Marin County sues Deloitte: Alleges fraud on SAP project

Marin County sues Deloitte: Alleges fraud on SAP project

Summary: In a important case, Marin County, California filed a complaint against Deloitte Consulting for its role in an over-budget SAP implementation.

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In a case that has the potential to reshape important aspects of the systems integration business, Marin County, California filed a complaint against Deloitte Consulting for its role in an over-budget SAP implementation. The lawsuit alleges that Deloitte committed fraud and "misrepresented its skills and experience."

ChannelWeb provides an overview of the case:

Marin County on Friday filed a lawsuit against Deloitte Consulting alleging fraud related to an SAP ERP software implementation the county said is still not working four years after it initially went live.

In its lawsuit, filed Marin County Superior Court, the county is asking for actual and compensatory damages of at least $30 million, along with unspecified punitive and, or exemplary damages and interest.

Deloitte in turn filed a claim on Friday with the Marin County Board of Supervisors that the County owes it $444,171.50 for work completed, plus an additional late charge of $111,713.80.

This quote, directly from Marin County's court filing, alleges fraud [see below for entire the complaint document]:

Deloitte mounted an extensive sales campaign to be hired by the County. As part of its sales efforts, Deloitte repeatedly represented to the County that Deloitte consultants had the requisite skills and experience to successfully implement a complex ERP software product specifically designed for public sector entities, developed and licensed by SAP AG and SAP America, Inc. ("SAP for Public Sector"). Deloitte further represented that for the County's SAP implementation, Deloitte had assembled a team of its "best resources" who had "deep SAP and public sector knowledge."

These representations were fraudulent.

The complaint emphasizes that the system integrator was aware of Marin County's lack of skill, experience, and capability to manage a complex ERP implementation. In non-legal terms, the complaint suggests that Deloitte lied to Marin County in order to make the sale:

Indeed, at the time Deloitte made [the representations], it knew that it did not have the ability or intention to provide the skilled resources necessary to deliver a successful SAP implementation for the County. Deloitte also knew that because the County did not have any prior ERP implementation experience in general, or SAP experience in particular, it would be depending on Deloitte to oversee, guide and manage the project. Notwithstanding such knowledge, Deloitte made these false representations in order to obtain the contract for the County's lucrative SAP project.

THE PROJECT FAILURES ANALYSIS

The lawsuit reads like a caricature of many IT Devils Triangle problems I discuss in this blog, and lists a catalog of alleged IT services failures.

For example, the complaint states that Deloitte mishandled staffing, project management, risk management, and testing:

As part of its fraudulent performance of the contract, Deloitte: intentionally and/or recklessly failed to disclose to the County that Deloitte's lack of SAP public sector skills resulted in a defective SAP system; withheld information about critical project risks; falsely represented to the County that the SAP system was ready to "go-live" as originally planned; conducted woefully inadequate testing; and concealed that it had failed to perform the necessary testing, thereby ensuring that system defects would remain hidden prior to the go-live.

According to the complaint, Deloitte failed to fulfill core system integrator responsibilities required on a project of this type.

Related: Exploring the Devil's Triangle The IT failures blame game (part 1) The IT failures blame game (part 2) 'Pain chains' and the IT Devil's Triangle

Broader context. Considering the case within a larger framework of IT failures in general, three general points stand out:

1. The court filing describes sales practices that are common through the consulting and systems integration industry.

For example, the complaint alleges that Deloitte committed to "dedicate our best resources and bring tailored implementation strategies to meet [Marin's] long-term needs." Many IT customers complain their system integrators do not follow through on such commitments and use inexperienced labor in attempts to reduce their own costs and increase profits.

Disconnects between service provider promises and actual delivery plays a significant role in many failed projects. For example, EDS recently lost a £200 million ($300 million dollars) court case to UK-based company BSkyB.

