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HP to pay Sky £318m in benchmark CRM suit

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9th Jun 2010
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The final stages of a long running battle that may change the nature of the outsourcing market have been played out as HP agreed to pay BSkyB £318 million compensation over a failed CRM implementation from 10 years ago.

The total settlement includes £230 million in damages, as well as £40 million in interest and tax, already paid by HP, which has also decided not to pursue an appeal against the ruling. HP said: "This matter is now closed, having been settled fully and finally on mutually agreed terms."

HP – which last week announced plans to axe 9000 jobs as part of a push to revitalise its services business - is believed to have run up legal costs of around £40 million fighting the legal battle with BSkyB. HP will now make a final £48 million payment to the broadcaster.

The case revolved around a CRM implementation project won by EDS – now part of HP – which the services giant won back in 2000. EDS had been chosen to design, build, manage, implement and integrate the process and technology for the CRM system which was to be based in Sky's contact centres located at Dunfermline and Livingston.

The objective was to replace the existing Digital Customer Management System (DCMS) which was an old system built up over the years. There were concerns in its ability to allow Sky to deal with an increasing number of customers and services, while it was also recognised that a new CRM system with enhanced functionality would enable the broadcaster to reduced its churn rate. The new CRM system was to include the replacement of the DCMS and Field Management Systems as well the implementation of a new telephony solution. It also needed to include functionality to replace billing and operational finance functionality in DCMS.

Even in the early days there were clearly issues as a renegotiation followed in 2001 which led to a Letter of Agreement. In 2002 Sky took over the performance of EDS' role of Systems Integrator and a Memorandum of Understanding was signed. Sky then alleged that EDS had made fraudulent misrepresentations which led to EDS being selected over Pricewaterhousecoopers.

Instead of the intended CRM system going live on 31 July 2001 and being completed by 1 March 2002 at a baseline budget of £47.6 million, Sky would later contend that the functionality for the CRM system was only completed in March 2006 at a cost of about £265 million.

Seriously in delay

In a judgement delivered in January, EDS was found to have deliberately lied about the time needed to complete the customer software implementation at the broadcaster. EDS "failed properly to resource the project" after this point, and was "seriously in delay" with regard to milestones, the judge wrote in his judgement. In the eight months to March 2002, when EDS’ work was terminated, it had done "little".

At one point during the legal battle, it emerged that one of the EDS team – and one of the firm's main witnesses in the case - had lied about his professional and academic credentials. Joe Galloway had stated to the court that : "I hold an MBA from Concordia College, St. Johns (1995 to 1996)". He said that he was in St John in the US Virgin Islands and attended Concordia College for approximately a year which involved attendance at classes.

In reality, Concordia College was a website which provided on-line degrees for anyone who paid the required fee. To demonstrate this, BSKyB's QC applied for an MBA degree for his pet dog Lulu. Lulu was awarded a degree certificate and transcripts which were in identical form to those produced by EDS' man Galloway - but with better marks!

Galloway also told the court that he had worked on St John on a project for Coca-Cola and had flown in and out of the island on "a small commuter flight". He said: "It was a long project. We were there a total of 15 months, but I would be there for a time and then go away and then come back." In fact, there was not and never had been a Coca-Cola office or facility on St John and it was not possible to fly onto the island as there was not, nor ever had been an airport on St John.

EDS accepted that Galloway had lied in court and he was dismissed from the firm.

Moving on

With the case finally settled, HP will be hoping that it can move on from the situation as swiftly as possible. The firm has been working to absorb EDS into the HP corporate structure and shaking off the baggage of the BSkyB case can only help at a time when there's still much to be done. Last month, HP CEO Mark Hurd commented: "Our services business has made great progress integrating EDS and we see the results both in our pipeline of opportunities and improved margins. That being said, we still have more work to fully capture the enormous opportunity."

The firm also plans to invest $1 billion in its enterprise services unit over several years while also laying off 9,000 employees, This should result in savings of $500 million to $700 million a year and help its corporate clients to run their businesses faster and more efficiently, according to Tom Iannotti, senior vice-president and general manager of HP Enterprise Services, who added that the company has identified "significant opportunities" to grow. "These next-generation services will enable our clients to benefit from the combined technology and services leadership that only HP offers," he said

Meanwhile, other outsourcing giants may well be looking a little more closely at contract negotiations and service level agreements as the case will undoubtedly set a benchmark for future proceedings of a similar nature. "Opinion is divided as to whether HP should have dropped its appeal," noted Dr Katy Ring of analyst firm K2 Advisory. "One difficulty may have been that some key members of the original EDS legal team involved in the case have left HP as part of its rounds of redundancies. That being said, a legal precedent has now been set and this provides a new opportunity for customers unhappy with their contracts to seek a litigious exit.

"For buyers entering new contracts the lesson to be learnt is that contracts have to factor in change management issues, and that both buyers and suppliers must agree mutually acceptable parameters for change in project scope. In much the same way that buying stocks and shares carries the caveat that they may go up and down in value, IT projects may not deliver what some people expect them to deliver. We all know this to be true but often choose to forget this at the moment of purchase!"

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