Shaun Snapp on The Criminal Nature of Consulting Firm Software Selection

Executive Summary

  • Consulting companies nearly always rig software selections so that the vendor they make money from wins.
  • As this is fraud on the part of the consulting firm, it is by its nature criminal.

Introduction

IT consulting is normally all about sales and billing hours. The best way to maximize billing hours is to get clients to implement the most complicated and expensive applications. To do this, consulting companies pretend to be independent software vendors, which ultimately leads them to be selected.

Rigging RFPs

An RFP is how requirements are documented to know what is needed when evaluating different vendors. However, as explained in the book How to Rig an RFP to Maximize Billing Hours consulting companies normally do not allow customers to select from vendors that are the best match for the requirements. This is because it would be detrimental to billing hours. Therefore, the RFP must be rigged so that the software selection results in the “right answer,” the right answer is implementing the software that the consulting company has resources it can bill for. This is known in the industry and considered entirely normal. The consulting company engages in fraud when they declare to their client that they will help them select the best vendor for their requirements. What they mean is they will select the best vendor for the consulting company.

Conclusion

IT consulting is filled with misrepresentations that should qualify as fraud. Many IT consulting companies engage in behavior that should be subject to not only civil but to criminal implications. Software selection fraud is just one of the many areas by which IT consulting firms routinely defraud their clients. The consulting companies do a double disservice to their clients because even after they leave, the customer is stuck with software which was normally selected only because of the needs of the consulting company. Consulting companies walk out of clients all the time, and perpetuate the same fraudulent tactics on their next clients. Having worked in IT consulting for decades and with many different firms (as an employee, as a sub-contractor, as just another consultant reporting directly to the end client) there is not one of the consulting companies that we would trust to do a software selection. IT consulting companies are dedicated to doing what they can to get the most out of the software selection for themselves while leaving the least benefit for their clients.

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Shaun Snapp on IT Consulting Exaggeration and Criminal Behavior

Executive Summary

  • Consulting companies nearly always greatly exaggerate their capabilities to customers.
  • Consulting companies routinely engage in behavior which is criminal as it violates fraud statutes.

Introduction

IT consulting is normally all about sales and billing hours. Having worked on IT projects for many years, it has been extremely rare to find projects where the capabilities of the consulting company have not been greatly exaggerated by the partner level resources.

Fraud Versus Puffery

Fraud is when one misrepresents a product or service. One this is sold, and something else entirely, of lower value, is delivered. For IT consulting companies it is common to lie about the following areas.

  1. A Unique Methodology: Nearly all consulting companies state that they offer a special or unique methodology for implementation. We reviewed many consulting methodologies in the article The Real Story on IT Implementation Methodologies. Our observation was that there was nothing special about any of them and that they were primarily designed to sell IT projects.
  2. Special Resources: Exaggerating the training and expertise of resources is extremely common in IT consulting. Resources often have skills listed for which they have only a passing exposure. At one consulting company resources that had performed demos, altered their resumes to state that they had participated in full implementations for customers they had only prepared a demo. Sometimes the exaggerated skills are added by the resource themselves, and sometimes they are added by the consulting company.
  3. Pretending Public Information is Specific to a Consulting Company: IT consulting companies will often overstate the degree to which they have contributed to their area versus how much they have taken material available from published books and articles.
  4. Timelines: It is highly common for consulting companies to exaggerate the speed at which they can implement software.

Conclusion

IT consulting is filled with misrepresentations that should qualify as fraud. Many IT consulting companies engage in behavior that should be subject to not only civil but to criminal implications. Furthermore, IT consulting companies use these same fraudulent tactics and patterns against US government agencies.

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Shaun Snapp on Criminal Inflation of Revenue Prior to IPO

Executive Summary

  • It is common for software vendors to inflate their revenues and profits just prior to an IPO.
  • Learn why in many cases this can qualify as criminal intent.

