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7/22/2005
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See You In Court

Behind-the-scenes activity keeps lawyers busy as customers sue vendors over failed IT projects--and as vendors fight back.

Collin County, Texas, last year signed an $8 million contract with Siemens Business Services Inc. for SAP applications to manage the fast-growing county's financial, human-resources, and other operations. Shortly after work began, however, Siemens encountered problems meeting the contract's requirements, and things only got worse from there, the county charges. In March, Siemens said it couldn't complete the project at all. With $1 million down the drain, angry county leaders sued Siemens and SAP's public-services unit. Damages sought: $10 million.

You don't hear much about IT projects gone awry that end up in litigation, because tech vendors avoid talking about their million-dollar mess-ups, and there's little upside for customers in grumbling. Many of the companies contacted for this story declined to get on the phone. But there's a constant buzz of legal activity behind the scenes as vendors and miffed clients point fingers over software or systems-integration undertakings that fall far short of expectations.

Collin County is represented by Dallas lawyer Peter Vogel, one of hundreds of attorneys across the nation who specialize in IT litigation. Neither Vogel nor Siemens would comment on the specifics of the case, and SAP didn't return phone calls seeking an interview. Vogel says an out-of-court settlement remains possible. Indeed, only

a small percentage--as little as 3%, by one estimate--of such disputes reach trial or binding arbitration; most are settled out of court or through mediation, with the outcomes often concealed from the public.

The majority of lawsuits brought by business customers involve systems that never got deployed, failed to work as promised, took too long to implement, or cost too much. But it works both ways: Vendors are known to sue clients, too, usually for failure to pay.

The legal professionals who specialize in IT litigation are keeping their skills sharp. Last month, some 100 lawyers attended the International IT Law Conference at Southwestern Law School in Los Angeles, where sessions included Simplifying Complex IT Litigation and Computer Disasters. There also was a moot court on a make-believe IT project to build a Web site, LargeWorld .com, for a fictitious travel consortium at a projected cost of $10 million. The trial highlighted many problems that can and do occur in real life: employing unproven technologies, lack of cooperation among partners, understaffing by a contractor. When a nonconsortium airline unveiled a competing Web site with unique features, LargeWorld needed to develop those, too. That added eight weeks and $2 million in costs. Once launched, LargeWorld was slow and buggy, and it got hacked by a former employee of the project's systems integrator. Fixing all that cost another $4 million.

The parties could have avoided litigation with better project management and documentation, suggests Michael Silverman, an IT litigator who participated in the moot court. Lack of communication between developer and client proves to be the biggest problem for many projects, and it's a huge mistake. "Get your whole team together to try to resolve the problems before firing those nuclear missiles," Silverman says.

Going to trial can be extremely expensive, so both sides are motivated to reach a settlement. If they can't agree, they often hire a mediator with an IT background. A final step is binding arbitration or trial. Given the prospects, most companies will try to work out their differences first. "Most get resolved short of filing the suit," says IT litigator Donovan Conwell of Tampa, Fla.

Case in point: Remember Halloween 1999, when a major order-fulfillment fiasco at Hershey Foods Corp. caused a 19% drop in profit? Hershey--which invested $112 million in SAP applications--stuck with its ERP vendor, and the two companies fixed the problem. "Everything's running very well," Hershey CIO George Davis told InformationWeek in 2002.

Legal disputes between user and vendor usually aren't clear-cut. Companies sometimes "partner" with vendors in implementing new systems, meaning responsibility for failure might be shared. "Both sides contribute to failure," says Warren S. Reid, president of the IT consultancy WSR Consulting Group, which specializes in IT litigation. One side could be 15% responsible and the other 85%, "but there's always blame to go around," he says.

Changes in the scope of a project can have something to do with it. Technology initiatives aren't static, and systems in development can be outdated by the time they're turned on. Who's at fault, say, when a vendor builds a Web site for a client and a competitor comes out with a site offering more and niftier features?

Whether there are more IT lawsuits today than in the past is unclear; even rough figures are hard to find since legal databases don't differentiate IT litigation from other types of corporate contract cases. Silverman senses that more IT suits are being filed, despite vendors doing a better job in recent years of delivering workable systems on time and within budget. The pace of the Web, he asserts, has made some vendors sloppy. "The Internet forces people to move faster to get things done and allows developers to release software that may not be as complete as they'd like because they know they can fix it," Silverman says.

See if this sounds familiar: "Let's just get the software done and out to users and see how well it works. It doesn't need to be perfect." Says Silverman, "I've seen that argument made."

But Reid contends the pace of IT litigation has slowed, partly because there hasn't been a new tech wave sweeping the market, such as the tough-to-implement enterprise systems popular in the 1990s. Then, project failures seemed the norm as ERP systems took too long, cost too much, and often didn't work as promised. Standish Group studies show that 31% of IT projects failed in 1994; that rate plunged to 18% by 2004. "Both parties [client and vendor] are doing a better job in managing projects," Reid says.

Yet IT remains complex. Standish deemed 53% of IT projects last year as challenged, meaning they had delays and cost overruns of 20% or more. That figure was unchanged from 10 years earlier.

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