On November 5th, 2012, swamped in the aftermath of Hurricane Sandy, the National Grid management team made the decision to go-live with a major SAP implementation. The cost of the damage done by the failed implementation easily surpassed the costs that had been incurred to implement. An external audit determined that the failed implementation was due to an array of problems from the definition of scope and budget to inadequate testing and business preparation. In December of 2017, National Grid filed suit against Wipro requesting their money back as well as the cost of all damages. On June 1st, 2018, Wipro filed a motion to have three of the five causes for action dropped. Does National Grid have a legitimate case? What chances do they have of prevailing in court?
UpperEdge takes a closer look at this case and provides our opinion on National Grid’s odds on prevailing.
The Decision to Go-Live and the Implications
National Grid, one of the largest investor-owned power distribution companies, faced a difficult choice in October of 2012. The SAP project that was three years in running and marred by delays and budget overruns was scheduled to go live on November 5th. Failure to go-live meant a delay of another five months, likely another $50M in additional spending, and a trip back to the rate commission to request adjustments to pay for the overruns.
At the same time, Hurricane Sandy was pounding up the east coast. By mid-October, forecasts for damage in National Grid’s service area were extensive. For a utility company, power restoration takes precedence over everything else after a hurricane. National Grid had to know they had a bumpy ride coming when they made the decision to go-live. What they clearly didn’t understand was how bumpy the ride would be.
In the weeks that followed the go-live, while the National Grid crews were working tirelessly to restore power, the SAP project team was just beginning to understand the full extent of the damage being caused because of the implementation. As time wore on, the problems compounded, and the cleanup effort intensified as additional resources were brought on to clean up the mess. Here are some specifics reported by National Grid:
- Payroll was a disaster – Over-payments of more than $6M were made to employees and not recovered. There was $12M paid in settlements to employees related to short pays and deductions. Delays in the generation of W2’s and other tax reporting occurred.
- Vendor payments — Just two months after go-live, National Grid had 15,000 vendor invoices that they were unable to process for payment, inventory was in shambles, and vendors were being issued payments with the understanding that reconciliation would take place later.
- Financial reporting — Prior to go-live it took National Grid four days to close its financial books. Following go-live the close took 45 days. So bad was the financial reporting, National Grid lost its ability to access short-term borrowing financial vehicles based upon its inability to provide satisfactory financial reports.
The problems were so profound that the cleanup took more than two years to complete with a calculated cost of $585M, more than $150% of the cost of implementation.
The Lead Up to the Decision
The journey to the decision point for National Grid was not unlike other companies that have followed the same path. In 2007, National Grid had closed on a major acquisition making it one of the largest privately held power distribution companies in the US. This acquisition left the company with two sets of financial and operating systems. Capturing the synergies of combining these systems and adopting new sets of business processes were key components for the justification for the project. The project was also viewed as a method to allow National Grid to address significant audit deficiencies in its financial business processes.
In mid-2009, National Grid hired Deloitte as its systems integrator and set a project budget of $290M that was submitted and approved by the Utilities Rate Commission. Shortly after the start of the project, National Grid looked to develop a relationship with a firm to lower cost delivery of the development effort required for the program. As a result of an RFP process, WIPRO was brought on to the project. Shortly thereafter EY replaced Deloitte in providing project oversight and Wipro’s role was reported to have been broadened to system integration responsibilities.
The program operated with a target go-live date of December 2011. This date was later moved to July 2012 and followed by October 2012 and then a November 2012 target date. The final sanctioned estimate of the project was set at $383M, nearly 30% beyond the original target budget that was approved by the board.
In July of 2014, the NorthStar Consulting Group presented their findings of a Comprehensive Management and Operations Audit of the U.S. National Grid Companies sponsored by the New York Public Service Commission. The 265-page report covered a broad range of the company’s operations and governance. Throughout the report, the impact of the failed go-live was noted as well as the governance processes that led the company to determine that going live on November 5th was the best decision.
