Why Deloitte Has Problems Implementing SAP

Executive Summary

  • Deloitte has many well-known SAP project failures that are not isolated events.
  • Why is it so difficult to separate Deloitte’s SAP capabilities from the lies.

Is Deloitte a good firm to use for SAP implementations? They are a large SAP implementor. However, some significant issues with hiring Deloitte that companies should be aware of are listed below.

Introduction

Deloitte has a high number of problematic SAP projects. The exact ratio of problem projects to overall projects is difficult to estimate, and even projects where Deloitte is sued by its clients, are declared by Deloitte as not their fault. However, of the few that go to court, many others leave the client in a worse state than when Deloitte arrived on site. The following are well-known SAP implementation failures, and three of the five have gone to lawsuits. These include the following:

  • Levi Strauss
  • Southern California Edison
  • Los Angeles Unified School District
  • Marin County

Serious Problems on SAP Projects

The problems at these companies include the following: Levi Strauss having a significant reduction in earnings which they attribute to the Deloitte lead implementation. With Southern California Edison, Deloitte at one point during their project moved away from showing project plans to the company to keep SCE from knowing how far behind the project is.

Disabling Clients

Finally, with the Los Angeles Unified School District, their implementation prevented them for a time from even printing paychecks. This resulted in an $18 million judgment against Deloitte, although the damage done to LAUSD was much greater. A very similar story emerges with the case of Marin County versus Deloitte and SAP. The accusations against Deloitte from multiple clients quite serious. They allege that Deloitte.

“Engaged in a pattern of racketeering activity designed to defraud the County of more than $20 million.”

Deloitte bought off an employee at Marin County to sign off on their deficient work.

“Marin County’s suit also names as a defendant Ernest Culver, a former county employee who served as project director. The county alleges that Culver interviewed for jobs at Deloitte and SAP, where he now works in the Public Services division. During that time, Culver “was also 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.”

If Deloitte has done this in one account, it has probably done it at several. More details on the nature of Deloitte’s conduct in the Marin County case are available at this link.

What Marin County Says About Deloitte’s Practices

Marin maintains that Deloitte is guilty of racketeering and fraud.

Marin County’s suit also names as a defendant Ernest Culver, a former county employee who served as project director. The county alleges that Culver interviewed for jobs at Deloitte and SAP, where he now works in the Public Services division. During that time, Culver “was also 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.

We estimated that there are many cases like the Marin County case, but clients have been too concerned about bad publicity to bring a case against Deloitte. However, what is new about the Marin County case is the allegation in court documents that Deloitte converted an individual inside of Marin Country to essentially an agent of Deloitte. At some point that individual must have known they would not have a place in Marin County, once the deficient work by Deloitte was discovered. In the court documents, Marin County accuses Ernest Culver of hiding the benefits he was receiving from Deloitte as well as the future employment discussions that were being undertaken.

Marin initially argues that Culver’s failure to disclose each of the expensive meals provided to him by Deloitte as well as the discussions of potential employment that occurred in the relevant period (October 2006 through April 2007) were material facts that Culver had a duty to disclose to Marin. See, e.g., Huong Que, Inc. v. Luu, 150 Cal. App. 4th 400, 414 (Cal. App. 2007) (“an employee, while employed, owes undivided loyalty to his employer.”). Marin argues that it was entitled to Culver’s “conflict-free judgment” and loyalty during this time and that, instead, because of the undisclosed meals and employment discussions, Culver was acting in Deloitte and SAP’s best interest instead of the County’s.

Therefore the question of great interest is when did Deloitte make it known to their “inside man” that he would have a position which significantly improved his career inside of Deloitte? Given the nature of the work performed by Deloitte, it seems it was very early in the project. However, the dates that the approval for $3 million in extra work, versus Ernest Culver’s move from Marin County to Deloitte, looks quite bad for Deloitte. This quote is from the official court documents.

Richard Arrow, and the new Project director into seeking the BOS approval of $3 million in additional fees for Deloitte and SAP, id. ¶ 160; the additional fees were approved by the County on May 1, 2007, id., ¶ 162; and Culver secured employment with SAP in July 2007. Id., ¶ 180.

This is two-month difference between approval and Culver moving to Deloitte. A good attorney will subpoena the expense records of Deloitte for the Marin County project, and will most likely find the inside man’s name on many expensive dinners paid for by Deloitte but expensed to Marin County. Taking a person out to dinner and flattering them, and proposing a great future together, is how the corruption process usually begins. We guessed how this worked before we read the following paragraph in the county’s claims.

