Outsourcing: Ruling Against EDS Gives Customers Power

By Stephanie Overby , CIO |  Business, EDS, HP

Although the U.K. court ruling was decided largely on the basis of facts from one person's statements as opposed to systematic failings of the outsourcer or outsourcing vendors as a whole, says Brudenall, dissatisfied outsourcing customers may go digging through notes from the pre-contract courtship phase of their relationships to see if arguments around fraud can be made.

"The letter of the contract will generally prevail under U.S. law," explains Harvey, "unless a complaining party is able to prove that there was fraud in the inducement to sign the agreement or intentional misrepresentation or something of that nature that would cause a court to look beyond the contract itself."

It's likely only large or high-profile outsourcing customers might consider this kind of lawsuit, but Fersht says he's already seeing several vendors trying to preventatively terminate unhappy-and unprofitable-relationships where delivery is not meeting expectations.

"It's not always the vendor's fault," Fersht points out. "It's often a combination of poor relationship management on both sides."

The cost of establishing an outsourcing agreement could also go up as a result of customers engaging in more extensive due diligence on their providers' pitch, notes Harvey. And, says Brad Peterson, a partner in Mayer Brown's sourcing practice who helps companies contract with IT vendors, "it will be harder for customers to get vendors to accept risk."

What's unclear is whether this case is likely to influence vendors' sales tactics. "The days of IT suppliers making grandiose claims about the abilities of the company or a particular piece of technology should be over," says Brudenall. "If suppliers learn anything from this case, it is that courts-in the U.K. at least-will come down hard on any supplier found to have given misleading and fraudulent statements to a customer in order to win the business."

Vendors already know the risks of putting "optimists" on commission, says Peterson, and have controls in place to manage that.

Still, "the pressure to win business is greater than ever," says Fersht. Some providers may continue to promise the moon, and "just try harder not to mess up with clients in the future." That could mean greater attention to SLAs in the negotiation process and increased investment in project management and client delivery expertise.

Diligent IT outsourcing customers should make sure their contracts capture as much of what is said during sales and negotiations as possible.


Originally published on CIO |  Click here to read the original story.
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