Co-op Insurance Sues IBM for Breach of Contract: Is Agile at Scale Worth the Risk?

On December 18th 2017, U.K. Insurance Co-Op Group’s CIS General Insurance Limited (CISGIL) filed a breach of contract lawsuit against IBM United Kingdom Limited.  The complaint, filed in the High Court of Justice Business and Proprietary Courts of England and Wales Commercial Court (QBD), claims that IBM knowingly and with reckless disregard for the impact on CIS General did not comply with the terms of its services agreement.  CISGIL claims that this alleged breach resulted in significant damages to CISGIL in excess of 200 million pounds sterling.

This project appeared to be, on the surface, one of the most high-risk endeavors that UpperEdge has seen in some time.  I would go as far as calling this the ‘Game of Thrones of Risk,’ each risk capable of taking the project down on its own.  The risks included:

  • Tight timelines with financial consequences
  • Unproven software
  • Unproven vendors
  • High levels of regulatory change
  • The use of agile at scale
  • A client business operating at a loss in an industry that is being redefined by digital.

UpperEdge follows and reports on these types of suits for our clients.  There are always lessons to be learned and risk mitigation tactics that can be developed from these types of implementation failures.  As always, there are more questions than answers in the early stages of these proceedings.  In the remaining portion of this blog, I will lay out what we know from our research, what we suspect and conclude, and what we would like to know and hope to find out through future litigation filings.

A Bit of Background

CISGIL is roughly a £350M business that is member of the £11B Co-operative Group based in the U.K.  In 2014, it was determined that the CISGIL organization would separate itself from the Co-op Banking entity, under which it was previously operating.  As a part of this division, the firms needed to separate shared operations on an aging IT platform.

Meanwhile, Innovation Group, an insurance services firm with roughly 3,500 employees and £210M revenue, decided to split its operations into services and software.  The software portion of the firm became the supplier of 1insurer, a software platform that provides capabilities in managing policies, claims, and billings.

At the same time, IBM’s Global Services business was in a downturn and was not performing in the market consistent with its peers.

The Time Line

The timeline below sheds some light on what led up to the lawsuit and was pieced together through a review of the lawsuit that was filed, a review of Co-op Group’s annual and semi-annual reports, news releases from Innovation Group and 1insurer, and additional research.

June 2014 – CISGIL issued an RFP to bidders to provide a new end-to-end IT solution, replacing the systems that were running on the shared platform with Co-op Banking.

October 2014 – IBM won the bid and engaged in an initial due diligence phase of the program.

January 2015 – The Co-op Banking entity announced they had signed a £95M deal with IBM to migrate their system’s infrastructure to a new platform, along with a 10-year £275M managed services agreement.

CISGIL entered an interim agreement with IBM to design a high-level solution and define the specification requirements.  One of the key requirements identified was the critical need to be off the existing platform by Dec 31, 2017.

It is likely that if the project could not be completed on time, CISGIL would be required to bear the entire cost of the computing platform they shared with Co-op Banking.  

The lawsuit suggested that CISGIL spent roughly £5.6M with IBM for this 5-month phase and £3.9M with other vendors.

June 2015 – CISGIL and IBM signed a Master Services Agreement (MSA) along with two Statements of Work (SOWs), one for implementation services and the second for managed services, with the total value of the implementation services deal (3 years) at £55M.   Three releases of the designed software were to be implemented with the following schedule:

Release 1 – Go live in March 2016

Release 2 – Go live in August 2016

Release 3 – Go live no later than November 2017

Innovation Group announced they had signed a contract to design and deliver software and managed services to host the system along with the client’s other systems.  It was announced as a £45M deal with £12M in services in the first year.  This was later identified as the largest contract that the Innovation Group software division had ever signed.

Based on a review of Innovation Group’s LinkedIn staff profiles, it appears that the company relies heavily on agile development methods.

December 2015 – CISGIL and IBM signed amended implementation SOW.  It is not clear if the implementation schedule was changed with this amended SOW.

The Carlyle Group bought The Innovation Group for £500M and rebranded the software division as 1insurer, aligned with the software products brand. 

January 2016 – CISGIL’s annual report indicated that the project had achieved all major milestones through 2015 and the first release of the developed software was delivered in January of 2016.   The report stated that the project was entering the testing and delivery phase.

March 2016 – 1insurer announced the release of a new version of software, V7.5.

April 2016 – The milestone to go live with Release 1 was missed (later alleged in the lawsuit just filed).

