Miles Alexander, Partner at law firm Simmons & Simmons discusses the dispute between BSkyB and EDS

Ramsey J has finally handed down his verdict in the long running case of BSkyB v EDS (26 January 2010, Technology and Construction Court), ruling at least in part, in favour of the claimants, BSkyB.

The handing down of the verdict marks the end of a process of deliberation that began in July 2008 when the last court hearing on the case took place and decides a claim worth over £700m. The case itself took years of preliminary argument and amendment of each side’s submissions to come to Court. It concerns allegations of fraudulent misrepresentations and breaches of contract that go back as far as 2000.

It is reported that Ramsey J found the defendants liable in fraudulent misrepresentation on one of the five claims made by the claimants, rejecting the other four. The judgment is likely to be of interest to anyone involved in the marketing, tendering and delivery not only of major IT projects but also other large service contracts.

The Dispute

The case concerned a dispute that had arisen after BSkyB appointed EDS to build a £48m Customer Relationship Management system and provide training in its use following a successful tender. BSkyB alleged in their Particulars of Claim that the contract had broken down by February 2001. At this point the project was effectively put on hold and replanned and the contract varied accordingly by what was referred to as a “Letter of Agreement”. After this, deadlines for implementation continued to slip and the two companies parted ways in early 2002, with SSSL taking over the running of the contract, acting on what BSkyB have described as EDS’s “repudiatory breach”.

The court battle between BSkyB and EDS is a tale of a contract process that appears to have gone wrong from the start. The claimants alleged misrepresentation from the pitch process onwards which continued through to the signing of the Letter of Agreement. EDS fought back and argued that they had been hampered by vague and shifting requirements from the BSkyB.

While the full figure of damages to be awarded to BSkyB is to be determined at a hearing in February, the BSkyB believe that they are likely to be awarded at least £200m. This is  more than the limitation clauses would have restricted them to although somewhat less than the total £700m claimed by BSkyB.

Risks for suppliers and customers

Many business people will agree that a salesman’s pitch will often write cheques that those who do the actual work cannot cash but where such puffery becomes misrepresentation, especially where contracts attempt to exclude all extrinsic representations has been a matter for debate. Ramsey J’s full judgment,  runs to several hundred pages and no doubt discusses this issue in great detail. It is likely that it will have repercussions for suppliers giving estimates and accounts of their abilities and the functionality of their products to customers.

That contracts go wrong is also a fact of life and any supplier will carry out a risk assessment of these potential problems. According to BSkyB, the potential problems with EDS’s capacity to deliver were so severe as to make any representations made in the tender process fraudulent misrepresentation.  However, EDS took a different view. In their amended defence they argued:

“The points to which the Claimants refer are “risks,” which are commonly understood within the IT industry as anticipated potential challenges, to be avoided or managed. The Claimants have treated risks as if they were “issues”, i.e. currently manifest problems.”

A supplier doing the work is more familiar with the potential risks and pitfalls, which occasionally result in increased costs and overruns while the customer will want and expect everything to run smoothly and so be risk adverse. Contracts drawn up by the supplier will often exclude liability for delays and costs overruns will generally appear to fall on the side of the supplier. The firmest due dates that the customer will receive will generally be during the tender process but the contract will generally offer little practical comfort to customers unless time is of the essence which is almost unheard of. Where these worlds collide, the result is often dissatisfaction, disputes and ultimately, litigation.

Watch this space

HP (which now own EDS), continues to deny any accusations of deceit and are reported to have said that they intend to appeal the ruling. They are likely to hope that the process does not take up as much time and money as the original trial did. Despite the length of the judgment, the long term impact of the decision may well be in doubt pending the outcome of any appeal which may result in a redefinition of the law on misrepresentation. The recent case of CBS v Dunlop Hayward, shows quite how far the courts are willing to go in terms of awarding losses suffered against those they have found to be dishonest (for further details on that case, go to www.elexica.com/briefdoc.aspx?id=7383.

A more detailed note on the repercussions of this ruling and the effect the judgment is likely to have on the law surrounding misrepresentation will be published on www.elexica.com on Friday.

Last week we published a report on outsourcing and offshoring in UK subscriptions of The Economist. Key themes in the report were “defining successful outsourcing” (p3), “renegotiating existing contracts” (p10) and “assessing offshore risk”(p22). We’re always keen to hear feedback so please follow the links below to download a pdf of the report or read on our website.

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http://www.outsourcingandoffshoring.com/UP/whitepapers/33_Outsourcing_Final.pdf

If you like what you read then you may also be interested in O&O magazine, our title dedicated to outsourcing and offshoring. The magazine is practitioner–focused but with a strong foundation in theory and research, it is a valuable resource for financial controllers, as well as other professionals involved in the sourcing process.

