Do IT Consulting Companies Have a Fiduciary Duty?

What This Article Covers

  • Background on Fiduciaries
  • The Similarities Between the Financial Advisors and IT Consultancies
  • How This Applies to IT Consulting
  • Understanding the Motivations of the IT Consulting Partner
  • Issue 1: Consulting Companies Keep Clients in the Dark
  • Issue 2: Choosing Inappropriate Alternatives
  • Issue 3: Blocking Out Vendors that the Consulting Company Does not Specialize In
  • Do Consulting Companies Have a Fiduciary Responsibility to their Clients?
  • The Problem When Providing Advice is Combined with Zero Fiduciary Responsibility
  • What is the Impact on all of This on the General High IT Failure Rate?

Introduction

Let us begin this article by evaluating the term fiduciary:

“Fiduciary: In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.” – Wikipedia

When one is speaking to a financial advisor, as a recent episode of the PBS program by Frontline explained, the first question should be

“Are you a fiduciary?

Very few of them are in fact fiduciaries — this means that if not, the advisor will most likely steer you to investments that offer the highest margins for him or her. And the highest margin investments for the financial advisor are often the worst investments for the client (bad investments sweeten the pot for the advisor by offering a higher compensation to the advisor). Financial entities work by employing larger number so salespeople — which instead of being called “salespeople” are called “financial advisors.” However, the term financial advisor is not an official designation. Aside from having to pass no test for competency, there is no test for financial bias.

What This Means

What this all means that basically financial advisors can recommend pretty much whatever they like and cannot be held accountable for providing bad advice. That is they have no fiduciary duty to their clients and therefore have no fiduciary liability. In fact, their only measurement by the company that employs them is how much money they make for the company.

This is a primary reason so much retirement savings has been directed towards high risk and “complicated” and poorly performing investment products like annuities.

How This Applies to IT Consulting

Frontline did an excellent job of explaining how the financial industry works — by employing large numbers of salespeople who are pretending to be investment advisors. Often the language used by “investment advisors,” makes it seem as if they are offering good products to their clients, however, an investigation into this matter indicates that what they show their clients is entirely dependent upon how they are compensated.

In IT consulting, prestigious consulting companies such as Accenture, Deloitte, IBM, KPMG, Cap Gemini also seem to imply that they look out for their clients’ interests, but in fact they are entirely unregulated and because they lack a fiduciary duty they have extremely limited legal liability (fiduciary liability) if they provide advice that hurts their clients. It is extremely difficult to get judgements against IT consultancies because their legal liability is so low. In the case of Marin Country vs. Deloitte, Marin Country charged Deloitte with bribing their chief auditor — who rather conveniently left Marin County for a position of a Senior Manager at Deloitte very soon after approving $3 million dollars in consulting services.

The implementation provided by Deloitte were deemed to be incompetent and inexperienced by Marin Country and the system Deloitte installed never worked properly. However, because Deloitte is not a fiduciary, Marin was forced to go after Deloitte for civil racketeering (see this article for more details).

Understanding the Motivations of the IT Consulting Partner

The main salesperson at an IT consultancy is called a partner. IT consultancy partners have very high consulting service quotas — often around $2 million per year. Partners don’t do much work on projects, their job is to sell. Senior level resources in consulting companies that cannot sell are called directors, and their status is lower than a partner.

Partners are highly restricted on which products they can recommend. They are essentially compelled to recommend the major applications from SAP and Oracle, two software vendors that have agreed to outsource their consulting to these companies.

However, there are three important issues where are almost entirely unexamined in the enterprise software industry:

Issue 1: Consulting Companies Keep Clients in the Dark

The consulting partner never informs their client that they recommended software because they happen to have resources which they can bill for — and they do not disclose that the nature of their business with SAP or Oracle is completely different from their relationship with smaller software vendors. The partner does not explain the quota which he or she is under and how they will lose their job if they do not meet this quota.

All of these mechanizations are hidden from view by the client. Clients and we have spoken with many of them, seem to think that the IT consultancy is providing their recommendations based upon the actual capabilities of the software and the match with the client’s business requirements.

Issue 2: Choosing Inappropriate Alternatives

In most cases, neither of these software vendors (SAP or Oracle) will be the best alternatives for the client — but the partner must recommend them because these are the applications for which the IT consultancy has trained resources. And resources that can bill hours.

In fact, SAP and Oracle became two of the largest and most successful enterprise software vendors not as much due to the quality of their software products as much as due to their special business relationship with large consulting companies — essentially corrupting their function. (we say corrupt, but in truth the advisory function of IT consultancies has always been for sale, it is just that SAP and Oracle are currently the high bidders)

Issue 3: Blocking Out Vendors that the Consulting Company Does not Specialize In

If the partner recommends another application, that software vendor will tend to want to bring in their own consulting resources (who know the application) and this will cut into the partner’s managed billing hours. Partners that allowed this to happen would be fired from the IT consultancy. Therefore the system is set up to allow no deviation and to never place the clients’ interest ahead of the IT consultancy.

Conclusion

Consulting generally and IT consulting in particular works the same way. No IT consultancies are fiduciaries and none of them have any fiduciary duty to their clients.

In fact, the concept does not even exist in IT consulting.

IT projects have a very high failure rate — somewhere between 50 and 75% depending upon the survey used. Two major reasons for this is that most projects implement what is not the best software for the client’s requirements. A second reason is that consulting companies add considerable expense and lengthen project implementation time. Very simply, large consulting companies increase the overall IT projects failure rate both by recommending inappropriate software and software which is the most expensive and often the most complex. In this sense, consulting companies parasitize the technology benefits of software, transforming into billing rates for software that should never have been installed in the first place.

The IT project failure rate could easily significantly be improved if IT consulting companies were required to be licensed as fiduciaries. However, if this were to occur it would rapidly reduce the profit margins of IT consultancies, and therefore, they would fight and defeat such legislation, probably on the basis of some ridiculous free market argument and how this would limit choices in the marketplace. The same legislation has been brought to make investment advisors fiduciaries and it was easily defeated by the lobbying money that quickly flowed to Washington from the enormously powerful financial services industry.

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References

Fiduciary. Accessed November 9, 2013. Wikipedia

https://en.wikipedia.org/wiki/Fiduciary

Hiltonsmith, Robert. The Retirement Savings Drain: The Hidden and Excessive Costs of 401(k)s. Demos. 2012

https://www.pbs.org/wgbh/pages/frontline/retirement-gamble/