The Increasing Dangers of IT/Purchasing Vendor Perks

Rob Enderle

A couple of weeks ago I had lunch with Jeff LaValley to catch up and talk about old times. Jeff and I worked for IBM Internal Audit on a team specifically created to deal with acquisitions and problems with corporate governance. Unlike most internal audit teams, ours was made up of CPAs, CMAs and MBAs and often included titled executives as part of the review team. We had the unique responsibility of not only correcting bad management teams, but eliminating those that were too broken to be easily fixed and then staffing the organization ourselves until replacements could be found.


To this day, I'm not aware of an effort like this anywhere else, and after the executives that created our group left to run other companies, we were eventually eliminated and replaced by a more common, and mostly toothless, internal audit organization.


The topic of our conversation was how troubling the practice of making IT a part of a vendor's sales team was becoming, particularly in government, and the likelihood that there would likely be a major multi-company catastrophe much like that surrounding post-dated stock options, a number of other financial scandals or even recent government scandals.


I think it likely appropriate we chat about this before it becomes the next news item.


IT as a Sales Tool (Emphasis on "Tool")

While I could point to one vendor in particular as the poster child for this behavior, it has migrated over the last decade or so with sales people to a variety of companies. I'm talking about the practice of rewarding IT decision makers for being loyal to a company or brand with gifts. These gifts range from trips on the vendor's nickel (sometimes in private jets), exclusive access to sports teams and racing events, cash prizes and cars for winning fixed contests, and executive jobs with the company they consistently give business to.


For about two decades there has been a steady state of this activity, and during the last U.S. administration, there is the perception that this activity has grown in many companies to become the norm as internal audit was defocused and underfunded, and bad habits became institutionalized.


The people involved generally know they are not doing the right thing by altering RFPs and accepting these perks in exchange for doing so, but in these hard economic times, appear to be less willing to raise their hands and take the ethical high road.


Even for a CEO -- and you saw this with the Google CEO's Apple board seat -- it is often hard to take the ethical high ground and step away from a perk. It appeared clear that Apple had to fire him from his position in the face of a government investigation.


Increasing Risk-Trigger Event

The U.S. government has taken a controlling interest in a large number of corporations where these practices are likely rampant and these companies are undergoing increased scrutiny for their practices. In addition, it is likely that there will need to be significant staffing changes to allow the government to claim victory in its efforts.


This creates two potential opportunities for these practices to become visible. One where a strengthened internal team discovers the practice and the more likely, where a laid-off employee realizes that as a whistleblower, he or she can perhaps keep the job, be compensated for reporting the crime, or get a finder's fee in exchange for testimony under existing whistleblower regulations that should aggressively apply to these government-owned companies. Granted, the whistleblower might simply be upset at being laid off. Also, in these tight times, it is increasingly likely the losing sales teams will flag these things either officially or not because they want to protect their income.


The most likely companies to be hit initially are firms that the U.S. government has taken an interest in, however, government entities aren't immune either. There appears to be to be a little bit of a witch hunt right now by both parties to claim either that they are aggressively protecting interests (Democrats) or pointing out that the party in power is corrupt (Republicans). Either could result in a high-profile event tarnishing both the vendor and the client involved in the activity.


Once the trigger event gains notoriety, visibility of these practices is likely to spiral out to other companies in the same industry and then related companies and finally to most publically traded and public-sector entities. In this Internet age, where news no longer really needs to be verified and bloggers are operating on a fast trigger, I don't expect this to take long.


Protecting Yourself

Particularly if you are in one of the initial high-profile federal government-controlled areas, it is likely time to ensure that there are proper controls over all large-ticket acquisitions and that there is no consistent financial relationship between a winning vendor, particularly one that is or appears to be sole sourced, and the related decision maker(s). It goes without saying that rules surrounding vendor gifts should be revisited in light of the risk and that employees are reacquainted with them.


There should also be a process in place that can be executed quickly if someone discovers or reports an illicit vendor relationship, so the damage can be quickly contained or minimized.

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