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Failure of the Outsourcing Project: BSkyB and EDS Case Study

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Updated: Jun 25th, 2022

BSkyB’s unsuccessful outsourcing case is an excellent example of a situation where high expectations and poor management turn advantages into disadvantages. This project has become one of the most significant legal cases in both the IT field and outsourcing (Davis 2010). Although outsourcing work could be successful, some mistakes on the part of the client, BSkyB, and the vendor, Electronic Data Systems (EDS), became fatal for the project.

These problems refer to inadequate assessment of the project and high expectations, poor management, and blurred requirements. However, these challenges could be overcome by renegotiation. Consequently, the main findings of the BSkyB and EDS case are that lack of communication between the parties exacerbates problems that can be solved by joint efforts.

Outsourcing Project Overview

Summary of the Case

BSkyB’s failure is one of the most significant cases in IT outsourcing, which has been covered in all media. BSkyB is the largest television company in Europe, and due to the expected increase in customers, the company decided to improve the system for users by making it more accessible and personalized (Oshri, Kotlarsky, and Willcocks, 2015). In July 2000, EDS won the tender to design, develop and implement a customer relationship management system (CRM) for BSkyB (BSkyB v. EDS, 2010).

On November 30, 2000, after the initial Letter of Intent, a subsidiary of BSkyB, SSSL, and EDS entered into a Systems Integration Contract, which aimed “to provide the CRM System at Sky’s existing contact centres located at Dunfermline and Livingston” (BSkyB v. EDS, 2010, p. 9). The contract included a point about completing the “eCRM Live in One Hall” stage with a budget of £47,637,000 (BSkyB v. EDS 2010, p.12). However, in 2001, the contract was revised and the parties signed the Letter of Agreement, which extended the deadline for the implementation of the first stage until March 2002.

Process of the Failure

Difficulties with the implementation of the project arose at the initial stage, which led to a delay and the inability to complete the project on time. This fact can be noted in the first revision of the contract, which extended the terms until March 2002. However, these changes did not help, and, in 2002, EDS completed only the basic phase of the project by spending a designated budget. The responsibilities of the integrator were committed to SSSL by signing a Memorandum of Understanding (BSkyB v. EDS 2010). The main reason for the failure was distorted data about the capabilities of the project and the timing of its implementation.

EDS wanted to win the tender, but in reality, its capabilities did not allow it to implement the plan by the initial proposal. BSkyB completed the final integration of the new CRM system only in 2006, with a budget of £ 265 million (BSkyB v. EDS 2010). BSkyB sued EDS because of failure and received £ 318 million in reparations from the company (BSkyB v. EDS 2010). Thus, the project, which was supposed to be successful due to the benefits of outsourcing, brought losses to both parties.

Client Perspective on Failure

Experience of BSkyB in Outsourcing

BSkyB is a company that constantly improves its technology to meet customer demand. During its existence, the company has shown higher innovation abilities than other TV providers, and to a large extent (Nobre, Walker and Harris, 2012). However, judging by the available information and the mistakes the company made in this case, BSkyB had no previous experience with outsourcing and relied on its efforts. In addition, BSkyB often bought or performed joint operations or transactions with other companies, which ensured its constant development (Our history, n.d.). Therefore, BSkyB’s inexperience in outsourcing and the process of selecting companies was one of the reasons that led to the failure of the project in 2002, or the rejection of EDS services.

Analysis of Selected Sourcing Model

The process of choosing a business model is one of the most critical components for ensuring successful outsourcing projects. A properly selected model allows the company to establish either profitable long-term relations with an outsourcing company, or reduce the risks and costs of the services. In general, a business model is defined as a “rationale for how an organisation creates, delivers and captures values” (Keith et al. 2016, p.36).

However, the source of the business model is a relatively new concept, which is more focused on the financial side of the issue. According to Keith et al. (2016, p. 37), “A Sourcing Business Model is the combination of two critical concepts: the contractual relationship framework you use to work with your supplier and what economic model you use.” Therefore, an outsourcing model determines the relationship between the client and the vendor.

