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A legal case in Britain could have positive ramifications for CIOs sorting out contracts.

Earlier this year when the judge hammered down his gavel in the long-running British court battle between pay TV network British Sky Broadcasting and IT services giant EDS over a failed information technology project, the sound reverberated around the enterprise IT world. Chief information officers high-fived and vendors felt a chill run down their ­collective spines. The court had decided that EDS – now owned by Hewlett-Packard – had committed fraud by knowingly promising to deliver a new customer relationship management system in a time frame it knew was not feasible. The finding ­rendered a £30 million ($52.6 million) ­liability cap in the agreement redundant and exposed EDS to unlimited damages, which look like at least £200 million.

On the surface, the dispute echoes the experiences of many CIOs where projects that started with high hopes ended with alarming bills and humiliating overruns. But it also threw up two key questions that chief executives will expect their CIOs to be able to answer from now on.

First, should we be calling the lawyers and hauling our own suppliers into court? And second, what are you doing to ensure we don't end up airing all our own dirty laundry in a decade-long contractual courtroom dispute?

To answer the first question, as with all legal issues, very much depends on the specifics of the case. But a partner at the legal firm McCullough Robertson, David Downie, says Australian CIOs could have a better chance of pulling off the fraud charge. "It is fair to say that most IT disputes in Australia have allegations of misleading or deceptive conduct, but you don't see fraud in the mix because people have largely ­forgotten about it as a course of action," Downie says.

"BSkyB was aware of it and I think Australian litigators will be encouraged to include that tort in their proceedings now. A claim of this size is enough to make local and multinational IT suppliers think again when they are making claims about their solutions."

Stronger position

Downie says customers often opt not to make a fuss when projects fail, for fear of attracting the attention of the media and angry investors, but with more attention to contracts and statements made by salespeople and others outside the contract, they might be in a stronger position than they think when it comes to seeking compensation.

Judge Vivian Ramsey found that former senior EDS ­employ­ee Joe Galloway, who led the pitch for the BSkyB contract, had provided time scales that he thought BSkyB desired, without any reasonable basis.

BSkyB has since said that without his keen assurances it would have awarded the ­contract to a competing bid from PricewaterhouseCoopers.

Downie says IT vendors operating in Australia are more likely to be found guilty of a similar offence than in Britain, as section 52 of the Trade Practices Act is explicitly worded to prohibit conduct in trade or commerce that is misleading or deceptive or likely to mislead or deceive.

The EDS judgment found that the company had not carried out any proper analysis before promising project time frames and that the salesman's conduct went beyond carelessness or even gross ­carelessness and was dishonest.

However, CIOs thinking this could lead to an open-and-shut case in any project overrun would need to take into account the most amusing aspect of the whole matter. Galloway – EDS's key defendant in the case – had his credibility shot to pieces on the stand when he was publicly shown to have lied about possessing an MBA degree bought online from a fictitious ­college in the US Virgin Islands. BSkyB's barrister Mark Howard obtained the same qualification for his dog Lulu during the trial – and the dog received better marks.

The judge admitted the episode eroded any trust he had in Galloway as a witness, and any organisation seeking a similar judgment would need to weigh up just how likely it would be to be able to prove that a vendor had deliberately lied to them.

That brings us to the CEO's second issue, one that goes to the heart of the ­abilities of the modern CIO or technology leader. How do you ensure that vendor relationships work in the first place?

Most IT departments these days are not huge builders of technology and rely, in the most part, on implementing bought solutions. Therefore contract negotiation and management is arguably the most important skill for a CIO to possess.

With a number of high-profile project overruns in its recent history – notably the Myki e-ticketing system – the Victorian government has been looking at ways to tighten up its procurement processes for major technology programs.

On the front line is VicRoads, which is getting to the pointy end of a long process to select the vendor to develop a new ­registration and licensing system for three government agencies. Ian Rodgers, program director for the project known as RandL, has been trialling a new form of procurement called interactive vendor engagement (IVE).

Rodgers says the idea is based on a methodology coming out of Britain called competitive dialogue. In effect it involves a series of interactive, collaborative engagements conducted with the market while the project team goes through the process of developing its request for tender. "We sit down in a very controlled ­environment and engage the marketplace to effectively share with them our ­business requirements," he says. "We can then listen to the marketplace about how they would propose to solve the problems we are posing them, and as we go through a collaborative process we are able to develop an RFT [request for tender] that is pretty realistic."

Rodgers accepts that this lengthening of the tender process brings about more initial expense on both sides and concedes that it is an approach best left for major capital procurements.

However, he says it has removed a lot of the uncertainty, guesswork and cloak-and-dagger style manoeuvring that exists on both sides of the deal.