As part of the findings, NorthPoint documented National Grid’s management observations as to the root cause of the failed implementation. These included:
- Overly ambitious design
- Significantly underestimated scale of transformation needed
- Limited availability of internal personnel due to ambitious business agenda
- Multi-partner model did not deliver business benefits
- Lack of ownership of certain business processes
- Testing less effective than expected due to limited range of scenarios tested and limited data availability
- Inadequate quality of data from legacy systems
- Too much focus on timeline and not enough focus on quality
- Training methods proved ineffective
National Grid continued to engage Wipro in making the necessary fixes to the installed SAP system tolling their agreement (extending the statute of limitations for filing suit). On November 30th, 2017, National Grid filed a lawsuit against Wipro in the U.S. District Court Eastern District of New York. The lawsuit notes that National Grid was unable to file suit against EY due to the language of their contract. The suit alleges that Wipro:
- Fraudulently induced National Grid into signing the original agreements. National Grid claims that Wipro misrepresented its SAP implementation capabilities, talent, and knowledge of the U.S. utilities business operations and common practices.
- Breached its contract with National Grid by:
- Failure to prepare design documents and specifications to industry standards,
- Failure to prepare programming and configuration to industry standards,
- Failure to adequately test, detect, and inform of problems,
- Failure to advise that the system was not ready to go live.
- Breached express and implied warranties by not providing consultants that were consistent with a top 25% SAP implementation firm.
- Negligently misrepresented for the same reasons identified in the first cause for action.
- Violated New York’s General Business Law for deceptive practices.
National Grid is seeking damages in the form of relief of all contractual obligations, restitutions of all amounts paid to Wipro, damages associated with a poor go-live, punitive damages, and all attorney’s fees and costs associated with the lawsuit. UpperEdge calculates Wipro’s financial exposure north of $1B.
On June 1st, 2018, Wipro filed a motion to dismiss on three of the five causes for claims that fraudulently misrepresented its capabilities and negligent misrepresentation. In its response to the National Grid RFP, Wipro claims that it identified that it had a well-established SAP practice, installed SAP globally for utilities, and had a long running relationship with U.S. utilities. There was no explicit statement indicating that Wipro had not completed implementations of SAP for U.S.-based utilities nor were specific references provided in this regard.
Wipro also defends much of the language in the RFP response as common puffery implying that National Grid had a basic responsibility to check references. UpperEdge has obtained copies of National Grid’s RFP and Wipro’s response, and believes that Wipro has a reasonably good chance of having their motions to dismiss granted. Oral arguments on these motions are to be held on June 10th.
What We Would Like to Know
As the litigation progresses, there are a number of questions that we hope to find the answers to:
- Where was EY? EY was providing project management oversight. They clearly have an understanding of what it takes to put in a major SAP implementation. How did they not see or anticipate the major problems that occurred and warned the National Grid management team? Or did they?
- Where was SAP? In their suit, National Grid claims that Wipro developed an overly complex system that relied on the development of new capabilities vs. using the software as designed. National Grid identified SAP as providing some level of oversight. Why didn’t they point out these significant deviations from standard? Or did they?
- Where were National Grid’s project owners? Client project teams have responsibility for signing off on requirements, designs, and project strategies. What standards were used for signing off? Did National Grid provide Wipro with the appropriate access to expert personnel to properly identify requirements? Did Wipro believe that they had accurately captured all requirements based on National Grid’s sign-off?
- Where were the auditors? Programs of this magnitude are often reviewed by both internal and external auditing. Were risk assessments performed? Were the appropriate mitigations put in place?
UpperEdge’s current assessment is that National Grid does not have a strong case. There are many checkpoints the project needed to pass to move forward, each requiring National Grid to sign-off on the quality of the delivered product. There were many opportunities for National Grid to identify poor quality talent on the part of Wipro and demand replacements. The final decision to go-live always rests with the client and unless Wipro was looking to deceive National Grid regarding the results of its testing, it will be difficult for National Grid to prove Wipro was negligent to the point of being solely responsible for all damages.