The terms of the contract between BSkyB and EDS indicate that they have applied the performance-based services model. This model is based on the fact that payments to the supplier are built on the expected result but not for individual transactions for completed work (Vitasek, 2015). BSkyB initially determined the size of the budget and also indicated the limited conditions under which the payment may change. This budget was provided for the development and installation of a new CRM, that is, the expected result.

In general, such a model, in theory, is suitable, but in practice has led to failure. However, the company’s mistake was not in the wrong model, but in the absence of detail. BSkyB needed to split the budget into sectors and phases initially for tracking and controlling project costs and progress. In this case, it would be easier for BSkyB to detect delays in the early stages and replace the vendor and save money for the next steps. Therefore, the performance-based services model is suitable for this project, but it needs to create a more accurate plan and budget allocation by stages.

Outsourcing Strengths, Weaknesses, and Retained Capabilities of the Client

Outsourcing was beneficial for BSkyB and should have brought more benefits; in another case, a powerful company did not seek the services of a foreign company. One of the biggest advantages of outsourcing is cost savings due to the purchase of services from professional teams and companies (Dinu, 2015). Consequently, the main strength of BSkyB outsourcing was the opportunity to save time and money in creating an established department for developing a CRM system. BSkyB has fully understood the process and technical language to evaluate the project and provide accurate data already in the process of implementation (Hughes et al., 2016, p. 8). Therefore, the tender was a convenient way to implement the project in a shorter time for BSkyB.

At the same time, the weakness of outsourcing for BSkyB was the same need to conduct a tender and determine the right company without knowledge and experience. Besides, the choice of an outsourcing company was decisive for BSkyB, since it has relied on its experience. This weak spot was the reason for their failure since lack of clarity in the topic made them choose an insufficiently qualified team.

Retained capabilities on the first contract were practically nonexistent. The essential things were control of agreement and “management of the overall implementation of these workstreams co-ordinated across the Sky CRM program” (BSkyB v. EDS, 2010, p. 28). Although even control over the contract was not complete, since all points were defined in the document and could not be changed without justification. However, after changing conditions in 2002, BSkyB took over almost all capabilities as it received the duties of a system integrator. Therefore, its capabilities became business systems thinking, monitoring of the contract, and building relationships (Feeny and Willcocks, 2006).

These items are significant, because after breaking the agreements with EDS, the project, although with a considerable delay, was still implemented. If BSkyB continued to rely on EDS, then the project would probably not have been realized, or much more substantial sums were involved. However, the ability to quickly find a replacement for the EDS helped achieve the goal, albeit four years late.

Risks for the Client

BSkyB has taken many risks associated both with external circumstances and the shortcomings of the company. External threats are international outsourcing as a company from the United Kingdom hired a company from the United States. The risk, in this case, is associated with a different organizational culture and location, but it is minimal since both countries have an individualistic approach, the same level of development, and the lack of a language barrier (Burnett, 2016). At the same time, the main risk was the idea of ​​the project, since BSkyB wanted to use CRM of high complexity, which was still used on the market. The process of creating it was complicated because it required new solutions, which probably could not be feasible.

Other risks relate to the details of BSkyB and EDS. Firstly the budget was poorly planned, which did not give guarantees for an adequate distribution of resources that would cover all stages. Besides, it was necessary to determine the maximum budget, exceeding which the work on the project had to stop (Verner and Abdullah, 2012). The client took the risk of adding costs and possible non-fulfillment of goals in this regard.

Another risk was the transfer of all responsibility for the final product to EDS since BSkyB could not give exact requirements and specifications throughout the project. This mistake ultimately led to delays in the implementation of the project and confusion in its development. In addition, according to previous estimates by AA, the project was supposed to cost the company £60-90 million, and EDS offered only £48 million (BSkyB v. EDS, 2010). BSkyB agreed to low cost and short terms, without checking the reality of these conditions, thereby putting themselves at risk of high expectations (Rost, 2016). Thus, poor management and high expectations of BSkyB led to increased risks of failure of the project due to the fault of the client.

