As enterprise management systems are implemented on a mass scale, conflicts between customers and consultants will arise with increasing frequency. Today the market needs new services: independent project audits.

Yuliana Petrova

Conflicts are inherent to ERP (Enterprise Resource Planning) system implementation projects. The relationship between clients and the companies responsible for implementation inevitably turn sour every time work falls substantially behind schedule, exceeds the budget, or doesn’t meet customer expectations. Usually, the two parties try to come to an agreement amicably: the customer won’t benefit from dismissing the consultant, since the project does need to be completed after all, and the consultant’s reputation could be tarnished by an unsuccessful implementation. For these reasons, lawsuits against consulting companies have always been the exception. Recently, however, Russian companies unhappy with their consultants have become so numerous that two or three show trials won by pioneering customers could generate a wave of similar lawsuits.
Microsoft Business Solutions’ (MBS) partners may be the first to find themselves in the dock. This is because of the popularity of the ERP systems they implement, MBS Navision and Axapta, and because many of them still have limited experience. In the last year alone, the number of MBS partners doubled, reaching a hundred companies. The first trial against a MBS partner – ATK Consulting Group – began last year.

In October 2002, Grigory Dmitriev, General Director of Inkoma Integration Company, which builds telecommunication networks, signed a contract with ATK Consulting Group to implement MBS Navision. ATK charged $90,000 for its services and agreed to automate financial accounting, logistics, and human resources in eight months. Inkoma, according to Dmitriev, took all organizational measures required for successful implementation.
The first complications began when Inkoma and ATK had to deal with exchange rate differences. It took several months to agree on a procedure. Then, ATK changed the project leader, and it took some time for the new manager to get the hang of things. It became impossible to complete the first, financial stage of automation by the scheduled date – January 31, and early in March, Inkoma and ATK signed an additional agreement to move the date of delivery to March 30.
In the meantime, disappointment in the project was growing at Inkoma. According to Dmitriev, the main argument in favor of the Western ERP system from the very beginning was that Western business processes were built into the system. In the course of implementation, the company was supposed to adopt these processes and thus improve its performance. However, the reality did not live up to Dmitriev’s expectations: “We had hoped that consultants would help us streamline our economic activity. Instead, they simply re-loaded accounts from our former bookkeeping software into Navison.” ATK maintains that developing accounting procedures and optimizing business procedures was beyond the scope of consultants’ responsibilities under the agreement.
The relationship between Inkoma and ATK deteriorated as the project fell further behind schedule and consultants made a large number of mistakes.
The whole affair ended on July 8, when Inkoma gave ATK notice of cancellation of the contract and demanded their advance back. The hearing of the case, in which ATK is accused of breach of contract, began in arbitration court last October.

In the West, disputes and lawsuits between customers and those who implement ERP systems turned into its own kind of business long ago. Today, many lawyers, auditors, and insurers are involved in this business. There are lots of options for conflict management. To begin with, specialized law firms offer their services to customers (and to consultants). During the whole period of implementation, lawyers keep an eye on how the work is going, whether the objectives and terms of implementation are subject to change and, most importantly, how the project is documented to ensure that their client could defend their actions in court. Lawyers are paid fees if the company succeeds in completing the project and avoiding legal proceedings, or a percentage of the court award. In addition, many US and European insurance companies, such as The Chubb Group, AIG or Zurich, insure diverse project risks, for example, the risk of failure to achieve the project’s final goals.
Consultants can insure their professional liability lest they go broke due to legal expenses. Should a customer claim compensation for damage to its business due to a consultant’s actions, the insurer will indemnify this damage. To assess project status and resolve differences, either party may invite an outside arbitrator, an auditor. Voluntary audits are quite common at foreign companies. In some cases, however, an audit is mandatory. For example, some banks, when granting a loan for an ERP project, stipulate that a customer is obliged to hire an auditor for the project. An audit is also required in order to determine insurance premiums and claims to be paid out, and all insurance companies working in IT have relevant specialists on staff.
Therefore, strange as it may sound, the increase in the number of conflicts between customers and those who implement systems, including legal disputes in courts, may turn out beneficial as well. It could speed up the development in Russia of new services related to disputes and lawsuits, such as project audits, and special classes of insurance and legal services. They in theory could turn ERP implementation into a much more civilized business.

Today, what Russian enterprises seem to need most of all is independent project review, since many Russian customers have experienced differences with consultants and can’t resolve them on their own. Companies hope that outside expert review could provide unbiased answers to urgent questions: Is the implementation process proceeding as it should? Is a consultant solving specific issues correctly? Are funds being spent properly?
The institution of independent review could serve as a foundation for new insurance services as well. Professional liability insurance in Russia is a thing of the distant future. The main obstacles are that insurance will inevitably increase the cost of implementation services (and customers are not ready for this), and that it is extremely hard for a company to prove a causal relationship between consultant actions and company losses (and insurers are not ready for this).
There is also no point in discussing a new, separate market for audit services for the time being, as this type of activity is not very profitable. Specialists have to be highly skilled and competent, whereas services are provided on a one-time basis and are inexpensive compared to implementation cost. No wonder there are no “pure-blooded” auditing firms specializing in ERP systems and that audits are of little interest to large consulting companies as a source of income. Therefore, audits need to be popularized in Russia, and this is exactly what Microsoft Business Solutions is trying to do. The company has come to an agreement with Det Norske Veritas (DNV), an international certifying society, which will audit projects implementing MBS ERP systems.
Expert opinion varies on how the market for specialized ERP system auditing will develop.
Konstantin Chernov, the Head of DNV’s representative office in Russia, is confident that there is a much wider scope for auditing in Russia than in the West. Abuses of different sorts abound. Top executives deceive shareholders and tenders are not conducted properly. Therefore, only independent review would help owners find out whether their money has been thrown out the window.
Others argue that customers care little whether formal methodological requirements have been met in their projects. They want to learn why implementation failed, and auditing methods doesn’t provide an answer to this question.
Mr. Muratov, General Director of the consulting company MCT Labs, adds that another type of voluntary review is also in demand in Russia, namely reviews to determine whether the appropriate system was selected. It’s at this point when the most abuses occur in projects. This kind of review is an absolute must for large projects.
The main significance of all these new services is that they force customers and consultants to take a more responsible attitude toward both contractual obligations and implementation methods. When everyone will run projects so that they could easily account for their actions to a court or outside arbitrator, the number of successful projects will inevitably increase. Then, no one will need lawsuits or other legal proceedings.

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