A more open and honest approach has led to more honest assessments from potential suppliers, he says. "I have to say that the marketplace was extremely receptive to the idea of IVE. The picture we painted was that the government was a little bit tired of the fact that IT projects seemed to be unable to be delivered on schedule and on budget.

"We had been told that, particularly post global financial crisis, we had to be pretty damn sure that when we go back to the ERC [expense review committee] and confirm our costs that we've got it right."

Now at the end of the procurement process, Rodgers says everything is ­progressing on schedule and the new ­process has resulted in an extremely high level of tender responses. VicRoads has been left with two bidders that could most comfortably perform the role required, and is now in a position to assess its best and final offers with a much clearer view of value for money than in the past.

To ensure the client-vendor relationship will work throughout the program, Rodgers has designated a fixed price contract with the successful supplier to go through a detailed design before a final "go or no" decision.

"If you use the metric of percentage fit against our requirements then, in the view of our commercial and legal advisers, and the people on the program team involved on a number of similar-sized projects, we are well above average high scores," he says. "We believe that we are dealing with two tenderers who both have very good solutions, either of which could satisfy our requirements and importantly we are ­confident that we understand each other."

Playing games

It is a lesson that could well be learned by fellow technology buyers, according to one industry adviser who declined to be named in print. Rodgers says that on too many occasions IT projects are doomed to fail due to both CIOs and ­vendors playing games during the tender process.

"Looking at the EDS case in the UK, it is a very interesting conundrum that ev­olves," he says. "The vendors will often do everything they can to get the business, and vendor organisations need checks and balances to stop unethical salespeople over-promising, because they know that once they get the commission and leave then they are no longer responsible for it."

Listen and learn

Rodgers says CIOs must also change their practices and not list unrealistic requirements in their requests. He claims to have advised CIO clients that their requirements were unrealistic and has been told that they wished to keep them in the tenders as a sort of bargaining chip to keep the vendors on their toes.

"There is fault on both sides," he says. "It is easy to blame the vendor, but the client has some responsibility to vet the claims their vendors make. They also need to treat ­vendors fairly – I have lost count of the number of times clients have insisted on getting tender responses in unreasonably quick time frames because the project is 'urgent', only to then sit on the tenders for months before making a decision. It is no wonder they get ill-thought-out promises submitted in those circumstances."

Analyst at the technology specialists Intelligent Business Research Services, Alan Hansell, agrees and says that to avoid arriving at a poor sourcing decision clients must publish precise requirements and contextual information to vendors and give them sufficient time to respond, and be rigorous in the evaluation process. "Clients must put themselves in the shoes of vendors and ask whether their approach will get the best response," he says.

Hansell advises clients to conduct due diligence for capability and capacity to deliver before vendors are even invited to respond to requests for services. In understanding the motives of vendors, he says, CIOs must on one level understand when the limits are being pushed. Once a vendor has a foot through the door, and the CIO has staked some of their reputation on bringing the company into the fold, then it is already too late to have doubts. "Being selected as the ­preferred supplier is the preoccupation of every vendor," he says. "Once selected the ball is in their hands."

Positive signs

Australia and New Zealand partner at ­Technology Partners International, Tom McCormack, says he has noted a more mature approach in recent years in the negotiation of outsourcing contracts.

He says a successful relationship does not end with the signing of a deal. More responsibility must be taken by the CIO to ensure things work after the ink has dried. "The level of maturity in terms of striking large, long-term commercial relationships is a lot better than it used to be," he says. "

"There is a recognition on the client side of fair price for fair work, but also a better understanding their obligations to make the service provider a success."

Getting the most from your suppliers

◊ Do a market scan of potential respondents to facilitate development of informed requirements and know what is likely to be offered, to avoid surprises.

◊ Give vendors early warning of a tender being issued so they can get skilled people in place to respond.

◊ Provide sufficient contextual information so the vendor knows past history and growth expectations and can do their longterm pricing.

◊ Avoid the process whereby two selected respondents are bidding against each other post tender close. If vendors know it will be used, they are very likely to inflate their pricing.

◊ Add openended requirements, such as “How will the vendor meet the requirement?’’ Asking closed questions, such as, “Can it be done?”, leads to an inadequate response.

◊ Give vendors sufficient time to develop a quality response.

◊ Close tenders on the working day after a weekend so if necessary they can finetune their pricing with senior management over the weekend.

◊ Insist a standard template for pricing be used. Without it, comparison is hard and a bad decision could be made.

◊ Get an independent source to review the request for tender before it is issued, to pick up errors and flaws in requirements.

Source: Alan Hansell, IBRS

MIS Australia

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