Introduction

When software vendors are about to make an initial public offering, they will in many cases cook the books to make the revenues look as good as possible. The crime to be committed is fraud.

How Do Companies Artificially Inflate Revenues and Profits?

There are many tricks to revenue inflation.

  1. Push Off Expenses: It is very common for companies to push expenses until after the IPO. This makes the company look more profitable than it is. They do this knowing that they will incur those expenses later. Furthermore, some of those expenses may be necessary to be incurred pre-IPO, and pushing them after the IPO can have negative implications for operations.
  2. Bring Forward Deals: Deals can be brought forward, depriving post-IPO timeline of those deals. This is quite common.
  3. Push Harder for Short Term Bad Deals: Software companies can lower their standards of sale, which will increase sales…in the short term, but which will reduce the long-term viability of the implementations.
  4. Push the Sale Force Harder: This also has the consequence of increasing short-term sales before the IPO, but can cause long-term damage to sales as more experience salespeople leave post IPO, making it more difficult for the company to meet its long-term sales increases.
  5. Not Pay Out Sales Compensation that Was Agreed To: The incentives to bait and switch on sales compensation pre-IPO can be tempting. The reason being that salespeople take a high percentage of their income in bonus. And bonus plan can be altered while the salesperson is working, which is different than what was agreed to in the sales compensation plan originally. In extreme cases salespeople with a large amount of money due can be fired, to keep from paying bonuses, keeping more cash in the company, and again inflating actual revenues.

Conclusion

Software vendors employ a variety of tactics to inflate revenues and profits prior to an IPO. Some of the tactics are unethical, but others are illegal and fall into the category of investment fraud, and are therefore criminal in nature.

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Shaun Snapp on Criminal Behavior of Software Vendors

Executive Summary

  • It is common for software to provide false information to customers.
  • Learn why in many cases this can qualify as criminal intent.

Introduction

Software vendors normally present themselves as providing information about their software. However, many software vendors lie so extensively about their applications that is provides an entirely false impression as to what the software can do. The crime to be committed is fraud.

It is curious how infrequently the term fraud is used in software, but it should be used quite frequently. If a company that manufacturers refrigerators lie about what the refrigerator can do, that is very easily called fraud. But because software tends to be more esoteric, it is infrequent for the term fraud to be used, even when it fraud and therefore criminal. In analyzing statements by vendors we repeatedly find false statements contained in marketing documentation. It is considered very normal in the software industry to mislead customers, and in the past when we have supported sales efforts when we have pushed back on false statements, we have often been accused of doing things that would “lose the account.” In the head of a sales pursuit entirely false statements are justified on the basis of attaining the sale. The truth or falsehood of a statement often falls to the wayside.

Conclusion

The false statements made by many software vendors qualify as fraud and therefore is in fact criminal. Yet it is virtually unheard of for criminal investigations to be opened against software vendors by the government. Even in cases where customers have been completely lied to, the most the software vendor will face is a civil suit and no criminal implications.

Software vendors operate in an unregulated market. Many vendors feel, and are accurate in feeling, that they are immune from the repercussions of providing false information to customers. This is because we do not define fraudulent information as criminal if it is part of the process of selling software.

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IT Consulting Companies and the Mythology of Job Creators

 What This Article Covers

  • How the consulting business undermines the concept and the mythology of “job creators”
  • IT consulting companies and the contribution to income inequality.
  • Underhanded strategies by consulting companies to get sales at any cost
  • How low can consulting companies go?

IT Consulting Companies as Proof Against the Mythology of “Job Creators “

They are amazingly similar, part of the Mitt Romney crowd that think that they are the ones that actually add value to society, when in fact they really primarily do two things; live off of the labor of others and exploit labor. In fact, the consulting business is an excellent repudiation of the concept of the “job creators.” This is a phrase, which is often used by corrupt conservatives, and is repeated ad nauseum by Fox News.

