KPMG cleared in software implementation dispute

Responsibilities for software implementations must be clearly defined in the contract, say lawyers

Lawyers are warning businesses to be wary of pushing software implementation timelines after the High Court knocked back a claim by Dunedin-based Atlas Specialty Metals against implementation partner KPMG.

The dispute, decided in February, dates back to 1999 when Atlas, then called Southward Engineering Company, decided to implement a Baan ERP system. Baan was contracted to implement the system and KPMG to provide “data conversion assurance” to assess the data conversion process and the risk of going live.

The implementation caused disruption to the business and data corruption to the extent that Atlas was unable to obtain accurate financial data. However, despite that, the High Court found against Atlas and even awarded costs against it.

An analysis of the case from law firm Simpson Grierson says it contains valuable lessons for firms rolling out new software.

Southward Engineering sought to have the software live by April 1999 to avoid possible Year 2000 issues with its existing system.

“Importantly in this case, Baan did not promise that the software would be fully customised at the end of the third [data transfer] phase; rather, it would be configured so that further customisations could be carried out by end users,” Simpson Grierson lawyers Karen Ngan and Matt Smith write.

“It was therefore important that Southward’s own staff were trained and sufficiently skilled at the time that Southward accepted the software to undertake this customisation.”

Despite numerous delays in the implementation, a decision was made to go live in late March 1999, even though acceptance testing was incomplete. Baan warned Southward the risks of going live would increase under these circumstances while KPMG pointed to issues such as inadequate staff training, a lack of internal controls and insufficient system testing.

Southward also chose not to retain Baan for system support, relying instead on its own staff. However, a raft of problems were encountered after key users resigned. The main one was the inability to extract accurate financial data. Investigations followed and Southward concluded the finance model was a “complete mess”. In 2001, following advice from IBM, it decided to re-implement the system.

Southward could not sue Baan due to a liability cap and a two-year limitation on claims in the contract, so it sued KPMG, which refuted the claim, arguing it had not been retained for a full audit of the software and Southward was responsible for its own misfortunes.

The court found Southward had no one to take responsibility for correcting errors as they arose and the situation “snowballed”. Further, there was no evidence the errors had been present when the system went live and they could be attributed to ill-trained users.

The court also found the scope of KPMG’s services as defined in the contract were vague.

Justice Miller decided that whatever the complaints “the claim asks too much of the limited data conversion assurance services offered by KPMG.

“I am satisfied that … KPMG did what it promised to do, and was not negligent in failing to advise Southward to delay going live …”

Lawyers Ngan and Smith advise that responsibilities for software implementations must be clearly defined in the contract and the contract must provide adequate protection against non-performance. They say thorough testing has to occur before acceptance and skilled technical people have to be available throughout the project.

“The Southward case serves as a timely reminder to businesses that any software implementation project must be managed with absolute care and diligence. Skipping or rushing steps along the way can cause considerable problems, which can be costly to rectify,” they conclude.

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