BSkyB’s legal case against EDS is over, and the loser in terms of both money and reputation is EDS. EDS’s new owner, Hewlett Packard, has already paid £270 million in damages to Sky, and more may follow.
The case has significant ramifications for all CRM outsources, indeed, for any IT outsourcers.
The bare bones of the case are these.
In 2000, BSkyB, the UK’s largest satellite broadcaster, called for tenders to design, build, manage, implement and integrate processes and technology for a new CRM system for Sky’s Scottish contact centres.
EDS won the bid in the face of keen competition from PwC, but then failed to deliver the project. Sky eventually sacked EDS and, in 2002, brought the project in-house.
Instead of the intended CRM project going live in July 2001 and being completed by March 2002 at a baseline budget of £47.6 million, Sky contended that the functionality for the CRM System was only completed in March 2006 at a cost of about £265 million.
Sky claimed £709 million in damages from EDS, largely accounted for by lost business benefits. Two major classes of lost business benefit were computed: churn reduction and call volume reduction. Had the CRM system been implemented on time by EDS, Sky suggested they would have experienced reductions in both customer churn and call volumes, due in part to enhanced customer service by Call Centre agents and customer self-service.
EDS made misrepresentations prior to entering into the contract
Sky alleged that EDS won the contract based on representations made about the resources, cost and time to deliver the work.
Justice Ramsey, the presiding judge in the English and Welsh High Court, found that “Sky have not established that EDS made a misrepresentation” (quote from the published judgement) in relation to resources and “(a)ccordingly, EDS are not liable to Sky for misrepresentation as to resources.”
Justice Ramsey also found that EDS had not misrepresented the cost of the project. He writes: “EDS carried out a proper estimate of the cost of completing the project and had reasonable grounds for holding the opinion that they could and would deliver the project within that budget… Accordingly, EDS are not liable to Sky for misrepresentation in relation to cost.”
However, the judge found against EDS in respect of time. In their evidence, EDS claimed that they had carried out a proper analysis of the amount of elapsed time needed to complete the initial delivery and go-live of the project, and that they could and would deliver the project within the specified timescales.
Justice Ramsey disagreed. He reported: “That representation was false as there was no “proper analysis” nor were there “reasonable grounds”. It was made dishonestly by Joe Galloway [at that time Managing Director of CRM at EDS] who knew it to be false. In making the misrepresentation, EDS intended Sky to rely on it and to select EDS for the Sky CRM Project and Sky did so. Accordingly, EDS are liable to Sky in deceit for that misrepresentation.”
EDS made misrepresentations during the course of the contract
Sky also alleged that EDS made further misrepresentations during the course of the contract, namely that that it had the resources to complete the project to a revised programme and budget negotiated with Sky in 2001.
Justice Ramsey ruled that EDS had acted negligently in making these representations to Sky.
EDS breached its contract with Sky
Sky also alleged that EDS breached the contract by failing to provide sufficiently experienced personnel; failing to deliver services and documentation as required by the contract; and failing to exercise reasonable skill and care, or to conform to good industry practice.
Justice Ramsey agreed that EDS had breached the contract. He ruled that EDS’s project management was ineffective and that it had failed to resource the project with adequate technical and managerial talent.
Justice Ramsey also found that even after problems had been identified mid-project, EDS still failed to resource the project adequately. EDS was therefore judged to have failed to exercise reasonable skill and care or to conform to good industry practice in its performance of the contract.
Representations made prior to contract can be the basis for damages claims
EDS had tried to argue representations made prior to contract signature should play no part in the damages claim. EDS was relying on Clause 1.3.1 of the Sky-EDS contract. This ‘entire agreement’ clause read as follows: “…this Agreement and the Schedules shall together represent the entire understanding and constitute the whole agreement between the parties in relation to its subject matter and supersede any previous discussions, correspondence, representations or agreement between the parties with respect thereto…”.
Justice Ramsey found that although pre-contractual representations did not form part of the contract they nonetheless did in fact exist and could be used by Sky to support a non-contractual damages claim. He writes: “If it had intended to withdraw representations for all purposes then the language would, in my judgment, have had to go further” for example to expressly state that the pre-contractual representations were withdrawn, overwritten or of no legal effect.
You cannot rely on contractual liability caps if you make fraudulent representations.
The Sky-EDS contract contained a provision that limited EDS’s liability for breach of contract to £30 million. The relevant contract clause reads: “the Liability Cap for the Term shall not at any time be less than £6 million (six million pounds), nor greater than £30 million (thirty million pounds).”
Justice Ramsey found that the liability cap did not apply to the fraudulent misrepresentations made by EDS, therefore exposing EDS to a potential maximum damages claim of £709 million.
Some might argue that there has been a long tradition of CRM outsourcers overselling their capabilities, and clients understating their requirements, but both managing to muddle through their differences in the execution of the contract.
This ever-so-folksy interpretation of the client-vendor relationship has been shown to be a hollow sham by the Sky-EDS case. Outsourcer behaviours must change in several important ways:
1. Outsourcers must accept that have a duty of care to ensure that all resource requirements and time estimates are thoroughly justified, so that project costs are grounded on firm foundations with explicit assumptions. More diligent pre-sales analysis will lift bid costs for vendors, but these may be recoverable if vendors agree appropriate bid conditions with clients; if not they’ll just have to be recovered by the project costs. It will also take longer to prepare responses to RFQ’s. Outsourcers must ask themselves whether they are making any fraudulent (knowingly false) or negligent (carelessly false) claims about resources, time and costs. This case shows that it is better not to win a contract than to win it fraudulently and face the legal and reputational consequences.
2. Outsourcers must work much more closely with clients in the pre-design phases to establish exactly what functionality is required of the CRM system. In the Sky-EDS case, EDS claimed that the client really had little idea of what they wanted the CRM system to do, and even when this was established, that the client’s requirements kept changing. Any changes to functionality will have implication for resources, time and costs.
3. Client negotiations should be handled by honest, knowledgeable people. Mr Galloway’s dishonesty (which was dramatically proven in court when the prosecuting barrister’s dog was shown to have earned the same MBA as Mr Galloway) cost EDS £200 million. In a complex project such as the Sky CRM project, it may be difficult for any individual to be across all aspects of the project, and so there may be a case for multiple persons representing several supply-side skill-sets to be involved in pitching. Salespeople certainly need to be made aware of their legal obligations. Reward systems may also need review – will salespeople who are rewarded for winning contracts have any ownership of project delivery?
4. Outsourcers must ensure that they acquire and make available the right resources to deliver a project on time.
5. Outsourcers must accept that legal compliance costs will rise. Lawyers will have to do a better job of mitigating risk by establishing exactly what representations are relied upon by each party, and by explicitly excluding certain types of risk-bearing representations.
Footnote: Francis Buttle, the author of this article, was retained by one of the parties in this case to provide independent critical assessment of expert witness statements and evidence. Francis Buttle is a CRM expert, not a lawyer.