The Outcomes of the Failure for BSkyB

In general, BSkyB’s outsourcing project was a failure, although the company received a refund from EDS. Firstly, the project itself ended with a refusal to cooperate with EDS and a return to its forces. Secondly, much more money was spent than anticipated, although they were recovered later. Thirdly, the time spent on finalizing the project could be used to implement other initiatives and make a profit with working CRM. Therefore, although BSkyB won the case against EDS, the outsourcing experience was a failure.

Supplier Perspective on the Failure

Analysis of the Contract and Terms

Initially, entering into a contract with BSkyB was a profitable solution for EDS because working with such an influential company could bring its profit, reputation, and possibly a long-term contract. BSkyB could get a decent fee, and if the project were successful, it would bring glory to the company and new customers. Besides, CRM systems require constant maintenance, so BSkyB could enter into a long-term contract with EDS.

However, since the project was not evaluated carefully enough, the terms of the contract were impracticable and disadvantageous for EDS. However, having offered a lower price, EDS made a disadvantageous agreement that it could not complete in a short time. Consequently, the EDS contract with BSkyB was unprofitable not because of goals or objectives, but because of limited time and budget.

The Capabilities of EDS

EDS lost the case in court because it could not assess its abilities adequately and thereby made a proposal that it could not realize. In general, EDS was a company that participated in major international projects and had high chances to win the BSkyB tender. Their organizational culture, working language, area of work coincided with the requirements of the client as the American company, as well as BSkyB, promoted individualistic principles and used English. However, the requirements for the CPM system that BSkyB wanted were higher than for the products on the market; therefore, their development needed more time and experienced specialists.

EDS did not conduct a proper assessment of their abilities and took into account the fact that they had not previously worked with such orders, which was the reason for its failure. EDS could implement this project, but in a longer time frame and with a larger budget, although in that case, it might not receive a tender. Consequently, the capabilities of EDS were insufficient for the conditions indicated in the contract.

Risks of the Deal

The main risks that EDS took were the complexity of the project, the lack of experience in such operation, and exact requirements. These challenges arose because the conditions indicated in the tender were not clearly defined. The company also took risks associated with technical problems that might arise during the installation and development of programs. Consequently, the proposal they submitted for the competition also did not take into account the complexity of the assignment.

For this reason, EDS faced a challenge associated with understanding the concept of the new CRM and the results at the design stage, which turned out to be more complicated. EDS also starts to work on the project with no experience in this area, although IT products are its specialization. The contract did not provide many details related to the final product, so EDS also took the risk of not meeting the client’s expectations. As Liu and Yuliani (2015, p.52) note, “By establishing communication channels between the clients and vendors, requirement misunderstandings can be resolved at an early stage.” However, in the case of EDS and BSkyB, high-quality communication was never established, which led to the failure of the project.

The Outcomes of the Failure for EDS

EDS suffered significant financial, time, and reputational losses in this case. Firstly, the delay in the implementation of the project took time for which the company could implement the project for another company. Failure in court has cost EDS not only the profit that they could have received but also £318 million, excluding costs of the trial process. The case also was widely publicized in the media, so the reputation of EDS as a professional and honest company has suffered significantly (Iqbal and Dad, 2013). Therefore, this failure of the project was one of the most unsuccessful for EDS for its existence.

Recommendations

The Reasons for the Failure

The main reasons for the failure are project risks, poor communication, and an initially incorrect assessment of the project. The cause of the failure was also the lack of a trusting relationship in which companies could develop a suitable plan, even after realizing the deadlines that EDS originally proposed were unrealistic. Another critical reason was BSkyB’s overestimated expectations due to untruthful project evaluation. At the same time, although the main fault lies with EDS, which indicated incorrect data, BSkyB trusted them without additional checks and expert opinions.

