Will BSkyB victory over EDS increase cost of outsourcing?

The high court ruled last month that EDS, now part of HP, misrepresented its capabilities when supplying a CRM system to BSkyB. The case puts pressure on suppliers to improve the way contracts are negotiated and managed.

The high court ruled last month that EDS, now part of HP, misrepresented its capabilities when supplying a CRM system to BSkyB. EDS, which has already been ordered to pay £270m damages, lost on the grounds of fraudulent misrepresentation.

The case was not the landmark judgement many people first thought. But it will put pressure on suppliers to improve the way contracts are negotiated and managed.

It is a warning to suppliers that unless they change their pre-sales processes they too could face fraudulent misrepresentation, particularly if they are not clear what they can deliver.

An event, sponsored by Computer Weekly and outsourcing consultancy Burnt-Oak Partners and attended by businesses that outsource, along with suppliers and lawyers, revealed how those in the industry think the ruling will change the way they do business.

Jean-Louis Bravard, director at Burnt-Oak Partners and former global head of financial services at EDS, says suppliers' pre-sales costs will inevitably increase and could be passed on to their clients: "Suppliers are not going to absorb these extra costs, but they will add them to the cost of the [delivery] model."

According to an insurance industry source, insurance premiums have already increased by 20% to 30%.

Lee Ayling, UK head at sourcing consultancy Equaterra, says suppliers will face added costs in the pre-sales process, which does not always end in a sale. "Inevitably, certain suppliers will incur more costs and will get the cost back from their customers somewhere."

 How the judgement will hit supplier costs
 
  • Insurance premiums will increase.
  • Many suppliers will implement process changes.
  • Suppliers will have to change how they train pre-sales people.
  • Request for proposals (RFPs) will have to be tighter, with no more cut and pasting from marketing material.
  • The project delivery teams have to be brought into the pre-sales process as early as possible.
  • Contracts might take longer to complete, therefore costing more.
  • Suppliers will have to invest more in red teams - post-sales people who make sure contracts are deliverable.

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 no longer be possible," he says.

Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner, agrees that supplier bid costs will increase, but he does not expect 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.

"If suppliers are tempted to put their increased bid costs 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," he says.

Peter Brudenall, lawyer at Hunton & Williams, says some suppliers and customers still do the minimum to ensure contracts are deliverable. He says that 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," he says.

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 a rise in outsourcing prices would make it less likely to outsource in the future.

 

Quick deals might dry up 

It will take longer to agree contracts as suppliers attempt to make them bullet-proof following the EDS/BSkyB case. This will make it more difficult for businesses to use outsourcing as a means to react quickly to a business challenge.

To ensure the contract is watertight, businesses must understand what they want from the start.

But according to one member of the audience at the Burnt-Oak Partners and Computer Weekly event, this is difficult because many projects work to 18-month timeframes, so requirements often change while the project is being implemented. This will increase the use of third-party sourcing consultancies.

 

 

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