Waste Management's lawsuit against SAP for a "complete failure" of a $100 million software implementation boils down to promises. What did SAP promise Waste Management? And how much responsibility does Waste Management bear for believing those promises?
As background, news surfaced last week that Waste Management filed a complaint against SAP in the district court of Harris County, Texas. The suit, filed March 20, was fairly well publicized, but many of the accounts were thin on detail. Typically, IT failures aren't black or white. There are many shades of gray. Projects change, there's scope creep and often the vendor and the customer share some of the blame.
With that in mind, I've been perusing Waste Management's complaint against SAP (PDF download). For its part, SAP doesn't comment on ongoing litigation. If this spat ever does get to court, it will highlight the enterprise software sales process, which really revolves around promises. According to Waste Management's complaint, SAP said it could offer an out-of-the-box ERP system with no customization. Waste Management's reality was different.
That disconnect isn't all that noteworthy. Enterprise software companies typically say there is no customization required and customers still need to tweak. What's interesting is that Waste Management is going after SAP in a very public manner. I'm familiar with Waste Management from a previous case study on the company. In a nutshell, it's a giant company that has been built via acquisition. Legacy systems were everywhere and a good chunk of them were outdated. From 2003 to 2005, Waste Management was becoming more than an army of small waste hauling firms and an integrated company. In 2005, Waste Management was looking to overhaul its order-to-cash process--billing, collections, pricing and customer set-up.
A few choice excerpts and the lessons learned:
"In order to gain acceptance in the United States waste and recycling software market, and to obtain large monetary benefits from current and future license and implementation fees, SAP fraudulently induced Waste Management to license an 'United States applicable' Waste and Recycling Software solution. This software was represented to be 'a waste industry standard solution with no customization required.' SAP further represented that the software was an 'integrated end-to-end solution.' Unknown to Waste Management, this 'United States' version was undeveloped, untested and defective. Although SAP knew of the software's defects and its inability to function in the United States market conditions, it nevertheless represented that the software was a mature, 'out-of-the-box' solution with the functionality and scalability necessary to meet Waste Management's specific business requirements and transaction volumes."
Lessons learned: If your mother says she loves you check it out. One question: Wouldn't a pilot have surfaced this software as a joke? What were the probing questions being asked of SAP here? SAP had competition and formulated its pitch based on being out-of-the-box and being rapidly installed, according to the complaint. How realistic was that expectation? Let's face it: ERP is brain surgery and sometimes there is no anesthesia. I'm inclined to laugh at any software vendor that pitches enterprise software out of the box. It's not a magic pill. Another wrinkle: SAP's sales effort was led by Dean Elger, a former Waste Management controller. Is that too cozy?
"SAP represented that its software was a 'proven solution' and that SAP had 'the implementation experience to deliver productive functionality in less than one year.' These representations were false as the software modules used by SAP in its 'United States' version of the waste and recycling software had never been used together before and had never been tested in an actual productive business environment. To further its deception, SAP personnel also helped develop a 'business case' for Waste Management that detailed how SAP's software purportedly would enable Waste Management to obtain hundreds of millions of dollars in increased efficiencies and revenue assurance. SAP never told Waste Management that this business case depended on an undeveloped product."
Lessons learned: Why would you depend on a vendor to develop a business case? Here's the deal: Vendor makes up metrics, you consider them for what they are--a marketing pitch--and then you do your own work or hire someone else to do the legwork for you. SAP's analysis predicted net annual benefits of $106 million to $220 million a year and those savings convinced Waste Management to enter a contract under its Safe Passage program, which is designed to poach Oracle customers.
"SAP presented Waste Management with a series of pre-contract product demonstrations consisting of what SAP represented was the actual waste and recycling software. Yet Waste Management has discovered-- and, in internal documents, SAP has admitted -- that the pre-contract demonstrations were in fact nothing more than fake, mock-up simulations that did not use the software ultimately licensed to Waste Management. SAP's senior executives, including its president, Bill McDermott, participated in these fake product demonstrations, which were rigged and manipulated..."
Lessons learned: If true, these demonstrations, which were given "on many occasions during an eight month time period in 2005," were on shaky ground and SAP should have disclosed its software was being developed. The software was built on SAP R/3. What do you do if you're a customer? Perhaps it all comes down to questions about other customers. If Waste Management would have asked what other waste and recycling companies used this software it would have likely caught SAP. For instance, there's no reason a company the size of Waste Management needs to be an early adopter and the suit notes that SAP only had small European waste companies as customers. Waste Management only has one major competitor--Allied Waste. It's a happy duopoly for the most part. If SAP's software was an alpha release at best Waste Management should have been the guinea pig for free. SAP would have made money for having Waste Management as a reference customer.
"SAP represented that it had well-trained personnel with the requisite expertise, experience and knowledge of the software to implement it rapidly on a company-wide basis...These representations were also false."
"SAP's attempted installation of the waste and recycling software at Waste Management was a complete failure. The installed software failed to contain basic functionality that had been represented and was unable to run Waste Management's most basic revenue management operation."
Lesson learned: Consultants have a role and it sounds like Waste Management could have really used an independent third party to evaluate and implement SAP. A law firm to create an escape clause out of this $100 million contract would also have been handy. This deal needed an escape hatch before a messy lawsuit.
Postscript: SAP had promised to implement this Waste Management system by Dec. 31, 2007. It never happened. According to Waste Management's complaint, SAP's solution to the contract spat is to convert the out-of-box implementation to a more involved software development effort.