The vendor that was too good to be true

As an IT veteran, you think you can smell a rat a mile away — and this skill is a necessity when hiring and firing vendors. But then a seemingly solid vendor comes along and reminds you that if it’s too good to be true, it probably is.

I once worked for a very large company where the executives were enamored with the idea of subcontracting out a lot of the IT work. In some cases it was infrastructure, such as desktop support, and in other cases it was the development and operation of the systems at the heart of our business. There seemed to be no boundaries because they believed it was cheaper than building and maintaining the work in-house. As a result, our department spent a lot of time developing specifications for and managing outside organizations to make sure our business got done.

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Many times when searching for vendors or making sure a third party did what was needed, we felt it would be so much easier to acquire the personnel to bring the task in-house. Of course, there was never time to work toward that goal, and management preferred the idea of outsourcing it anyway.

A good vendor can be hard to find

In one critical area that carried a high profile with our customers, we had significant trouble with vendors either abandoning us or going out of business. The cost to integrate with a new vendor was substantial, and each time we started with another vendor, we incurred the same integration costs all over again.

We were in our third year and our third vendor when yet another contract fell by the wayside and we needed to find an alternative approach, pronto. We seriously considered building our own system since we had had so much trouble with vendors in that area, but it was determined yet again that there wasn’t time.

All seems to be in order

Another vendor was found. The company was well-financed and had an impressive client list. We called several clients for references, all of which were glowing. We asked the vendor for a copy of its audited financial statements. In response to our request, the vendor produced statements and an audit report from one of the Big Four Accounting firms. We also had a technical team spend many hours on technical due diligence. All seemed in order.

It turned out that our two companies worked together extremely well. The “out of the box” system did everything it was supposed to, and the vendor worked effectively to make the modifications we requested. We couldn’t believe it — we had finally found a terrific vendor for that system.

There was something odd, though. The vendor didn’t have a CFO, and it was very difficult to get the company to bill us. We regularly asked for invoices, since we were paying for time and materials and needed to keep track of our burn rate, but often to no avail. When we talked to the vendor’s CTO about this, he apologized and said the company wasn’t very good about that but weren’t worried as it had plenty of money.

Well, that may have been their preferred way of doing business, but definitely not ours. But we were still very happy with the quality of the work and the fast turnaround time. After about a year of working with this group, the crew raised another round of venture capital and was quite pleased with the state of its business.

It was nice while it lasted

One weekend, though, the other shoe dropped. We were scheduled to have a bunch of system changes implemented that were critical to our being able to meet commitments to our customers, so we were pretty excited to see them go in. However, when we came in on Monday morning, we could see that the changes had not been implemented.

We started contacting the vendor but could get no answers from the technical team — and the senior management wasn’t returning our calls. As it turned out, the system changes did not go in because the FBI was investigating the vendor and had seized its goods, including the system for our company, and was making a copy for forensic analysis purposes. They would not allow any changes until they had a system snapshot.

The reason for the investigation? Some of the senior managers, including the CTO, were mismanaging company funds and funneling into their own personal accounts. We found out that the copy of the audited financial statements that we had been given before we’d hired them had been forged. The company had been lying to the VC firms that had provided the funding, and many of the senior managers had been living “Lifestyles of the Rich and Famous” using the company bank account while the rest of the company had been putting out a pretty good product.

The whole situation was a big mess for a few months. The VCs, who were worried about significant liability issues, filed Chapter 7 in short order. A couple of the execs each pled guilty to wire fraud and were sentenced to lengthy terms in federal prison.

The press ripped into a couple of the VC firms for having been duped. It is standard procedure for the board to hire the auditor and meet privately with the auditor. In this case, the board delegated that to the vendor’s management team instead of doing it themselves. I expect that one or more members of the board lost their jobs with the VC firms that they represented.

As for me and my team? We once again scrambled to move and integrate into yet another vendor — and crossed our fingers that this one would work out.

The constant trial and error while trying to push a company forward gets tiring. You can do more research the next go-round and still get burned. My question: How much due diligence is — finally — enough?

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This story, “The vendor that was too good to be true,” was originally published at InfoWorld.com. Read more crazy-but-true stories in the anonymous Off the Record blog at InfoWorld.com. For the latest business technology news, follow InfoWorld.com on Twitter.