A Matter of Opinion
A Federal District Court tells us that software salespeople can say anything they want--just like the rest of us. This is the second in a series on what's wrong with the applications market.
Truth in Sales
What prevents software salespeople from outright falsehood during a software sales cycle? I'm not talking about exaggeration, excess enthusiasm, or an optimistic view of future releases. I'm talking about making statements that are completely untrue.
This question emerged as we compiled a study of recent suits against enterprise application providers. The study (which will be a premium for paid subscribers in 2005) is part of our ongoing attempt to understand how value is actually delivered by applications.
Before embarking on the study, we knew that a salesperson's own sense of honor and concern for his reputation was the most important thing keeping statements in bounds. And we thought that the software companies themselves might have some ethical standards for salespeople, which would also help. But we also thought that outright falsehood was a dangerous thing, because it might provide grounds for later court action. The courts, we thought, might have some minatory effect.
But we found a case recently that suggests otherwise.
The Facts of the Case
According to the court documents, here is what happened. A well-known and respected ERP vendor (Company A) sold their product to a firm (Company B) in the Midwest. The firm planned to run the product on a well-known and respected hardware platform and, before they bought, they wanted to be sure that the product ran [my word] on the platform. In an e-mail, the salesperson told Company B that Company A is "unaware of any unreasonable performance issues with its software on the [unnamed] platform."
Company B bought the software, but found that the software "could not be effectively implemented" on the platform. Since they had already spent "several million dollars" on the software, they filed a fraud complaint.
The lawyers for Company A asked the court to dismiss this claim out of hand. The court complied.
When ruling on a motion like this, the court is required to assume that the facts of the case are those most favorable to the complainant ("accept as true all well-pleaded factual allegations"). For the purposes of this discussion, we shall follow suit and assume that the software did not in fact run
on that platform.
Before I go further, let me put in some disclaimers. I am deliberately not identifying either party, and I am not passing in any way, shape, or form, on the facts of the matter. I am not saying that what the salesperson said was actually true or untrue. I am asking the following question. "Assuming the salesperson's statement were not supported by the facts, what would the courts do about it?"
Final disclaimer. I am not a lawyer. This is not a legal opinion, etc., etc.
The court dismissed the complaint because it said that the software salesperson's statement
was not a statement of fact, but a statement of opinion, and statements of
opinion can't be the basis for a complaint of fraud. According to the court, a statement of fact is one that is "susceptible of [sic!] exact knowledge," and nothing in the statement quoted above, according to the court, was so susceptible.
Let me try to restate this clearly, but without prejudice to either side.
Assuming that there were extreme performance problems, that,
for instance, the product could not even be loaded onto the platform
or that the media were incompatible, was the salesperson's statement, "know of no
unreasonable performance problems," fraudulent? No, according to the courts.
The statement was a matter of opinion.
Has the court gone haywire? Not at all. Courts are supposed
to dismiss fraud claims that are based on statements of opinion,
because they don't want to be protecting unwary consumers who rely
on what the court called "seller's 'puff' or 'trade talk'" and
then get angry about it.
The court is also saying, reasonably enough, that it
doesn't want to get into the software business. You or I
might think that when a software
product does not even run on a platform, the question
of whether there are "unreasonable performance problems"
is susceptible of exact knowledge. But you and I know
more about software than the courts do.
A License to Prevaricate
So let's go back to the situation. Company B
certainly had a legitimate concern: will the product
run on their platform? This ruling says that it's up to them to determine what is "puff" and what is true.
What they actually did before buying was clearly not good enough. They asked Company A for assurances. Company A (according to the court) told them that the product "could
be implemented" on that platform and that Company A was "committed to
supporting the implementation" on that platform. But, once those assurances were proven to be "puff," it was the customer's problem, not the company's.
What should Company
B have done to find out the truth about the platform (or about any other statement that Company A made)? From what I can see, the only way was
to pay "several million dollars" and test the software for themselves.
I have no idea what actually went wrong in this situation. Maybe the software salesperson
was lying; maybe he or she was misinformed; maybe he or she made it up; maybe he
or she was telling the exact truth, but had a very different idea about what
"unreasonable performance problems" meant from what Company B thought it meant.
It doesn't matter. To find out what was actually going on,
Company B had to buy the software.
Caveat emptor, indeed.
Once they did shell out the
dough, they do have some recourse. According to the court,
the right way of resolving any dispute in this matter is through a "breach of
contract" claim. More on this later.
Why Believe a Software Salesperson?
It's a peculiar business, isn't it? Here is a product that
people are plunking down millions for. And as a practical matter,
the only thing that keeps a vendor from telling you things that are
completely
at odds with the facts is the vendor's ethics and the salesperson's
sense of honor. And the only way to find out whether they're telling the truth is either a) lie detector tests or b) buy the product, write a really good contract, test it, and then sue
for breach of contract.
This is in contrast, mind you, with the situation that holds
for car salespeople. In this country, a car salesperson is not
going to tell you that a
car runs, when in fact it doesn't have an engine. If that
did happen, you wouldn't go after the dealership for
breach of contract. There are lemon laws and television stations and
laws about warranties. There are car companies that care something
about their reputation. There is, in short, a culture and a legal
environment that says, "Some exaggeration is possible,
but basically car manufacturers need to make a product that runs and is safe." If you spend
several million dollars for a car,
you'd get a Maybach, not something that doesn't even move without a tow truck.
So what are customers supposed to do, presales? Well, they can blindly
trust the vendors--and many do precisely that. Some trust, but
also verify, or at least think they do. They ask for demos, for instance, and do
reference checks. Take my word for it, it isn't much. I've seen a demo artist at a software company convince a senior executive and his team when the product crashed four times during the demo.
