Worried About Overbilling? Buyers Beware

No one likes to be overbilled, yet both buyers and outsourcers know it happens. Often, the assumption is that overbilling is the result of a technical error, not human malfeasance. But that isn’t always the case, and the outsourcing community is increasingly sensitive to these concerns – particularly after the high-profile example of Infosys Ltd overcharging Apple Inc.

That begs the questions: is overbilling a larger problem in the outsourcing community than in other services-related IT projects?  “Yes,” says Liz Evans, who is with the Shared Services and Outsourcing Advisory practice within KPMG’s Management Consulting group. “While some are not of the magnitude of the most recent, highly publicized examples, our experience both through Managed Governance Services and outsourcing relationship health checks reveal sometimes troubling data in this area.”

Evans, who would not comment on specific companies or examples, suggested that overbilling has as much to do with the sheer scope of the various engagements, as opposed to anything nefarious.  “IT outsourcing agreements are typically some of the most complex pricing arrangements,” she said. “They are impacted by pricing units, performance, contract changes, projects, and consumption of services.”

Infosys and Apple: a Cautionary Tale

In the Infosys and Apple example, the outsourcing giant let go the CFO of its BPO division, citing his lack of compliance with the company’s code of conduct. The CEO of the BPO unit also resigned. From an industry perspective, the good news is that the information came to light after an internal audit, and Infosys, India’s second-largest IT services exporter, acted quickly to notify Apple and address the issue. That’s not how things usually go down.

“Most overbilling situations are handled out of the public eye,” says John Masley, a management consultant with KPMG’s Shared Services & Outsourcing Advisory in Houston. “It doesn’t look good for either party in the case of an overbilling scenario.”

That makes the Infosys/Apple debacle all the more unusual, particularly given Infosys’s insistence that the irregularities were not material in nature. That isn’t always the case.

“We have seen situations that run nearly seven digits of overbilling where the remedy is very low-key and out of the spotlight,” says Masley. “A well-governed relationship can always overcome innocent overbilling through equitable means and correction.  Intentional overbilling is a different story altogether.”

But whether intentional or not, increased transparency goes a long way to addressing the problem.

“Increased transparency as part of outsourcing transactions, and more specifically, surrounding consumption-based pricing, is improving the industry as whole in this space,” says Evans. “However, overbilling can occur in both fully transparent as well as less-transparent pricing structures.”

Which is to say, mistakes happen, regardless of pricing structure. The solution is to have solid contract controls and verification policies. This all falls within governance practices that should be the norm, but that can be difficult as relationships change. Outsourcing is constantly evolving, and getting a handle on how billing reflects that can be a challenge.

“An effective invoice verification process as part of a robust governance process is imperative to mitigating risk in this area,” says Evans. “Consistency and oversight are key contributors of accurate billing.  In addition to a robust invoice verification process, contract change management, consumption management, and service performance management processes are critical.”

More Bad News to Come?

The fallout from the Infosys case isn’t over yet. Press reports suggest that six more employees will be fired as a result of inflated invoices. This apparently went on for months, and suggests a deliberate practice. The worry is that internal incentives may be in place that would encourage employees to behave unethically, though KPMG does not see this as some sort of cultural malaise within the industry.

“We don’t believe there is a chronic ethical issue in the outsourcing industry in the area of over-billing,” says Masley. “Executives and sales people are incented to establish profitable and sustainable billing mechanisms and price points. Competitive pressures, the advisory community, and the availability of market information in most spaces today is typically enough to maintain control over any egregious pricing on the part of provider organizations.”

Then what went wrong at Infosys? In a way, nothing: it was the company, not the client, that found the problem and acted aggressively to solve it, even risking negative press. And all of this was happening as Infosys is in the midst of working out a new strategy to maintain market share.

If anything, the caution flag should go up for Apple – unless it was their internal audit that caught the problem, and they have since deferred to Infosys. Either way, in outsourcing as in any business engagement, to some extent it is always buyer beware.

“Clients should ensure they have appropriate audit rights and remedies for any and all billing processes on their account,” says Masley. “They should also exercise spot audits regularly to ensure that the invoice verification process is working as designed, and mitigating any billing risk.”

That includes requesting the source data that supports the invoice to help with spot check audits. Clearly, the buyer should never defer all audit functions to the provider. If they do, they might end up paying more than they bargained for.