The Concept

The basic concept is that  the entities that “create jobs” are businesses. However, when a consulting company either hires a permanent employee or someone like me as a sub-contractor, they are not hiring to fill an internal need, but hiring to fill the need at another company. Therefore, the consulting company cannot be the job creator. They are the job or demand intermediary. And, very quickly, if another company, say IBM were to win the contract from Accenture, then the Accenture would be the hiring company. But again, all that has happened is demand has switched to flow through a new intermediary.

Lets chart about how the demand for consulting services originates  Here is another example, I once interviewed with a company for a demand planning project. I competed against Plan4Demand. I told the company that it was not possible to turn on statistical forecasting in SAP DP in 3 months, and I believe that Plan4Demand either said it was possible, or from my experience seeing their PP/DS webinar, essentially sugar coated what could be done in DP, and mentioned none or few of the downsides in the application. This may have been the decisive factor that helped them get the business. Therefore Plan4Demand staffed the project, instead of a recruiter I worked though. A few months later I was contacted by Plan4Demand about whether I would be interested in working for them….full time of course, so they could pull the majority of the billing rate into their coffers. It should be noted that even in situations where I would work as a contractor to Plan4Demand, they would still take roughly ½ the billing rate that the client paid, contribute nothing to my ability to implement the project (in fact probably detract from it as they had given inaccurate information to the client to get the business – placing the responsibility for meeting the false promises). This payment is what economists refer to as a rent. In fact one can easily simply replace several words in a quotation from the independent economist Michael Hudson. Here is the original quotation which refers to the charging of interest on the part of banks which work under a fractional reserve system (i.e. they can loan out roughly $100 for every $1 to $2 they have on reserve:

Interest payment much like a tax – a charge without a corresponding cost of production, paying for the privilege of creating bank credit electronically in today’s world. It is predatory rather than productive, adding a price without reflecting an intrinsic cost-value. It is a form of economic rent – although not one that Ricardo discussed when he limited the concept of landlords rather than to the banking sector.

The same paragraph works for consulting companies with just a few adjustments in orange text:

Payments to consulting companies above the monies paid to the consultants (which are quite significant) much like a tax – a charge without a corresponding cost of production, paying for the privilege of the matching buyers and seller in today’s world. It is predatory rather than productive, adding a price without reflecting an intrinsic cost-value. It is a form of economic rent – although not one that Ricardo discussed when he limited the concept of landlords rather than to the consulting sector.

Underhanded Strategies by Consulting Companies to Get Sales At Any Cost

Plan4Demand may take some intellectual property off of the internet and present it as their own, as they did on a PP/DS webinar with an unsourced graphic from SCM Focus, lie about how an application is generally implemented in order to motivate an implementation on the basis of a false assumptions, or they may write a comical and fallacious white paper on a topic they know nothing such as with white papers by Booz Allen Hamilton.

They may take material from a published book on an inventory approach but then tell the consultant not to tell the client that the method came from a published work, as Andersen Consulting instructed me when I found a method that could have been used at Pfizer. They may “adjust” the resume of their resource, as Andersen Consulting did with mine when I first came out of graduate school – to phony up some experience I did not have. They may accept a consulting selection project, but then insert themselves into the process by making the client feel that there was really only one choice, to go with the consulting company for the implementation that was supposed to only oversee the bidding selection – as Deloitte Consulting instructed me to do with a contact that I made in SAP training.

The management for Plan4Demand/Accenture/Deloitte/etc.. then goes out and buys themselves a new Audi A4, and then casts a vote for Mitt Romney and goes home and tells their family and friends about how they create all these jobs.

How Low Can Consulting Companies Go?