Among the county’s claims is that Culver was “bribed” with lavish meals and job promises.

The Stakes Are High

  • Marin County is stating $30 million in damages, and because Marin is suing Deloitte under the Racketeer Influenced and Corrupt Organizations Act, which entitles the plaintiff to a trebling of the damages, so $90 million.
  • Marin County has already incurred $3.5 million in legal expenses
  • The allegations against Deloitte are very serious, and essentially fall into the category of bribery

The Multiple Aspects of the Allegations Against Deloitte

The allegations against Deloitte address so many aspects of the firm that it ranges from bribery to competence to lying about software to lying about the credentials of their employees.
This is encapsulated in the quote below from the Mercury News.
“(Deloitte) employed rookies to work on an untested system, failed to provide proper training and rushed to meet installation deadlines despite problems, in order to obtain fee payments. The result was a “defectively designed, deficiently installed and poorly-functioning SAP system.”

The Precedent It will Create

The Marin County case is so flagrant, and the Deloitte attorneys must know that their situation does not look good if the case were to goes the trial, and are attempting to bury Marin County in legal paperwork and legal costs in order to prevent this eventuality. Deloitte has no interest in a public hearing on this matter.

The Marin County representatives and attorneys clearly understand the intimidation strategy that Deloitte is employing, as is evidenced from this quotation.

“Our board is not shrinking from this corporate attempt to bury us in legal costs,” said Supervisor Steve Kinsey. “The compelling documentation we’ve gathered has bolstered our board’s confidence to fight this all the way through trial if necessary.”

A Bit About Racketeering

Racketeering is the creation of a problem that the organization then solves. Racketeering was initially only for organized crime. However, it is increasingly used in civil matters. There is a legal debate as to how many private individuals should be able to sue under RICO statutes. However, it should be noted that many of the techniques employed by supposedly legitimate companies, like Deloitte, can be seen to fall into that category.

The County also alleged that, after two years of working on the SAP ERP implementation, Deloitte collected over $11 million in fees even though it knew that the SAP system would not meet the County’s requirements.

We estimate, through seeing Deloitte on many projects that the Marin County experience is repeated at many clients across the country. However, most will never sue Deloitte because the individuals that initially selected Deloitte do not want their careers tarnished. Lawsuits in systems implementations occur when failures are so massive that they interfere significantly with the operations of the company. In this case, the original allies of Deloitte within the company have no way to protect the implementation and have no choice but to go along with the sentiment to make a legal issue of what Deloitte did to them. The depth of problems related to the Deloitte work are documented below:

The system was supposed to automate and simplify Marin County’s finance and HR business processes. Instead, reporting and system functionality are a mess. Marin County hasn’t issued financial statements for the past two fiscal years. It can’t yet reconcile its cash balances.  Nor can it administer payables, receivables, fixed assets and inventories. Pension administration – a key component of public sector finances – has been partially stalled by an inability to extract current information from the databases.

The language in the filing against Deloitte is powerful. In addition to accusing Deloitte of racketeering, they are accusing them of being incompetent.

In its legal filings, Marin County claims that Deloitte botched the implementation project because it “was utterly incapable of providing the County with the necessary expert advice, guidance or leadership”. Marin further alleges that Deloitte had “staffed the project with dozens of neophyte consultants, many of whom lacked even a basic understanding of SAP”

Because of this discrepancy, Marin County has alleged fraud. However, are they fraud according to the court?

“The Court finds that the representations are highly subjective, generalized statements of the superiority of Deloitte’s qualifications made in a sales context. As such, they are “puffery” and not quantifiable, actionable misstatements that can form the basis of a mail fraud claim. As the Ninth Circuit explained in Cook, Perkiss & Liehe, Inc. v. Northern California Collection Service, Inc., 911 F.2d 242 (9th Cir. 1990), puffery or puffing has been recognized as vague, exaggerated, generalized or highly subjective statements regarding a product or business which do not make specific claims.”

Apparently not. Therefore false statements can be written in which actually make specific claims, but at least some courts will call the specific claims general claims. This means there is little incentive for Deloitte to not make these claims.

Marin County also accuses SAP of being delinquent in protecting them from Deloitte’s incompetence.

