will need to be more proactive in driving procurement processes forward.
Bidders may also want legal teams to audit the sales process much more closely than has previously been the case, especially on particularly large or vulnerable projects. "Vulnerable" projects are likely to include any project which touches on a customer's revenue-generating functions and which - like the BSkyB CRM system - could have huge implications on a customer's future success if it is not delivered. CIOs hoping for a less legalistic process will be disappointed.
Also, bidders will want to insist on fuller documentation detailing each promise made and the timescales for fulfilment of those promises during the sales process to ensure that all potential risks are mitigated and the potential liability is made subject to any agreed cap.
On the plus side, one effect could be to encourage service providers to be more honest and up-front with customers about delivery problems. Evidence in the case showed that, even in the early days of delivery, EDS was externally assuring BSkyB that everything was on-track while, internally, producing notes and memos attesting to rising panic and concern at the undeliverability of the project.
In personnel terms, CIOs may be dragged more directly into detailed pre-contact discussions as service providers limit who in their sales team can make delivery promises that can be relied upon - and to whom. Devastatingly for EDS, its case was drastically weakened when it was proved in court that its sales lead and key witness perjured himself by lying about having received an MBA from a "University" (which awarded the same MBA (but with slightly better grades) on-line to Lulu, a dog belonging to BSkyB's lead counsel in the case!).
In general, it has always been the case that CIOs have sought to ensure that service provider and customer bid teams are closely aligned at all stages of the sales process to ensure that delivery expectations are met on both sides and that the right people are on the teams. This case makes it ever more important to do so. CIOs and their project teams should continue to exercise diligence when conducting tenders, including by asking their service providers to provide firm evidence to support statements made in tender responses, including particularly dates for delivery. Service providers may need to work harder to justify their sales claims.
And finally, CIOs should insist that project teams should document more fully the down-selection process so that decisions can be linked to specific service provider representations and show reliance on those representations. Remember that it was an important part of the case that, but for the deceitful statements, the contract would have gone to PwC not EDS.
A Note of Caution
This case has been long awaited and expectations have built up about it. The result is the one which the IT services industry feared most. Unless overturned on appeal, the case certainly deserves its "landmark" tag. But let's not get carried away by the huge numbers and the Enron-like thrill of a case turning on allegations of dishonesty.
The case may well affect behaviours in the sales phase of key projects but it may not trigger a deluge of copy-cat court cases on failed IT projects. The court hasn't created new law here - it has merely applied existing principles of English law. BSkyB was bold (in pursuing both the "normal" breach of contract claim and the more aggressive deceit claim); lucky (not everyone will have a Perry Mason moment and destroy the credibility of a key witness by proving that he committed sustained perjury); rich (to be able to gamble an estimated £40 million in fees to pursue its claim); and resourceful (to be able to come up with evidence that showed EDS's deceit and that the contract would have gone elsewhere but for that deceit).
Few wronged customers on IT contracts will be in the same boat - although others may try. Most customers will stick to the simpler task of proving a breach of contract - although even that's not easy in a complex IT project with inter-twined responsibilities. It will remain a rare event to go for - and win, as BSkyB has done - the icing on the cake of a liability cap-busting deceit claim.
And, of course, although the court's judgment has now been handed down, it will not be the end of the story, with HP (which now owns EDS) having said already that it will seek permission to appeal which is unsurprising given that it has already invested so much into the case (not least an estimated combined £70 million in legal fees). Another hearing is due in February 2010 to begin the process of assessing the exact amount of damages due.
But, even so, although new law may not have been created, this case does represent a milestone and, in the future, a service provider may be less inclined to put its money where its mouth is if it isn't sure that it's making a safe bet.
About the author:
Alistair Maughan is Head of Global Sourcing at London law firm Morrison & Foester