After 16 years working in, with and around consulting companies, my opinion of them could scarcely be lower. (And this includes SAP America, which lies along with the best of them). It’s possible that my opinion could decline more, for instance, I could come to find out that IBM is engaging in human trafficking – which at this point would not surprise me, and I think many IBM partners would probably be up for. They are deeply misrepresented in the popular press as legitimate businesses or thought leaders when they are neither. They are not about true thought leadership or innovation, but about copying the ideas of others and selling selling selling. The same things I have witnessed have been witnessed by countless others, yet the criticisms of them have been scant. There is truly very little reason for them to exist. They add very little value and primarily function as outsourced HR departments for the eventual client. They reduce the quality of IT dollars spent because they constantly lie about the potential of the SAP and other software they implement to clients, who make investment decisions based upon this fact. As a general principle, I would estimate that only roughly 30% of the dollars spent on IT projects actually end up as a value added system for the company. The rest is frittered away on bad projects and bad software. The efficiency would never be 100%, but the existence of consulting companies dramatically increases the failure rate of projects, and beyond that the bad decision-making of what projects, what software to implement, etc. before the project even begins.

Income Inequality and Consulting Companies

They also increase income inequality generally. Consultants receive roughly 1/3 of their billing rate. That is an enormous overhead for the minor contribution of selling consulting services, providing business cards, health insurance and a laptop. This means that the majority of the rate flows to Mitt Romney types (don’t forget, according to Mitt, he inherited nothing – because he gave all of his and his wife’s inheritance away to charity and made his $200 million fortune from exclusively hard work.) The management at consulting companies also does not train their consultants aside from providing style tips or recommendations related to increasing their corruption. This is because the management at consulting companies is about extracting from their consultants, not making them better, and certainly not making them honest.

Reference

How Common is it for SAP to Take Intellectual Property from Partners?

What This Article Covers

  • What was the xApps program, and how did it qualify as competitive intelligence or corporate espionage?
  • The Wellogix case where SAP conspired with Accenture to steal IP from a best of breed vendor.
  • The role of consulting companies as enablers for SAP’s behavior.
  • The need for regulations on SAP to prevent predation.

Pre-Reading

Some time ago I commented that the xApp program, which was where SAP “partnered” with some best of breed vendors should be terminated.

Introduction

The program did finally become mostly irrelevant (a few partnerships persist), with partners who were ill-served by the program refusing to continue their relationship with SAP. However, what is not frequently discussed is that SAP garnered a great deal of information about best of breed vendors from this program. Many best of breed vendors entered into the partnership with great expectations, but SAP never seriously meant to help them much in the way of sales.

Historical View

However, SAP starting partnerships and then ending them, often with IP that later leads to a lawsuit is quite common. It happened with i2 Technologies and with Commerce One.

History Repeats Itself

This article describes how they mostly did the same thing to another vendor, called Wellogix. The entire article on this case is available in this article. The quotations from this article are eerily similar what has come to be an obvious pattern with SAP. Some quotes include the following:

“While SAP already had an SRM (supplier relationship management module) that could handle some procurement tasks, it was inadequate for “complex services,” according to the complaint. “Wellogix had a working version of this software, and SAP was aware that it worked in a large client environment such as BP.”

After the deal was signed, a number of SAP employees visited Wellogix’s offices for a few days in order to “kick-off the NetWeaver Partner Agreement and perform [SAP’s] due diligence on Wellogix for the purpose of either investment in or the acquisition of Wellogix,” it adds. “During the workshop, employees of SAP went through Wellogix’s P2P software code in person with Wellogix personnel disclosing parts of the code structure.”

But instead of following through with the partnership, SAP used Wellogix’s trade secrets to “replicate the capabilities” of its software and incorporated them into its own SRM products, according to the lawsuit.”

This is all very standard. In fact, after seeing SAP work this way for years, I feel I could have written this script without having actually to read the article. However, the next part of the allegation becomes even more interesting. This is because SAP did not act alone to steal Wellogix’s IP:

“In 1999, BP America hired Accenture to help it “create a paperless (i.e. electronic) process in oil field services,” it adds. “After a thorough review of over twenty vendors, including SAP, Accenture recommended Wellogix.”

In January 2002, Wellogix and BP signed a software and services agreement, it adds. But Accenture then obtained confidential trade secrets from Wellogix and passed them along to SAP, according to the complaint.

