Customer blames bankruptcy on IBM IT failure

American LaFrance (ALF), the "leading brand of custom-made fire fighting, fire rescue vehicles, ambulances, and heavy-duty work refuse vehicles," has declared bankruptcy, blaming IBM and a failed ERP implementation.

According to filings in the District of Delaware bankruptcy court (PACER case no. 08-10178), problems occurred when ALF was spun out as an independent company from Freightliner, the previous owner. During the transition, ALF outsourced "accounting, inventory, payroll, and manufacturing process services" to Freightliner. As part of the transition, ALF developed a "standalone" ERP system designed to support the firm after the Freightliner separation was completed.

The bankruptcy filings describe the painful cutover from Freightliner:

Almost immediately upon the changeover to the ERP System, ALF recognized serious deficiencies with the system that had a crippling impact on ALF’s operations. Some of the problems that ALF encountered in implementing the ERP System included, among others: (i) inability to reconcile data between the Freightliner system and the ERP System; (ii) incorrect or incomplete inventory, purchasing and customer data due to either problems with the Freightliner system or the conversion of the data to the ERP System; (iii) inaccurate or incomplete vehicle configurations loaded in the ERP System; (iv) insufficient training on the ERP System; and (v) missing financial information including accounts payable detail, incomplete or inaccurate accounts receivable data, and inaccurate beginning general ledger balances.

For the next several months following the changeover, ALF attempted to solve the plethora of problems with the ERP system. Despite such efforts, as a direct result of the problems with the ERP System, ALF became unable to complete the manufacture of many pre-ordered vehicles.

The manufacture of highly-customized Emergency Vehicles requires the availability of a large number of inventory SKUs at key points in the production process. The conversion from the Freightliner system to the ERP System resulted in the inability to account for inventory on a reliable basis. This, in turn, severely limited ALF’s ability to deliver completed products to its customers. Consequently, ALF’s inability to deliver vehicles had an immediate impact on ALF’s cash flow and created a liquidity crisis.

ALF claims that IBM is responsible for the IT problems that precipitated the bankruptcy:

ALF is currently analyzing potential causes of action against IBM based upon services provided by IBM in connection with the problem-riddled transition to the ERP System.

The documents describe IBM Corp. (for the "customer agreement") and IBM Global Services (for "systems applications project assistance") as having open contracts with ALF. IBM is listed as a $5.5 million creditor, although ALF disputes the invoices:

THE PROJECT FAILURES ANALYSIS

In my reading of the documents, which only present ALF's side of the story, it could be said that both ALF and IBM dropped the ball during the transition from Freightliner. Here are my conclusions:

• IBM did not manage the project properly. Given ALF's dependence on Freightliner, "serious deficiencies" in production software should have been identified prior to the cutover, for example by testing and running the systems in parallel. IBM managed development, which typically includes extensive testing before deployment.
• ALF did not manage the project properly. IBM's role does not minimize ALF's ultimate responsibility for managing this mission-critical IT project. ALF's management was probably distracted by the deteriorating Freightliner relationship, by a major facilities relocation that didn't go well, and by generally poor market conditions.
• The ERP problems were managerial, not technical, in nature. The list of ERP and data problems cited in the filings suggest poor project management, rather than technical issues, were at the root of the difficulties. Since the division of labor between ALF and IBM is not made clear in the filings, it's impossible to discern where responsibility lies.
• General market conditions made things worse. While all this was happening, the market for ALF's products tanked:

[T]he Emergency Vehicle industry is currently depressed. Many competitive manufacturers are experiencing financial difficulties and several have ceased operations.

• All these issues created customer service problems, multiplying the negative effects of the market downturn. For example, the Bellingham Herald reported:

The city is trying to get a refund of the more than $362,000 it spent on an American LaFrance pumper that has had electrical problems 10 times [since 2005].

In addition, FireRescue1, an industry news source, states:

Several departments that have ordered apparatus have suffered lengthy delays in delivery.

"I think one of their problems may have been that they underestimated the problems with moving a plant and production and actively pursuing business for new apparatus," [Bill Peters, who runs New Jersey-based Fire Apparatus Consulting Services] said.

"Perhaps they bit off more than they could chew, especially with the building of a new factory. It might have been wise not to take as many orders and not to have backed themselves up so much."

This risky, high stakes project was primarily business in nature, despite the heavily technical components. Project failures often arise when non-technical senior management don't fully understand the business ramifications of technical decisions made by IT. Poor communication and lack of understanding between IT and business management remains a serious problem contributing to many IT failures. My ongoing interview series, NakedIT: Conversations with Innovators, explores this issue in depth.

The combination of so many negative conditions ultimately created a situation where the company could not recover, leading to the bankruptcy. ALF was founded in 1832, so it's a shame to see this happen. Unfortunately, many of ALF's vendors will probably suffer as the company goes through bankruptcy.

(To research this post, I studied the bankruptcy documents, left messages for ALF's proposed Chief Restructuring Officer and its IT manager, spoke with two attorneys connected with the case, and got unpleasantly barked at by a third. All facts, conclusions, and interpretations in this post are based on information obtained from publicly-available filings.)

Update 2/22/08: IBM ignored a request for comment on the story. Larry Dignan wrote a great follow-on post.