BSkyB vs. EDS – identifying and valuing $1bn lost business benefits

Sky has won its English and Welsh High Court case against EDS, claiming damages of £709 million (US$1.13 billion).

In 2000, Sky called for tenders to design, build, manage, implement and integrate the process and technology for a new CRM system for Sky’s Scottish contact centres. EDS won the bid in the face of keen competition from PwC, but then failed to deliver the project. Sky eventually sacked EDS and, in 2002, brought the project in-house.

Sky alleged that EDS had made fraudulent claims and negligent misrepresentations to win the bid. Justice Vivian Ramsey found for Sky, asserting somewhat understatedly in his 468-page judgement that “the relationship [between Sky and EDS] was not a success.”

Instead of the intended CRM project going live in July 2001 and being completed by March 2002 at a baseline budget of £47.6m, Sky contended that the functionality for the CRM system was only completed in March 2006 at a cost of about £265m.

Apart from the extra costs that were incurred to develop the system, a significant part of the Sky claim for damages is lost business benefits, of two major types – churn reduction and call volume reduction. Had the CRM system been implemented on time by EDS, Sky claimed they would have experienced reductions in customer churn and call volumes, due in part to enhanced customer service by Call Centre agents and through self-service.

Both EDS and Sky agreed a modern CRM system would have significant advantages over Sky’s rather dated, customer management system that, in 2000, still used function keys and code entry. Modern CRM systems typically use a graphical user interface, point and click navigation, drop down menus, radio buttons, option buttons and trees that are familiar to Windows users.

In his evaluation of the value to Sky of churn reduction, Justice Ramsey faced a huge challenge. First, he had to understand the 22 elements of functionality that were specified into the new CRM system. These included functionalities that enabled the agent to sort, search or filter a customer's previous interaction history, to identify appropriate offers for a customer, to access a knowledge management system, including decision tree diagnostics, to receive ‘next best action’ prompts based on propensity modelling for cross-selling and up-selling, as well as self-service functionality delivered through the set-top box.

Second, Justice Ramsey had to appreciate where this functionality differed from and was superior to that available in Sky’s year 2000 customer management system. Third, he had to be familiar with the various reasons for customer churn, only some of which were within the influence of Sky. Sky distinguished between Cuscanners (customers who churned of their own volition) and Syscanners (customers who were ‘sacked’ by Sky).

Fourth, he had to assess the susceptibility of Sky customers to the retention efforts of Agents using the CRM system. Fifth, he had to consider the capacity of each element of functionality to influence each of the different reasons for churn.

Expert witnesses called by both sides had taken different views on these matters.

Justice Ramsey has not himself calculated the lost business benefits from the delayed CRM implementation, but has provided guidance on how the quantum shall be computed.

Sky expects to receive damages of at least £200 million, and EDS is seeking leave to appeal. This case has some way to run.