Wellogix also sued Accenture in 2008, and won a $94 million jury award against the company earlier this year. Last month, a judge lowered the award $50 million and told Wellogix it could either accept the new amount or hold a new trial.”

And this is also not surprising. I have been writing for some time that SAP is far too powerful with the major consulting firms. In most cases, the major firms simply recommend SAP no matter how poor the fit. In fact, for most clients I work with, the most appropriate software from requirements and functionality perspective is not selected. There are several reasons for this, but one primary reason is that major firms like Oracle and SAP distort the market, making is far less efficient — as an economist would consider it, than the consumer software market. There is a great misunderstanding regarding the nature of market efficiency. Markets do not automatically become efficient through competition. Markets must be kept fair for an efficient market to exist as companies desire to build monopolies. This is poorly understood generally, as even some economists (many who take money from monopolies themselves), do not emphasize it. This is the entire reason for anti-trust regulations, regulations which are generally unknown to the pubic.

Regulation performs the same function performed by referees at any game. A fair game can only be ensured by an impartial intermediary which enforces the civil rules of the game. Those who use the term “free markets” or competition without understanding this feature of markets essentially do not understand the entirety of the history of economics. The efficiency of the enterprise software market is extremely important for the efficiency of the overall economy as is discussed in this article.

Major consulting companies maximize their revenues by recommending SAP, and this is why software selections performed by the major consulting companies are essentially rigged as I described in this article.

Advisement?

There is a concept that a consulting company provides an “advisement” function to their clients. However, with the money that drives the compensation schemes in the major consulting companies, the concept of putting the client ahead of the consulting firm’s revenues has essentially disappeared.

However, in this case, Accenture (which is not only accused but has been found guilty) conspired with SAP to help SAP steal intellectual property from a smaller vendor. This must have caught Wellogix entirely by surprise. However, it shouldn’t have because first of all, Accenture has a terrible reputation for unethical behavior, but also because the major consulting firms like Accenture receive so much of their consulting revenue from SAP that they are almost an arm of SAP. The best terminology I can use to describe the relationship is that they are remotely controlled.

Conclusion

This is a perfect example of how SAP has simply accumulated far too cozy a relationship and far too much influence over other actors in the enterprise market. I am not sure what more evidence the Federal Trade Commission (the body that polices anti-competitive behavior) has to see before they step in to limit SAP’s clear and obvious monopoly power in enterprise software. It has gone from major consulting firms overwhelmingly recommending SAP, even when the solution barely exists, to now a consulting company (and I would tend to doubt Accenture is the only one) assisting SAP in stealing IP from a vendor which the vendor freely shared with Accenture. If the FTC or other body does not eventually stop the behavior, it will get worse because SAP grows bigger every year, and very simply, power corrupts.

Continuing to try to address SAP’s abuses of power with smaller parties litigating against it is insufficient for the task. The litigation undertaken by Wellogix must have been extremely expensive, and a distraction for them, and is not something they should have had to bear. I wish I could have spoken with them before they partnered with SAP to explain how SAP operates. I have been fortunate enough to warn several vendors, and I think to keep them out of SAP’s lair.

All vendors, regardless of their size, deserve protections from predacious companies like SAP. Theoretically, companies are supposed to have similar intellectual property rights. However, that is now how it is in practice. SAP claims and has superior intellectual property rights over other vendors, and routinely violates the intellectual property rights of other vendors. This has been demonstrated in multiple lawsuits, as well as my observation of new SAP modules that have copied much of the functionality of best of breed vendors that they were once “partners” with. This is why it is time to regulate SAP, and not simply leave individual lawsuits as the only defense that best of breed vendors have against a company with $12.5 billion in annual revenues, and that doesn’t seem to think that rules of fair play apply to them.

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References

http://www.computerworld.com/s/article/9197887/Update_Oracle_awarded_1.3_billion_in_SAP_lawsuit