Moreover, poor communication, contract risks, and BSkyB’s requirement for EDS “to be flexible,” made it difficult to understand the features of the systems, since specifications have changed all the time. Consequently, work on such a complex project became even more difficult for EDS. The project also failed due to the lack of a clear and adequate schedule and budgeting by stages as this lack impedes the process of monitoring the tasks’ implementation. Therefore, although the main reason for the failure was an inadequate evaluation of the project by EDS, which paid compensation, BSkyB also made several mistakes that led to financial and organizational problems.

Measures for Safeguarding BSkyB and EDS’s Position

Both companies could make a few changes to preserve their position in this project. The first solution for both companies is a more thorough analysis and verification of the requirements for the project and the final result, which would lead to an adequate assessment of the time for its implementation and budget. However, even if the verification step was skipped, actions could be taken to minimize the risks for both parties.

BSkyB needed to specify the exact terms, requirements, and budget for each stage and phase of the project. The lack of this data on the contract, as well as the fact that mistakes were discovered too late, are the consequences of a poor monitoring system and failures to manage end-user expectations. As noted by Khan and Khan (2017, p. 340), this problem could be resolved by “Proper record keeping, efficient documentation, negotiation.” Besides, the documentation of requirements, together with the budget, would help to avoid misunderstanding or misinterpretation of the CRM system design and would accelerate the process of its development and installation.

EDS could mitigate risks by requiring a clear understanding of the product they need to develop, as well as the scope within which change can occur. This clause in the contract would help the company at the initial stage reassess the project and offer BSkyB other real terms and budget, realizing its mistake. Thus, the establishment of precise requirements for the tasks, deadlines, and budget in the contract, as well as communication channels, could secure the situation of both parties.

Recommendation to Project’s Success

The main recommendations of this project refer to the initial assessment of the requirements for the end-product, changes of the contract terms, the establishment of communication, and the intensification of control and management. The first recommendation is to conduct an adequate assessment of the project by both parties as it would help to determine the unreality of the conditions proposed by EDS. The second recommendation is to clarify contract terms about stages and their budget since the indicated requirements accelerated the project development process and would help to control it from the client and the vendor.

The establishment of communication is primarily associated with the need to implement end-user expectations. Although the problem was in the vague information about the project from BSkyB, EDS also did not try to solve this problem. According to Khan and Khan (2017, p. 341), more frequent visits for management, as well as dividing the development process into parts, could clarify the situation, or at least identify problems at earlier stages. BSkyB also should have left more capabilities for controlling operations, since they chose the performance-based services model, which is focused on the final result. If BSkyB leaves the possibility to monitor the implementation of processes and their coincidence with expectations, it would increase its responsibility for the project and also help to identify problems and solve them in the first months of development.

Conclusion

Therefore, although most of the blame was put on the vendor, the BSkyB and EDS project had many flaws on both sides. Management shortcomings, absence of precise requirements, and budget separation by stages, as well as lack of these items in the contract, led to delays in the project implementation and the termination of the contract. However, the most critical aspect of any outsourcing project is constant communication, since almost any problem can be solved by negotiation and revision of the initial agreements. Consequently, the project could become successful, despite its initially inadequate assessment, if the parties wanted to establish high-quality cooperation and relations.

Reference List

‘BSkyB v. EDS’ (2010) EWHC 86 (TCC). BAILII. Web.

Burnett, R. (2016) Outsourcing IT, the legal aspects: planning, contracting, managing and the law. New York: Routledge.

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Liu, J. and Yuliani, A. (2016) ‘Differences between clients’ and vendors’ perceptions of IT outsourcing risks: project partnering as the mitigation approach’, Project Management Journal, 47(1), pp. 45–58.

Nobre, F., Walker, D. and Harris, R. (2012) Technological, managerial and organisational core competencies: dynamic innovation and sustainable development. Hershey: Business Science Reference.

Oshri, I., Kotlarsky, J. and Willcocks, L. (2015) The handbook of global outsourcing and offshoring: the definitive guide to strategy and operations. Basingstoke: Palgrave Macmillan.

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Verner, J. and Abdullah, L. (2012) ‘Exploratory case study research: outsourced project failure,’ Information and Software Technology, 54(8), pp. 866-886.

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