Could a court ruling in favour of a customer in a long battle with an IT supplier, over a failed IT system, result in higher prices for businesses?
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The ruling that EDS, now part of HP, misrepresented its capabilities when bidding for, and selling, a CRM system to BSkyB was not a landmark judgement but it will change the processes used to reach the final contract.
The fact that EDS, which has already been ordered to pay £270m damages, lost on the grounds of fraudulent misrepresentation meant the law has not changed. But suppliers have received a warning that unless they change pre-sales processes there could be more rulings of fraudulent misrepresentation.
But these changes come at a cost and the clients could be charged more to meet additional supplier overheads.
In the past the relationship between supplier and client usually allowed some room to renegotiate, but EDS’s defeat gives customers another option.
An event sponsored by Computer Weekly and outsourcing consultancy Burnt-Oak Partners, attended by businesses that outsource, suppliers and lawyers revealed how the industry sees the ruling change the way they do business.
Jean-Louis Bravard, director at Burnt-Oak and former global head of financial services at EDS, says the costs for suppliers will increase and this could be passed on to their clients. “Suppliers are not going to absorb these extra costs but add them to the cost of the [delivery] model.”
According to a contact of mine there has already been a 20% to 30% increase in insurance premiums.
Lee Ayling, UK head at sourcing consultancy Equaterra, says the added costs will come in the pre-sales and process, which does not always end in a sale. “Inevitable certain suppliers will incur more costs and will get the cost back from their customers somewhere.”
He says that service providers should have repeatable processes which will lower the costs in the longer term.
Ayling says suppliers that provide standard outsourcing projects will not be affected but those doing large complex one-off projects will have to go through internal validation and qualification before agreeing contracts. “In the past some used to wing it but this will not be possible anymore.”
Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner, agrees that supplier bid costs will increase. But he does not expect the customers to be charged more as a result.
“The costs will be operational for the suppliers and they will not necessarily be able to pass this on to customers,” he says. For example legal costs will not rise but suppliers will have “to put robust processes in place which will add to management costs,” adds Lewis.
But Lewis says if suppliers start putting their prices up there will be others with more efficient processes that will step in and bid for the business.
“If suppliers are tempted to put their increased bid cots on customers those that are more efficient, have better management processes and do not lie to their customers will do better. They will not need to pass on the extra cost.”
Peter Brudenall, lawyer at Hunton & Williams, says there are still some suppliers and customers that do the minimal work to ensure contracts are deliverable. He says following the EDS/BskyB decision suppliers will have to invest in improving pre sales processes in the UK.
“I do not think they will be able to pass on the extra cost because it is a very competitive market.”
Stephen Boulton, head of IT at Leek United Building Society, says increased prices would put off many IT decision makers. He says the company currently favours in-house services and “If outsourcing prices raised it would disincentives them and make it less likely that we would outsource in the future.”
BskyB’s victory over EDS in a dispute over a failed CRM system will increase the fixed costs of outsourcing service providers but whether it increases prices for end customers is less certain. The healthy competition in the sector could limit the increases.