Related: Full text of EDS v. BSkyB court decision

According to ComputerWorld UK:

The judge found that in 1999-2000, when EDS pitched for the contract, its head of customer relationship management software had “dishonestly” represented the time required to complete the work. EDS had not conducted any “proper analysis” of time, the judge said. The then EDS head of CRM software, making the time representation, “knew it to be false,” the ruling found.

Taken together, the Marin County and BSkyB cases send a clear message to system integrators, consulting companies, and professional services departments inside enterprise software vendors: hyperbole and open-end, unsubstantiated claims are not acceptable.

2. The original services contract recognizes Marin County's inexperience with ERP. Marin's contract uses detailed language to specify the experience of people supplied by Deloitte.

For example, the contract says:

"[I]ndividuals shall each personally have significant prior experience, in equivalent positions and performing equivalent duties, with SAP software implementation and integration projects for governmental entities prior to being so assigned..." [See below for the entire services contract.]

Marin's contract language is highly specific regarding resource requirements, suggesting the County was concerned about its own ability to manage the project properly. If Marin communicated these concerns to Deloitte early in the project, it placed a further burden on the system integrator to oversee the work responsibly.

Related: The IT failures blame game (part 1) The IT failures blame game (part 2)

My writing on IT failures is clear that customers, software vendors, and system integrators typically share responsibility for project success or failure. Nonetheless, customers purchasing sophisticated systems, such as ERP software, do have a level of responsibility to ensure the successful outcome of their own projects.

In a recent podcast interview with an experienced SAP customer, I discussed customer accountability in relation to system integrators:

Customers should control the conversation with their integrators and lead from that premise.

Customers and software vendors cannot expect the system integrator to take final accountability for project success. Although vendors may be responsible to complete certain work, the customer must lead and drive the result. Customers cannot expect their integrator to prioritize, escalate, direct, and drive topics to closure.

The integrator’s primary interest is managing the contract and scope of work, so the customer must remain responsible for managing the integrator’s performance.

In my view, it is highly unusual for a project to fail without some culpability on the part of customer.

Related: Enterprise IT: Inside an SAP customer

Given this, and despite everything in the lawsuit, I believe Marin County likely does share some portion of the blame for this project failure.

3. SAP is conspicuously absent from the complaint. On this failed project, SAP supplied software and Deloitte provided services; the lawsuit does not question SAP's software functionality, capability, or business fit.

Although this was not an SAP services project and SAP shoulders no blame, the company's brand equity takes a significant hit whenever a so-called "SAP project" fails. Although SAP would not comment, I'm sure that company management is acutely aware of this impact.

This preliminary post is based on an initial read of the filings and a conversation with Mark Ressler, lead attorney on this case. Expect more detail as I digest the details. Given its potential significance to enterprise buyers, integrators, and vendors, I will follow this matter closely, and write more in-depth, as the situation unfolds.

Responding to my request for comment, a spokesperson for SAP told me, "SAP policy is not to comment on matters of litigtion especially when those matters aren't directly related to SAP." A Deloitte spokesperson did not immediately respond to my request for comment.

Here is a copy of the lawsuit filing, in its entirety (click the link to download the document):

Marin County complaint against Deloitte Consulting on failed SAP project

And here's a copy of the original contract between Marin County and Deloitte (click the link to download the document): Marin County - Deloitte Consulting contract on failed SAP project

Topics: Legal, Enterprise Software, SAP

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  • RE: Marin County sues Deloitte: Alleges fraud on SAP project

    Damn fine piece. I agree that the customer - especially if they opt for the "name" and do not perform proper due-diligence - may play a role in any implementation failure, but the role of the integrator who misrepresents themselves is perhaps more important.

    How often do consultants, professional services providers or integrators bet on the come that they can obtain/hire the necessary staff to implement a job that they have bid on? This is absolutely an important legal case worth following - if for no other reason than to see the reaction of SAP if Deloitte is found to be at fault (is there a burden on SAP to monitor/evaluate the ability of it's integrators to actually perform?).

    I'm looking forward to seeing your update on this...

    - Fred
    fred@...