LITIGATION IN OUTSOURCING 

21st Century Insurance v. Computer Sciences Corporation
Joint Development of Software - Systems Integration

Arbitration Demand, December 2002

    Software Development by Outsourcer: Failed Project?   Every services provider has problems keeping clients happy.  Sometimes a services provider will serve as systems integrator in the hope of providing long-term managed services and performing ongoing upgrades and maintenance services.

    It seems that one customer, 21st Century Insurance Group, filed an arbitration claim against Computer Sciences Corporation ("CSC") seeking a refund of more than $100 million for failure to deliver an IT project that has not achieved the desired results.  The project was to provide state-of-the-art integrated software, including database management, workflow, marketing and insurance processing software to enable the insurance company to process its personal automobile insurance business for its customers.  The customer claims it has paid "most" of the purchase price for the system that remains in development. The "failed" system "currently supports less than 2% of the company's business," according the customer.

    It's the Customer's Fault!  If there is a failure, who is to blame?  CSC issued a press release on the subject, claiming the customer is to blame. To paraphrase, the customer deserves the blame because, says CSC:

• The customer decided to customize CSC's systems.  The customer decided the specifications.
• The customer's programmers worked jointly with CSC's programmers to create the new software systems.  
• The customer was in charge of making critical decisions on the direction of the development effort, the project priorities and the allocation of resources.
• The customer hired CSC for many projects, which involved multiple interdependencies.  The customer mismanaged the priorities.

    Counterclaim: Please pay our invoice!  Litigators are not surprised when a customer who owes money decides to sue preemptively for a declaration that it was defrauded, when the vendor's position is that the customer owes more money and needs to be compelled to pay.  Could it be that CSC failed to exercise sufficient diligence in the management of the relationship and the accounts receivable?

    Some Technicalities: Customer is Barred from Collection.  CSC argues that 21st Century's arbitration claim is barred for "legal" reasons:

• limitations in the contract.
• course of conduct by the customer.
• applicable law.

    Lessons for Customers.  Is your systems integrator asking you to run the project?  How are you managing the project: by specifications and standards or by change order, intervention and complex interdependencies between your own employees' services and that of your services provider?  This case highlights some classic issues in governance of project management and transformational systems.  

    Lessons for Systems Integrators and Outsourcers.  This deal looks like a systems development project gone sour. For a $100 million "mistake," there must have been signs of this problem emerging before the customer chose to go to dispute resolution. Too bad this vendor probably had to engage in providing services under threat of, and during, litigation.  But CSC's continuation of providing services is probably good strategy - it mitigates damages (if any are to be awarded) and promotes good public relations, inspiring trust for other customers that the dispute will not cause the vendor to pull the plug.     

    Arbitration vs. Litigation.  Take your pick. In this case, arbitration does not keep anything quiet or hidden from view because the amount involved is "material" to the customer's financial statements.  This choice is always difficult in advance, and both vendors and customers should analyze emerging legal issues affecting this choice.