Along with that SAP AG and SAP Services were joined to the complaint as additional parties.  The basis of SAP’s liability, as alleged in the complaint, is that SAP through its partnership with Deloitte knew or should have known of Deloitte’s fraud and continued to give them credibility.

However, Marin County would have known that SAP and Deloitte are so financially linked that SAP will never call out an implementation partner if they are a large consulting firm.

What Companies that Hire Deloitte Should Be Concerned With

There are many things to be concerned with when hiring Deloitte or if they are already working for you. However, a major concern highlighted by the Marin County case is that Deloitte may by offering some current of future financial consideration to individuals who are responsible for signing off on their work. Deloitte was able to find someone in the Marin County they were able to buy off, who signed off on work that has fundamentally disabled Marin Country for performing basic finance and HR functions. If Deloitte’s work was not deficient, why would Marin County be in the state that it is in, and how was sign off approved? These are tough questions for Deloitte to answer.

Appropriate Protection Against Deloitte’s Influence

If your company currently has hired Deloitte, the question is if Deloitte is doing the same thing to the individuals responsible for signing off on their work. You certainly do not want to be left with low quality work, and with the individual responsible for providing the sign off working at Deloitte in the future. Therefore, reasonable safeguards include the following:

Therefore, reasonable safeguards include the following:

  1. Have the work performed by Deloitte evaluated more broadly, and by more individuals.
  2. Bring in outside individuals with the background in SAP and similar type projects can be brought in and within a just a few months provide an audit of the work performed by Deloitte. An important caveat is that these individuals must be independent of Deloitte and must not be willing to provide Deloitte with a clean bill of health in return for consulting work, future consideration, etc. Deloitte does not offer direct cash bribes to individuals; their approach is much more subtle. One way to safeguard against this is to require that the independent auditor has no contact with any partner level (partner, director, etc.) at Deloitte. As soon as the Deloitte partner learns of the auditor, they will go about attempting to co-opt the auditor by any means at their disposal. Partners at Deloitte are extremely effective manipulators of other people, which is why the auditor should keep a safe distance from the Deloitte partner. In fact, for the analysis, there is no reason for the auditor to speak with the partner.

So Many Lawsuits Due to SAP Project Implementations

Deloitte has been sued for the WaMu failure, for approving fraudulent financial statements. Similar suits are in the works or have occurred from Symbol Technologies, Parmalat, and Bears Stearns.

A Larger Cultural Problem at Deloitte

In addition to the type of failure that leads to a lawsuit, Deloitte has an extremely contentious relationship with a number of its SAP accounts. One of these being Applied Materials, which is considered a nightmare account by many consultants at Deloitte. Many Deloitte consultants complain that the project problems, which are often caused by Deloitte partners (senior level decision makers) which created bad blood for the client. This then ends up being placed in the consultant’s lap. Furthermore, there is very little accountability at Deloitte at the higher levels so that the senior members can drop any problems on the account to the most junior members of the company.

Furthermore, there is very little accountability at Deloitte at the higher levels so that the senior members can drop any problems on the account to the most junior members of the company.

Deloitte does not invest in sufficient training or infrastructure. So its SAP sandboxes are supported on a shoestring budget, and some configuration that has been specialized for specific markets appears only to get lost because there is insufficient maintenance. Deloitte makes very high margins off of their clients, but those monies do not flow to consulting infrastructure. These are just a few signals that the partner level is pulling too much compensation from the company, and not giving enough for the operations of the business.

Change Order Sales Approach

I have it from both a reliable source as well as personally experiencing this on a Deloitte project of a certain way that Deloitte behaves that due to the number of times it has occurred would make it highly unlikely that this is simply a coincidence.

The steps work like this:

  1. Based on the sales approach of providing an initial price that is appealing to the customer, Deloitte low bids the project.
  2. Aggressively propose that Deloitte should take the role of the project management office or PMO. Deloitte has a web page where you can learn about their PMO services. Why does Deloitte work so aggressively to secure the role of managing the PMO on its underbid fixed price projects? The answer is it allows them to control when the client finds out that the project is late.
  3. In a very premeditated manner, months after Deloitte has known that the project would be late, Deloitte both blames specific members of the client’s team and then asks for a change order. The change order is presented as if it is a big surprise to Deloitte.

