February 26, 2010 by Jonathan Gross
With the enterprise resource planning (ERP) software battle between SAP and Waste Management heating up, Manufacturing AUTOMATION asked Ontario lawyer and ERP consultant Jonathan Gross to give his views on the lawsuit.
Earlier this month, Waste Management (WM) upped the ante in its lawsuit against SAP to $500 million. The root of WM’s claim is that it was allegedly deceived and defrauded by SAP during the ERP selection and implementation phases.
The jury should have its hands full trying to untangle this mess. Assuming that all of the allegations are proven, in my opinion, SAP should end up on the losing side. WM, however, would probably end up sharing part of the blame.
|According to [Waste Management], SAP pitched WM on a well-tested, sector-specific, ready-to-install ERP package.|
WM alleges that it learned after the implementation had started that no such software actually existed.
The Fraud Allegations
According to the plaintiff’s petition, SAP pitched WM on a well-tested, sector-specific, ready-to-install ERP package. WM alleges that it learned after the implementation had started that no such software actually existed. Rather, the ERP system in question was still in development and had “never been tested in a productive environment.”
WM’s fraud allegations go much deeper. Before buying the product, SAP purportedly demonstrated the fully functioning software to WM. WM claims it relied on SAP’s demonstrations when it finally chose the SAP software. WM says that it only later learned that SAP demonstrated a “mock-up” version and that the demonstrations “were rigged and manipulated to depict false functionality.”
SAP denies the allegations. However, if WM wins on its fraud and misrepresentation claims, this case could drive a stake through the heart of the world’s leading ERP vendor. No customer would want to build its business operations on a foundation of lies and deception. In addition, SAP would likely become exposed to criminal investigations.
It’s important to note that members of SAP’s C-Suite were directly involved in landing the WM account. It’s also worth mentioning that some of those executives are no longer with the company. There’s plenty of speculation about whether the departures are related to WM.
Waste Management’s Share of Liability
Just on the PR battle, SAP is getting pretty banged up. WM is also taking its share of hits. A close reading of its own court filings shows that it’s partially responsible for its own losses.
Here are two of the most glaring examples taken from WM’s own court pleadings:
#1: “Waste Management relied on [SAP’s] Business Case estimates in agreeing to license the SAP software.”
As part of its sales pitch, SAP prepared a “business case.” In it, SAP stated that its software would enable WM to achieve between $106 million and $220 million of annual benefits.
WM showed questionable judgment in relying on SAP’s projections. Clearly, SAP was partial. It was trying to make a big sale. In my analysis, WM was imprudent and arguably negligent when it decided to rely on an obviously conflicted analysis.
WM should have done its own homework. If it needed help, it could have turned to an impartial third-party advisor. An independent analysis might have shown it that the SAP software wasn’t the best choice.
#2: “Waste Management believed that developing a new software posed unacceptable risk… and instead decided to look for an ‘off-the-shelf’ solution that was already fully developed and fully tested”
Then, before it selected the software, WM admits it knew that SAP’s “Waste and Recycling Software had been developed specifically for Waste Management," according to court pleadings.
This is a case of WM both having and eating its cake. On the one hand, WM wanted a generic and well-tested system. In the end, though, WM selected the SAP system knowing that it had been specifically designed for WM’s business.
I agree with the prudent approach that WM had considered but didn’t follow. A company of its size and scale had very little reason to assume the risks of early technology adoption. It should have made sure that system stability and system track-record were unassailable selection criteria. Had it done so, it wouldn’t have selected the SAP system and wouldn’t be embroiled in this lawsuit.
In the end, if SAP acted deceptively, there’s probably little that WM could have done to protect its investment. However, it could have mitigated some of its losses had it applied more rigour to its project management.
Jonathan Gross LL.B., M.B.A., is a lawyer and consultant who specializes in aligning business with IT, selecting IT systems and implementing IT systems. He can be reached at email@example.com and on Twitter at twitter.com/Pemeco.