Reference no: EM131039053

A Disastrous Development Project

In 2004, Marin County in California decided to replace its aging financial management, payroll, and human resources systems with a modern SAP enterprise resource planning system. The county solicited proposals from various companies to act as software consultants on the implementation. Thirteen companies, including Oracle, PeopleSoft, and SAP, submitted proposals. In April 2005 the county selected Deloitte Consulting based on the firm's representations concerning its in-depth knowledge of SAP systems and the extensive experience of its consultants. From 2005 to 2009, Marin County paid increasing consulting fees to Deloitte as its staff grappled with serious fiscal problems. Essentially, the staff could not program the SAP system to perform even routine financial functions such as payroll and accounts receivable. A grand jury probe concluded that the system had cost taxpayers $28.6 million as of April 2009. At that time, Marin County voted to stop the ongoing SAP project, implicitly acknowledging that it had wasted some $30 million on software and related implementation services from Deloitte.

The Marin County Information Systems and Technology Group concluded that fixing the Deloitte-installed SAP system would cost nearly 25 percent more over a 10-year period than implementing a new system. In 2010, Marin County fi led a complaint alleging that Deloitte's representations were fraudulent. The complaint accused Deloitte of using the county's SAP project as a training ground to provide young consultants with public sector SAP experience, at the county's expense. It further charged that Deloitte intentionally failed to disclose its lack of SAP and public sector skills; withheld information about critical project risks; falsely represented to the county that the SAP system was ready to "go live" as originally planned; conducted inadequate testing; and concealed the fact that it had failed to perform necessary testing, thereby ensuring that system defects would remain hidden prior to the go-live date. Finally, the county maintained that, although it had paid substantial consulting fees to Deloitte, the system continued to have crippling problems. Deloitte fi led a counterclaim over the county's failure to pay more than $550,000 in fees and interest. The company maintained that it had fulfilled all of its obligations under the contract, as evidenced by the fact that all of Deloitte's work was approved by the county officials who were responsible for overseeing the project. In December 2010, Marin County sued Deloitte and two SAP subsidiaries, alleging that Deloitte had "engaged in a pattern of racketeering activity designed to defraud the county of more than $20 million." The county's lawsuit also names as a defendant Ernest Culver, a former county employee who served as director on the SAP project. The county alleged that Culver interviewed for jobs at Deloitte and SAP, where he now works in SAP's Public Services division.

It further claimed that during the SAP project, Culver "was approving Deloitte's deficient work on the project, approving payments, and causing Marin County to enter into new contracts with Deloitte and SAP Public Services, Inc." In late December 2011, a judge ruled that Marin County failed to allege sufficient facts to bring a racketeering claim against SAP under the terms of the federal Racketeer Influenced and Corrupt Organizations Act (RICO). However, he also ruled that Marin County could file an amended complaint. The judge further found that Marin County had alleged sufficient facts to bring a "plausible" bribery claim against SAP with respect to Culver. Finally, the judge denied SAP's motion to dismiss claims against its SAP America division. In mid-January 2012, Marin County filed an amended complaint in federal court related to its actions against SAP, Deloitte Consulting, and Ernest Culver. The president of the Marin County Board of Supervisors stated that the board is committed to ensuring accountability for its taxpayers. In early 2013, Marin County settled its lawsuit with Deloitte Consulting over the failed SAP project. The settlement followed the Court's dismissal of several of the county's claims as well as the county's conclusion, after a full investigation, that it should voluntarily dismiss its remaining fraud claims and its allegations of improper influence of a county employee (Culver) who managed the project.

According to the Marin Independent Journal, the county received $3.9 million from Deloitte, which is less than it paid in legal fees. It is important to note that neither Marin County nor Deloitte placed any blame on the SAP software. The dynamics between the customer and the system integrator caused this failure. Sources: Compiled from M. Krigsman, "Big Money: Marin County and Deloitte Settle ERP Lawsuit Under Gag Order," ZDNet, January 14, 2013; N. Johnson, "Marin County Cuts Its Losses, Settles Its Computer Lawsuit for $3.9 Million, " Marin Independent Journal, January 9, 2013; C. Kanaracus, "Judge Tosses Racketeering Claims in Marin County Lawsuit Against SAP," PC World, December 28, 2011; C. Kanaracus, "Marin County Alleges SAP, Deloitte Engaged in Racketeering," Computerworld, February 2, 2011; M. Krigsman, "Understanding Marin County's $30 Million ERP Failure," ZDNet, September 2, 2010; C. Kanaracus, "Marin County to Rip and Replace Ailing SAP System," IDG News Service, August 24, 2010; M. Krigsman, "Marin County Sues Deloitte: Alleges Fraud on SAP Project," ZDNet, June 3, 2010; J. Vijayan, "Deloitte Hit with $30M Lawsuit over ERP Project," Computerworld, June 3, 2010; T. Claburn, "Deloitte Sued Over Failed SAP Implementation," InformationWeek, June 1, 2010; www.co.marin.ca.us, www.deloitte.com, accessed March 14, 2013

Questions
1. Debate the lawsuit from the point of view of Deloitte and SAP.
2. Debate the lawsuit from the point of view of Marin County