The Real Story

Deloitte knows that it will change the order the client from when it first scopes the project to come up with the fixed bid. Deloitte will have the smoothest partners present the response, stating that Deloitte is “highly confident” that it can bring in the project on the proposed budget. But all the partners at Deloitte, as well as those who work on the pursuit that the project will be changed ordered.

The reason for Deloitte fighting to manage PMO is very simple. Deloitte needs to control the information regarding the status of the project. If the client manages the PMO, they will learn how late the project is too early in the process and this will lead to the client having a higher likelihood of stopping the project. Deloitte needs to keep two sets of “books.” In the version of the project plan shared with the client, everything looks like it is on schedule. In the actual version, the project is often months late.

My Experience with Deloitte

I worked with Deloitte on a fixed bid contract that followed this exact scenario. The information about how Deloitte does this repeatedly came from another contact that has worked with Deloitte, but the scenario I experienced was the following:

Deloitte had a fixed bid contract with a client where it controlled the PMO. When I came on the project I was asked to put together a detailed project plan using my experience to determine where we were. However, I was not to show it to the client. I created a project plan which showed that the project was 4.5 months late. When I showed this plan to the Deloitte partner, I was told: “whatever you do, you can’t show any plan that diverges from the PMO plan.”

“whatever you do, you can’t show any plan that diverges from the PMO plan.”

The client had repeatedly complained to Deloitte that they were showing them a matrix for the plan and telling them that this was “a new way that plans were being put together.” At a later date, Deloitte ended up change ordering that client. Deloitte knew for months that they were late, but did not inform the client until they thought the time was right.

Deloitte’s Core Competency?

The things Deloitte is best at don’t have anything to do with their consulting. Instead, their true core competencies are marketing and sales (i.e., getting clients) and litigation (i.e., defending against lawsuits). Consulting is how Deloitte makes money or how it bills, but it is sales and litigation that are the things Deloitte does best.

Therefore the beginning and end of the consulting relationship. Credit must be given where it is due, and at litigation and marketing, they are best in class. However, it is the middle part, the delivery of value where Deloitte has a problem. If they were to use their strategy consultants to develop steps to go forward, they might recommend outsourcing the consulting business to someone who can deliver value but keep the marketing and litigation capabilities under the Deloitte umbrella.

Deloitte’s promotional literature and advertising are excellent. However, that is the extent of their excellence. Working on or with Deloitte is quite frustrating because they do not set expectations appropriately nor do they know how to bring together the right skills to bring off successful implementations.

Conclusion

  • SAP projects are risky endeavors. However, based on my analysis of over a hundred SAP implementations, whether the lead implementation partner is one of the strongest indicators as to whether the project will fail.
  • Deloitte needs to change its internal culture to begin creating a more honest partner class that has accountability so that clients can trust them again.
  • Deloitte is overly concentrated on profit maximization. This means getting the highest margins for resources. So hiring the absolute least expensive resources, which means very high levels of outsourcing, and then charging the most for them. On many Deloitte projects, it ‘s hard to see Deloitte’s value-add.
  • Deloitte’s actual delivery has nothing to do with its marketing literature or sales claims.
  • We have worked on and followed many Deloitte projects. In all of those projects, we have yet to see a single instance where Deloitte did anything but put its interests ahead of its clients and raid as much money as possible from the account.

Financial Disclosure

Financial Bias Disclosure

Neither this article nor any other article on the Brightwork website is paid for by a software vendor, including Oracle, SAP or their competitors. As part of our commitment to publishing independent, unbiased research; no paid media placements, commissions or incentives of any nature are allowed.

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References

https://www.infoworld.com/d/applications/county-alleges-sap-deloitte-engaged-in-racketeering-272

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

https://www2.deloitte.com/ro/en/pages/operations/solutions/project-management.html

*https://www.nytimes.com/1988/08/01/us/steep-rise-seen-in-private-use-of-federal-racketeering-law.html?pagewanted=all&src=pm

https://www.backbonemag.com/Backblog/marin-county-v-deloitte-learn-from-this-erp-implementation-failure-to-drive-success.aspx

*https://www.r3now.com/sap-project-fraud-allegations-marin-county-v-deloitte-sap

https://law.justia.com/cases/federal/district-courts/california/candce/3:2011cv00381/236529/123

https://law.justia.com/cases/federal/district-courts/california/candce/3:2011cv00381/236529/112/

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