June 2016 – A new Chief Technology Officer was hired by 1insurer.

July 2016 –  A new CEO and Chairman was put in place at 1insure by Carlyle Group.

August 2016 – CISGIL brought on an interim CIO who was new to the company.

October 2016 – 1insure appeared to have discontinued news releases.  Information from and about this firm or its software is no longer updated.

January 2017 – IBM provided the first draft of a revised plan for implementation.

January 2018 – CISGIL issued an annual report explaining that the program was well off course and that they were in discussions with IBM to determine the best course of action.   The report also noted that the CISGIL management team was issued a bonus based on their performance on the project.

March 2017 – IBM issued an invoice to CISGIL for payment of £2.9M, due at the completion of delivery for software related to Release 3.

April 2017 – IBM provided an updated plan that indicated Release 1 would be implemented in part by June 2017 (15 months later than the original plan) and that the earliest delivery for Release 2 would be March of 2018 (well past the deadline for exiting the legacy platform shared with Co-op Banking).

CISGIL served IBM with a dispute notice saying that IBM was in breach of their contract and assessed general damages of £66M if the January plan was implemented and £110M if the April plan was implemented. 

CISGIL disputed a £2.9M invoice issued in March 2017 claiming that milestone was not signed-off and that expectations were that all previous milestones should have been reached.

IBM indicated to CISGIL that they were having 1insurer audited related to their capability to deliver the software as scheduled.

July 2017 – IBM terminated the MSA based on the non-payment of the £2.9M invoiced in March.

Co-op Insurance also officially terminated the contract with IBM.

Dec 3, 2017 – Co-op filed a lawsuit alleging IBM performed a willful and reckless breach of contract.

The Claims of Breach and Damages

Paraphrased from the suit, CISGIL claims that IBM:

  • Knew the appropriate project prerequisites (a valid purchase order and previous milestone sign-offs were not in place).
  • Knew that the purported invoice was not issued in compliance with the MSA.
  • Knew that CISGIL had reason to contractually dispute the invoice and did so.
  • Was reckless in the alleged intentional breach in that IBM knew that the termination of the MSA would result in substantial loss and disruption of the program.

Co-op Insurance has requested damages primarily in the form of:

  • Reimbursement of money paid to IBM (£33.7M).
  • Reimbursement of money paid to other vendors (£54.8M).
  • Cost of financing the bond used to fund the program with interest (£44.4M).

Our Initial Conclusions and Questions

From my initial review of the lawsuit, I have formulated the following assumptions regarding the program:

  • CISGIL, to some extent, was using IBM to insulate itself from the risk of using software from a relatively small supplier on a mission-critical application.
  • CISGIL personnel were significantly loaded with work in support of the separation from Co-Op Banking.
  • CISGIL was under significant profitability pressure due to losses for three consecutive years.
  • 1insurer was developing software to meet the requirements of CISGIL using agile methods.
  • IBM signed a contract with CISGIL that was more aligned with waterfall methods and milestones.
  • The overall approach to implementation was therefore a hybrid of agile and traditional waterfall methods.

As with any lawsuit, there are at least two sides to every story, but this one appears to have at least three.  As I was reviewing this claim, I started to ask myself a few questions that will need to be answered to understand what really happened:

  • Did CISGIL have independent QA services from IBM or other firms?
  • What portion of the IBM contract was a direct pass-through to 1insurer?
  • What additional services and accountabilities did CISGIL contract with IBM?
  • What role did IBM have with regard to providing project management and oversight for other external resources committed to the project?
  • What services were other resources performing to earn £54M?
  • What warnings were provided by IBM with regard to project execution?  Were there specific obligations with regard to CISGIL performance that were identified that contributed to the project’s poor performance?
  • Why would CISGIL feel comfortable enough to report that the program was on track in January of 2016?
  • What influence did the change in management for 1insurer have on the execution of the program?  How about the change in leadership for CISGIL?
  • Why would CISGIL issue bonuses to internal management when the program was so clearly off course?

What the Future Holds

UpperEdge will keep our eyes on this case to develop a deeper understanding of what went wrong.  If you would like to learn more about UpperEdge’s Project Execution Advisory Services and how we develop specific techniques to identify risks well in advance of them turning into issues, or if you have any questions or comments, please do not hesitate to contact [email protected].

Comment below, follow me on Twitter @jmbelden98, find my other UpperEdge blogs, and follow UpperEdge on Twitter and LinkedIn.

Leave a Comment

Your email address will not be published.