HP vs. the DND: When good IT contracts go bad

IT procurement experts say a dispute between HP Canada and the federal government over services agreements worth hundreds of millions of dollars raises important issues about how contracts should be managed.

The fallout between HP

and the government made national headlines Thursday after the deputy minister of Public Works sent a letter to the vendor demanding it repay $160 million the government says was fraudulently invoiced. HP has refused, blaming six unidentified subcontractors it says were hired at the government’s request as part of work done for the Department of National Defence.

Earlier this year, HP disclosed in a filing to the U.S. Securities and Exchange Commission it was still owed $10 million for the DND work, which was being audited by the department’s chief of review services for suspected “”irregularities.”” The dispute may end up in civil court, but in the meantime the government has demanded HP submit records concerning $366 million in contract billings to the DND between 1991 and last year.

Organizations like Ottawa-based Partnering and Procurement Inc. (PPI) regularly assist public sector clients in establishing contracts with IT vendors. Howard Grant, PPI’s founding partner and president, said his firm has acquired in excess of $20 billion with all levels of government and done more than 300 procurement deals. In that time, he said he has never seen any inappropriate behavior, but he noted the timing of the HP dispute comes on the heels of Auditor General Sheila Fraser’s report on the mismanagement of contracts involving federal sponsorship programs.

“”The thing that’s emerged from the government’s point of view is that it seems there’s a succession of this stuff,”” he said. “”In the case of the HP one, it doesn’t matter how tight your processes are. If someone wants to commit fraud, they’re going to commit fraud.””

Grant said clients often prefer to deal with a limited number of large private sector firms, but forms an umbrella contract that forces smaller firms to act as subcontractors. “”There’s some efficiency there,”” he said. “”If a company has five people working on a client site, if they get one invoice from the five people, it’s better than five separate invoices.””

Duncan Card, a lawyer with Toronto-based Ogilvy Renault, did not want to comment specifically on HP’s dispute with the government. He did say, however, that the increased specialization of IT vendors is leading to more situations where IT services agreements pull in many different firms, potentially complicating the management of the transaction.

“”Sometimes the public sector insists on dealing with one prime contractor,”” he said. “”I think public sector (organizations) all over the world are starting to reevaluate how they’re going to deal with consortia transactions, and whether the traditional one-stop-shopping solution is actually in their best interest.””

Grant said government may not have enough checks and balances to ensure certain things have been approved.

“”A client will sign off an invoice from a subcontractor. The subcontractor will send that signed timesheet or whatever it is saying that he’s done the work to, for example in this case, maybe HP,”” he said. “”(HP) has something signed by the client, so they then invoice the client. Well, the client’s signed off, so from a process point of view, they probably acted correctly.””

Ian Kyer, a lawyer with Toronto-based Fasken Martineau, said in some cases there are not formal subcontract agreements in place but “”partner”” arrangements where an IT vendor works with another firm’s solution rather than developing one of their own.

“”I’m seeing that everywhere,”” he said. “”It’s an unusual deal these days that doesn’t have some partnering of some sort in it.””

In an earlier interview with ITBusiness.ca, DND senior public affairs advisor Doug Drever said the contract that prompted the review was awarded to Compaq Canada in September, 2000. HP bought Compaq in 2001 but the original relationship goes back to the days of Digital Equipment Corp., which Compaq bought in 1998.

“”I’ve been in government public affairs for a number years, and cost audits and discrepancies in costing happen all the time in multi-billion dollar organizations,”” he said. “”In this case, it will be resolved.””

HP Canada spokesman Rob Ireland provided only prepared statements insisting that there is no merit in the government’s demands and that the company will vigorously defend any claim against it. In January, however, he admitted that inherited contracts can be challenging to take over.

“”In the end, people buy from people,”” he said. “”When there’s a change, that’s always tough to manage. I think the other thing is that HP understands it needs to have world-class controls and reporting capabilities. And it has that in place.””

Part of the problem, Kyer said, is that vendors may have substantially similar but differing terms for contracts with various clients. The work they do for those clients may be similar, but especially when contracts are inherited through an acquisition it is important they go over the fine details. In long-term deals, the parties involved may even stop auditing each other.

“”As time goes by, you get more relaxed,”” he said. “”And that’s when things slip through the cracks . . . it’s carelessness. They forget the rules exist.””

Card, who wrote a book called Information Technology Transactions: Business, Management and Legal Strategies, said he has been teaching contract and risk management best practices through courses offered by the Purchasing Management Association of Canada.

“”A CIO or a chief technology officer at a company or government might only be involved in one or two transactions in their entire career,”” he said, pointing out that in industries like entertainment, the complexity of contracts has seen many lawyers take on senior leadership positions at entertainment firms. “”You can never underestimate the importance of thorough due diligence.””

Both the DND and HP Canada have reportedly fired employees closely involved with the IT services contracts.

Comment: info@itbusiness.ca

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