Only limited aid, remember, can be expected from consulting companies or analyst firms. For one thing, it's hard to find one who works entirely for the customer. The consulting companies are in partnership with the vendors, and
the big analyst firms get a majority of their revenue from the software companies.
And even if there were no conflict of interest, none of them is in a position to
check more than a small percentage of a software company's assertions.
I sometimes think, "What would have happened if Company B had gone to me?"
All I could honestly have said was, "They say it runs." I knew the product--I
had read the company's
documentation--but I had never tested it on that platform, and I wasn't in a position to
test it.
At the time, of course, I worked for a company who got a very substantial portion
of its revenues from software vendors. Had I felt misgivings and expressed them
too forcefully, I know that some parts of my management would have been pretty irked.
"We get money from these guys, and we want more," might have been the line, "so don't
go shooting off your mouth without proof."
So what about that contract? Doesn't that offer a layer of protection?
Not
much. First of all, you never want to be in that situation; you don't want
to go through a software buying cycle where the only remedy you have
if a salesperson chooses to say something utterly at odds with the facts is
to sue for recovery of the money.
Second, have you ever read those contracts? You start out with
contract disclaiming any warranty or liability on
the part of the vendor. So you have to write contract language that
embeds every promise you care about in the contract, appropriately
worded. Then, after you pay out the money, get the software, assemble the team,
do the testing, and find out you've been taken,
you get to convince a jury who knows nothing about
it that there was a breach of the requirements in the contract. Statements made by the company misrepresented during the sales cycle can be entered in as evidence, but the nub of the case will be the requirements in the contract, not those statements.
Even if you wrote a brilliant contract, suing for breach is not a fun task. Even if you have justice and truth on your side, they have expert witnesses on theirs. When it's up to you to teach housewives and plumbers what "unreasonable performance problems" on a hardware platform are, you've got a lot of work ahead of you.
I've talked to a lot of people about this case, and you know
what, nobody is surprised either by the case or
by my description of where that leaves the customer.
"It's the Wild West out there," said one of the people
I talked to, an analyst whom I respect. "I know of much worse
cases."
Unfair Markets
Any of us who has studied markets knows that a market must present
a relatively even playing field, or else either the buyers or
the sellers will flee.
It seems pretty obvious that the market here is tilted against the buyer.
To buy at all rationally, buyers must have a great deal of
information about what they're buying. But only the company selling
the product has that information. (Let me say it again: neither analysts nor
consulting firms have the resources to provide honest,
informed, and unbiased versions of the required information.)
But nothing besides their own honor and code of ethics requires a company
to provide information that is honest and accurate, and there is every incentive
you can imagine to stretch, bend, or break with the truth.
Even if a salesperson or a company does want to behave ethically
(and I absolutely include Company A in that group), there is a Prisoner's
Dilemma problem. As long as you think the other guys will get an unfair
advantage by saying something more favorable than the facts can support,
you've got a powerful motivation to bend, twist, exaggerate, or hope that
the future will bring a better product.
So are companies fleeing the market?
Among companies I've talked to, there are certainly some who are by no means fleeing. Some
welcome the Wild West atmosphere, assuming that it fosters innovation. Some
feel that they have good lawyers and/or good software evaluators, and they
are not at a disadvantage. Some want what is available only in this market
and are willing to assume the risk. Many say that they have
smart lawyers. What I wonder is, are they behaving reasonably?
Even at carnivals, there are
always people who are willing to try their luck.
And the fact that some are willing to play doesn't necessarily speak about the whole. Particularly when the market offers something apparently attractive,
the decay of the market is likely to be slow.
From what I read,
there is still a market in stolen luxury cars in Albania. The fact that
the markets
are run by professional car thieves, who are armed, has over time
dissuaded many buyers from entering that market. But the prices
are really, really good. So there still are some people who believe they
are going to leave the market in the driver's seat and not in the trunk.
Does it really have to come to that, though?
Wouldn't it be better if steps were taken
to make the market fairer, rather than counting on people to continue to go to it?
What steps? Well,
the possible remedies are the same as in any unfair market.
The people who have the advantage could have an attack
of honesty and decide to treat their customers fairly.
Or, some large group of them could see a competitive advantage
in doing so and begin some kind of self-policing. (Imagine if
there were a standard and enforced code of ethics in the
application industry, enforced by an industry council!) Alternatively,
there could be regulation. Perhaps if there are
too many multi-million dollar losses, legislators will be
persuaded to take away some of the favorable treatment
of software that liability law gives the vendors.
Many people I've talked to hope that the markets will
be self-correcting. As the need for reliable information
is better understood, a market for independent
and objective assessment of application company claims
could emerge. (No sign of that, yet.) Or software companies
could realize that the Wild West culture is not in
their long-term interest and
decide to back their product claims with guarantees. (No sign there, either.)
Any of those things could happen. But I think it's wrong
to believe that they must. Markets that need to correct
themselves or die sometimes just die.
If the market was gradually collapsing because of distrust,
here's what you'd see. Slowing growth, even though the need
for the product remains strong. Smaller deal size, even when
products are heavily, heavily discounted. A strong desire
to pay for term licenses, so as to reduce risk. Slower sales cycles,
as increasing skepticism at all levels needs to be overcome. And
increasing dominance by companies that (accurately or not) are seen
as more trustworthy.
Again, I can't really say how much an entirely warranted distrust
is damaging the market. What
I do know is that there is far more skepticism
today about applications than there used to be, despite the
fact that applications are far more reliable and useful than
they were when everybody believed.
To see other recent Short
Takes, click here for a listing.
|