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Outsourcing has progressed from involving only peripheral business activities towards encompassing more critical business activities that contribute to competitive advantage. One example of outsourcing can just involve the transfer of business support functions to external suppliers in order to obtain higher levels of performance at a lower cost with relatively little upheaval for the organisation. Another example is that outsourcing can lead to major organisational change that involves dismantling the traditional structure of the organisation, transferring staff to external suppliers, re‐defining staff terms and conditions, and altering the expectations of the employees that remain within the outsourcing organisation. Additionally many organisations have a mature portfolio of outsourced services and multiple vendors working together which requires significant management commercially, contractually and culturally. As a result, outsourcing has become an increasingly important and complex issue, and a detailed and structured approach to the evaluation of potential suppliers is a key component in getting it right. Where outsourcing is evaluated and managed appropriately, it can be a very powerful means of achieving performance improvements and contributing to the strategic development of an organisation. However, unless an ordered approach to evaluation is adopted, many pitfalls will be experienced and, ultimately, the failure of not achieving the right result. Quantum Plus’ clients benefit from our structured and proven approach to the whole evaluation process, from selecting the long/short list of potential suppliers through all subsequent phases of the outsourcing lifecycle to conclusion of a contract and transition to the new service model. It is important at each stage to use the increased understanding gained from the output of the evaluation to feedback to suppliers’ specific areas of interest or concern, thereby iteratively gaining an holistic and comprehensive appreciation of what the supplier will deliver, its capabilities and also areas for detailed consideration within the subsequent contract creation and negotiation. Although the evaluation process focuses on facts gathered throughout the various stages of the procurement process, including site and reference visits, it is important to also consider the cultural elements. This will ensure an organisation can answer the questions that may be more important to the long term success of the relationship, such as ‘Can we work with this supplier organisation?’ ‘Will there be sufficient cultural fit?’ The Quantum Plus evaluation methodology is tailored for each client, but has been proven to deliver the right result from small outsourcing deals to large strategic programmes for multinational organisations. Agreement by all stakeholders, and from the key decision makers, of the output of the evaluation at each stage ensures agreed milestones and a clear audit trail for the decision making process. This then provides an outcome that is comprehensive and detailed, and provides a firm basis for any final decision making process that is required within the organisation. Greg Rideout, Managing Director Quantum Plus For further information please visit www.quantumplus.co.uk or call 01789 201630

As companies look for ways to derive more value from their outsourcing initiatives, BPU (Business Process Utility) is emerging as an option. By aligning people, process and technology, the BPU delivery model is most suitable for transactional processes that are built around standard inputs with well defined outputs. Under the BPU model, the service provider offers a turnkey solution comprised of best-in-class people, processes and technology.

The BPU model lends itself to a unit transaction pricing (aka ‘pay-by-the-drink’) model and thereby allowing companies to move away from their current ‘fixed cost’ base to one that provides greater flexibility and predictability in the current economic environment.

Driven by increasing pressure to provide cost savings and process improvements in a competitive marketplace, outsourcing providers are constantly looking for ways to deliver more value to their clients. In the current economic environment, more companies are jumping onto the outsourcing bandwagon in order to realize sustainable cost savings. The FAO (Finance and Accounting Outsourcing) segment, in particular, is witnessing a significant uptick in demand. With the continuing maturation of the market, resulting in tangible benefits, CFOs of multi-national corporations are now aggressively outsourcing their finance and accounting back offices on a global basis. Because of FAO’s track record, companies are becoming increasingly comfortable in outsourcing more complex functions such as financial planning and analysis, reporting and treasury, in addition to processes that are unique to their industry and core to their business.

The offshore FAO market has evolved considerably over the last few years. The benefits of labor arbitrage are a given; companies now expect their service providers to be accountable for business outcomes. Traditional fixed-cost or headcount driven models alone, built primarily around labor arbitrage, no longer drive outsourcing decisions.

Companies are now finding that a consumption and gain-share based model better addresses their needs. As organizations become more sophisticated about their approach to outsourcing, service providers are developing innovative and efficient delivery approaches. The BPU model is emerging as an attractive option to reduce costs and reduces risks, but deliver faster and better results.

How does the BPU model work?

The BPU delivery model, a managed service solution, is structured as a turnkey offering which helps companies transform their businesses by tapping into standardized processes and unified technology platforms at a much faster pace. However, BPU operates at the process level and is not a solution for the entire finance organization.

For a process to be appropriate for BPU delivery, it must be a volume driven activity, with standard inputs, rules-based processing and a standard output. Because the process is standardized, the service provider creates a rules-based technology platform that automates the process significantly. Manual intervention is only required to address exceptions not handled by the rules-based technology. Best practices and technology provide scalability to the process and allows it to be managed as a ‘utility’.

BPU can be delivered on a modular basis, so customers can add additional components to the service, but, the end product is not customized for each individual client.

Within the finance and accounting world, processes such as vendor invoice processing, expense claim processing, reconciliations and 1,099 processing are good candidates for BPU delivery. BPU is predicated upon the ‘pay-by-the-drink’ approach, where business processes are viewed as ‘utilities’ and the customer pays based on actual units consumed. The service provider makes an initial capital investment in the technology platform and is responsible for hosting and maintaining it on an ongoing basis. This ‘process-ondemand’ approach is increasingly becoming popular among companies that are keen to outsource, but do not wish to commit capital for long-term transformation projects.

Realizing the market potential and the value it brings to customers, especially during an economic downturn, service providers are aggressively developing BPU offerings

Manish Vora,

Senior Vice President

Contributors:

Paul Bray is a freelance journalist who has contributed to The Daily Telegraph, The Sunday Telegraph, The Sunday Times, The Times, The Guardian and many magazines including Computing, Director and Nasdaq International.

Rod Newing has been a freelance journalist for 20 years, writing on business and management issues, mainly in the Financial Times. He is also a chartered accountant who has worked as a line manager and management consultant.

Jessica Twentyman is a business writer whose work has appeared in the Financial Times, Sunday Telegraph, Director, Computer Weekly and Information Age.

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We welcome your feedback and ideas for our next report.

Anthony Wilks

Editor