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ScanSource Sues Avanade For Alleged Botched ERP Project

The suit, filed in U.S. District Court in Atlanta, alleges that Avanade committed fraud, tortious misrepresentation and breach of contract, according to ScanSource.

Distributor ScanSource has filed a lawsuit against Avanade, the joint venture between Accenture and Microsoft for what ScanSource calls a "bait-and-switch" tactic on a Microsoft Dynamics AX project.

The cost of the ERP software system project ballooned to $66 million and three years implementation after an initial estimate was given as $17 million and 11 months implementation, according to ScanSource. The ERP system is still not live, ScanSource added.

The suit, filed in U.S. District Court in Atlanta, alleges that Avanade committed fraud, tortious misrepresentation and breach of contract, according to ScanSource. The Greenville, S.C.-based distributor is seeking tens of millions of dollars in damages as a result of the alleged misconduct, according to ScanSource. Microsoft and Accenture are not named as defendants in the suit. Avanade does not comment on pending litigation, according to a company spokeswoman, who added "We can tell you that we believe the allegations are without merit. We intend to defend our position."

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ScanSource said the project is believed to be one of the largest global enterprise-level Microsoft Dynamics AX implementations to date.

The project began in 2009 when ScanSource signed a deal with Avanade to replace its legacy ERP with a new system to support ScanSource's planned global expansion. The lawsuit alleges that Avanade knew it was not capable of performing the Microsoft AX implementation for ScanSource and misrepresented its skills and abilities to land the lucrative engagement.

Avanade engaged in "bait-and-switch" sales tactics, ScanSource alleges, by telling ScanSource that highly skilled consultants would perform the implementation.

"Instead, Avanade provided ScanSource with a revolving door of consultants who knew little or nothing about implementing Microsoft Dynamics AX software or managing large-scale global ERP projects," according to a statement from ScanSource.

ScanSource alleges it was left with "an incomplete and defectively designed system that suffered from numerous flaws and required extensive remedial work," according to ScanSource.

Avanade allegedly wrote a "staggering" 500,000 lines of software code to try to have the Dynamix AX platform meet ScanSource requirements, according to the suit.

"As a result of Avanade's fraud and breaches, an implementation that was initially budgeted for $17 million has now cost ScanSource approximately $37 million -- and is estimated by Accenture, Avanade's parent entity, to require an additional $29 million to complete. This ballooning of the project cost estimate from $17 million to approximately $66 million represents an almost 300 percent price increase for delivery of the global ERP implementation that is years behind the originally scheduled initial go live ... ," according to ScanSource in the lawsuit.

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The suit further alleges that Avanade's inability to provide accurate estimates caused ScanSource to "de-scope" some of its minimum business requirements in order to reduce the escalating costs and keep on schedule, according to ScanSource.

"As a result of this de-scoping exercise, ScanSource had to retain some of its legacy applications to perform certain processes that the new Microsoft AX system was supposed to handle. For other de-scoped functionality, ScanSource was required to write its own applications to fill the gaps," ScanSource alleges in the statement.

The suit also states, "By forcing ScanSource to de-scope functionality, Avanade performed a classic bait-and-switch on ScanSource. Specifically, after being engaged on the project for only a few months, Avanade drastically increased its fees estimate, thereby forcing ScanSource to make the following choice: either pay substantially more for functionality that Avanade was supposed to deliver as part of the initial quote, or forego that functionality to reduce a ballooning budget far in excess of what Avanade had represented and agreed to."

During the project, Microsoft and Accenture performed quality assessment reports, and both companies concluded the project was being mismanaged and made recommendations, according to ScanSource.

"The Microsoft quality assessment, which focused primarily on software development, documented hundreds of 'Issues' with the Avanade-developed code. Many of these problems were characterized as 'Must Fix Issues.' Microsoft further criticized the manner by which Avanade altered the core Microsoft AX code, noting that 'even single methods have multiple developers' and that '[v]ery commonly, base classes, forms and tables have been modified,' increasing the costs of future upgrades" and maintainability of the system," according to ScanSource in the lawsuit. "Among other criticisms of the project, the Accenture quality assessment noted that the Project could not be completed without additional fees of $22.5 to $29 million, and resource commitments totaling 11,504 workdays."

ScanSource has signed with another company to mitigate the damages and harm caused from the project, according to the distributor, and plans to complete the Microsoft Dynamics project, the company said. That provider, which ScanSource did not want to identify, is in the process of assessing how much time and cost will be needed to complete the project, said John Ellsworth, general counsel for ScanSource.

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Prior to selecting Avanade, ScanSource conducted a 16-month due diligence study of several ERP platforms including Microsoft, SAP and Oracle and several implementation partners for each, said Ellsworth, ScanSource's general counsel.

"We did get references from everyone. Usually people give you good references. No other global enterprise-level Dynamics implementation we saw was shown to be problematic or made us second-guess the platform or the implementation partner at that time," Ellsworth said. "We still believe Dynamics is the best fit for us as a company, but what Avanade told us they could do and implement did not happen as they said it would."

Aside from cost overruns and resources committed to the project, ScanSource said the Avanade project has not had impact on sales or customers.

"It's been distracting to have this project go on for three-plus years, but nothing [distracting] in terms of business interruption. We're still running on legacy systems," Ellsworth said. "This is our first time doing a global ERP implementation project. All along the way, we had our best and brightest on the project. It became apparent to us that we were missing go-live dates that Avanade was putting out there. As more continued to happen for different and various reasons, we began to challenge them more. We said when you sold us this project, you said you were going to deliver within a year with this price tag. We're more than three times past the time and four times past the cost. That's not what we signed up for."

PUBLISHED JAN. 2, 2013

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