Enterprise Software

ERP vendors, implementers could be in for an avalanche of litigation

An botched implementation of SAP R/3 forced former drug distributor FoxMeyer Corp. into bankruptcy, according to a lawsuit filed against SAP and Andersen Consulting. Does this signal more litigation threats for ERP vendors and consultants?


Reading the headlines over the last couple of years might lead you to believe that ERP is in hot water. Quite a number of high-profile companies have reported problems with ERP systems and their implementation—Hershey Foods Corp., Whirlpool Corp., PetsMart, and Sobey’s,a largeCanadian supermarket chain, are a few recent examples.

ERP vendors and implementers, however, will tell you a different story. They say that although it’s true thatthere have been dissatisfied customers, these only represent a few cases out of tens of thousands of implementations. The media, they argue, report only the bad news.

In this article, I’ll tell you about a lawsuit brought by one company against the consultancy that handled (or mishandled, as the company contends) its ERP implementation, and I’ll talk about what this suit might mean for ERP vendors and consultants going forward.

First of three parts
This first installment of a three-part series discusses a lawsuit filed by FoxMeyer Corp., a former Texas-based drug distributor, against Accenture and SAP, and the effects the suit could have on other ERP implementers. Later articles in the series will discuss common problems with ERP implementation firms and some details to include—and avoid—in implementation contracts.

FoxMeyer Corp.’s case
FoxMeyer Corp., once the fourth-largest drug distributor in the country, is a name likely to make headlines in the coming months. Back in 1993, the Houston-area company contracted with Andersen Consulting (now Accenture) to implement SAP R/3. That implementation proved to be so disastrous, according to FoxMeyer,that it forced the company into bankruptcy and liquidation in 1996.(Neither SAP nor Accenture agreed to comment for this article.)

The bankruptcy trustee, on behalf of unpaid creditors, has filed lawsuits against SAP and Andersen Consulting, alleging that each contributed to FoxMeyer’s demise. Those cases, filed in 1998, are scheduled to go to trial later this year.

Some observers believe that the outcome of the case against Andersen will hit home with ERP customers if FoxMeyer recovers. FoxMeyer has alleged, in a case pending in the district court of Harris County, TX, that Andersen misrepresented the extent of its expertise, assigned inexperienced people to the project, and concealed from FoxMeyer the limitations of the R/3 software.

Will this case open the litigation floodgates?
“People remember the headlines,” says one SAP expert, “and this headline is going to read ‘Client recovers against big consultant over ERP implementation.’ There is a lot of latent dissatisfaction over ERP, and people are trying to figure out who’s at fault.” The likely result: an avalanche of future lawsuits against implementation consultants.

The attorney for the FoxMeyer trustee does not disagree. “Holding implementation firms accountable is a burgeoning area in the law,” says Mark Ressler, an attorney with the law firm Kasowitz, Benson, Torres & Friedman in New York. “One thing we’re doing in our case is exploring the notion of professional malpractice in software implementation.”

Any future torrent of litigation is dependent on two factors: one, that FoxMeyer wins, and two, that other companies are looking for an excuse to sue. Both of these suppositions are subject to dispute.

“Packaged software that has been implemented thousands of times is not necessarily bug-free,” says Jim Shepherd, an analyst with AMR Research in Boston, who has been following the FoxMeyer litigation. “But it is unlikely that problems with the software would cause an implementation disaster. This situation probably involves poor planning, poor management, and underfunding on the part of the customer.”

It has become more common to sue the implementation consultants over IT projects, Shepherd acknowledges,because they don’t have the advantage of selling a packaged product. But they do usually have rigorous methodologies backed up by reams of documentation that show the scope, plan, and execution of the project.

Shepherd's assertions hold water, if developments in the insurance industry are any indication. "Among insurance companies underwriting big projects, there is a reduction in capacity that the industry is willing to put up," says Tim Ehrhart, assistant vice president of worldwide errors and omissions underwriting at the Chubb Group, the largest underwriter in the IT sector. That means, in essence, that coverage levels are down while premiums and deductibles are up on insurance policies that cover this type of professional liability.

"What is happening in the marketplace is a direct result of the suit activity that we are seeing," says Ehrhart.

Nor does Shepherd agree that there are numbers of dissatisfied clients waiting on the sidelines to file suit. On the contrary, he suggests that there is a common but unfounded perception that there is a great deal of dissatisfaction with SAP.

“Only a dozen of these cases have ever come to light out of 30,000 or 40,000implementations,” he said. “Thevast majority of customers continue to buy seats and to upgrade. That is not the profile of a failed system.”

Leading ERP implementers—-the Big Five, IBM Global Services, EDS, and Perot Systems—continue to grow and thrive, Shepherd said. “Thebiggest implementationconsultants all have large ERP implementation practices, and most of that business is very successful.”

And with FoxMeyer’s troubled financial history—overextended management and commitments to long-term, unprofitable contracts—Shepherd also believes that the FoxMeyer case will be difficult for the plaintiff to win.

FoxMeyer attorney Mark Ressler tacitly admits that the distributor was not in the pink before it contracted with Andersen. “To the extent a company is in a precarious state,” he says, “it really can’t afford to spend tens of millions of dollars to overhaul its technology and get nothing in return. Not only did FoxMeyer fail to achieve cost efficiencies, but it was also out tens of millions of dollars in fees it paid to the consulting firm and software developer.”

Still, Ressler, a former federal prosecutor, is pushing hard to win the case. In an amended complaint filed last spring, Ressler alleges that Andersen’s actions were repeated with other customers, and is now seeking to prove that the FoxMeyer implementation was part of a “pattern and practice” of unfair dealings with clients.

In what Ressler views as a significant development, the trial judge ordered Andersen to turn over documents with regard to some of these other projects. “The judge found that the other projects were relevant to our case,” he explains.

Not surprisingly, Ressler sees the FoxMeyer implementation to be part of a “disturbing trend.” “While our case related to an implementation that lasted from 1994 to 1996,” he says, “problematic implementations have continued to the present. This suggests that the problems of the 1990s were not just growing pains.”

Share your ERP experience
Is there a sea of dissatisfaction with ERP performance? Or are most implementations successful? Give us your thoughts by e-mail or post a comment below.

 

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