Recently PC Connection, Inc. ("Connection"), a seller of IT solutions to governmental entities and small, medium and enterprise companies, sued International Business Machines, Inc. ("IBM") in New Hampshire federal district court in a fraud and breach of contract action arising out of a failed ERP implementation. Connection alleges that IBM touted its experience as an implementation partner for J.D. Edwards software and recommended that Connection move off of its legacy ERP system into a more recent release. Connection alleges that although IBM represented that it could complete the implementation within 17 months, at a cost of $9.2 million, it completely failed to stay within these estimates. Instead, IBM sought to inflate the contract price by claiming that certain of the fixes were out of scope and would require change orders, which also resulted in significant additional delays.

According to the complaint, Connections relied on its existing ERP system which was a J.D. Edwards ("JDE") system known as "JDE World" for virtually all aspects of its business. As such, the system was absolutely critical to the smooth functioning of the company. JDE subsequently was acquired by Oracle, which continued to support legacy JDE systems while also releasing new software systems. One such system was called Enterprise One ("E1").

The complaint alleges that IBM as a vendor and consultant to Connection began advising the company on upgrading to a new ERP system as early as 2013. As part of that consulting work, IBM recommend that Connection upgrade to E1, which IBM claimed would be faster and less costly to implement than other systems. Connection emphasized to IBM that should it move forward with a new ERP system, the system had to maintain the mission-critical functionality of JDE World, and that the implementation to a new system had to be completed without disrupting Connection's operations and its ability to service customers. Instead, according to the complaint, "[u]sing a playbook that has resulted in IBM being named in a slew of lawsuits over alleged misrepresentations made in connection with failed ERP implementations, IBM sold itself to Connection by holding itself out as a leading expert in managing similar, global projects concerning the implementation of new JDE systems. IBM claimed to have extensive experience both in helping companies like Connection to assess their business needs and select an ERP system to meet those needs, and in successfully implementing JDE upgrades". Connection alleges that these representations turned out to be false.

Connection green lighted the project and IBM next embarked on a "Discovery Assessment" to develop a project plan for implementation of the JDE upgrade. The complaint alleges that:

IBM billed Connection over $600,000 to conduct the Discovery Assessment. Following the Assessment, IBM represented to Connection that IBM had thoroughly analyzed, and understood, the Company's requirements for its ERP system, and had determined that a "vanilla" upgrade that leveraged "out of the box" E1 software was suitable for Connection. IBM further represented that it had determined, through its investigation, that the E1 platform would not require extensive customizations to provide the functionality offered by JDE World, and that IBM therefore had determined it could complete the implementation project within 17 months at a cost of $9.2 million.

Connection alleges that at the time that IBM made these representations it knew them to be false, and that IBM knew instead that the solution would require much more customization.

A common problem we see in ERP vendor and implementation partner disputes is the quality of the team deployed for the customer. In short ERP customers are promised the competent "A" team, and instead they get a team that is inexperienced, often located outside of the United States and not up to the task at hand. And that is exactly what Connection alleges here. Rather than the deep knowledge and expertise that IBM had represented it had with regard to implementing E1, the IBM team that was assigned to the project actually had little or no experience with E1. According to the complaint:

When it was obvious the E1 problems could not be dismissed as mere "glitches," IBM promised Connection that it would devote whatever resources were necessary to fix the system and complete the implementation. Specifically, IBM said it would dispatch a so-called "Red Team" comprised of IBM's most skilled technicians. The "Red Team" never appeared. Instead, IBM assigned the same individuals who had worked on the project, ineffectively, before go-live. IBM shifted most of the burden of undertaking the repairs onto Connection; work that IBM did undertake was assigned to off-shore consultants.

An important lesson is to pin down the ERP vendor and implementation partner prior to the execution of the contract, to identify the actual team members, and to ensure that the ERP customer indeed does get the "A" team. Otherwise, the ERP provider and implementation partner promise the sun, the moon and the stars, but ultimately choose to save money by bringing in an offshore team, without the promised experience. And often communication barriers result, as the foreign team cannot communicate adequately in the English language.

Connection also alleges that IBM botched the project when it pressed its customer to go live before the solution was really ready for prime time. According to the complaint:

In May 2020 IBM represented to Connection that the system was ready for go- live, when IBM knew or should have known that the E1 implementation was not close to completion. IBM's lead consultants, repeatedly told Connection's CEO and other executives that the Company's greatest weakness was its fear of risk, that it had to "rip off the band-aide" and go-live, and that any remaining issues with the E1 system could easily be resolved post go-live through simple "workarounds." (emphasis added)

Hours after the go-live process began on May 15, 2020, critical components of the E1 system within IBM's responsibility did not function properly or at all. Whereas IBM had represented to Connection that a "roll-back plan" – meaning a plan to revert to JDE World – would be available if problems arose during the transition, IBM did not deliver such a plan. Therefore, as system defects emerged, Connection could not revert to World.

Ultimately, the workarounds provided by IBM failed and Connection was forced to spend millions of dollars including $3 million in additional fees to IBM, as well as allocating tens of thousands of manhours of Connection personnel to remediate the defects. Connection also alleges that in order to complete the E1 implementation, it was forced to replace IBM with another implementation partner, at significant additional expense.

Connection's Complaint includes claims for breach of contract, contractual indemnification, breach of the duty of good faith and fair dealing, negligence/professional negligence, fraudulent inducement, fraudulent misrepresentation, negligent misrepresentation, and breach of the New Hampshire Consumer Protection Act.

As of the time this blog post was published, IBM had not yet responded to the complaint. Tactical Law will continue to monitor the case. Please check back for further updates.

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