Mega millions lost to software procurement fraud and error

Johannesburg, 09 May 2023
Leon Steyn, CEO of Dante Deo.
Leon Steyn, CEO of Dante Deo.

Organisations are losing hundreds of millions of rand due to fraud, error and negligence in software procurement and licence renewals.

This is according to Leon Steyn, CEO of boutique IT sourcing and procurement firm Dante Deo, which recently commercialised its IT Renewals Service.

Dante Deo’s team of legal, project management, IT asset management and procurement experts is credited with flagging hundreds of millions of rands in irregular and excessive software and IT services expenditure, contributing to state capture investigations and saving R2.5 billion for the South African National Treasury over three years.

Steyn says IT procurement and renewals is a complex field, fraught with risk for organisations that do not fully understand the legal implications of their contracts or how to align IT solutions with their organisations’ needs.

While corruption and fraud have made headlines in recent years, Steyn notes that even innocent mistakes can cost companies a fortune.

“For example, tech teams loading certain software packages and clicking ‘install all’ instead of installing only certain modules have unwittingly cost their companies up to 20 times what was budgeted for the software,” he says. He cites a case in which a local organisation expecting to spend R6 million on software was billed R120 million at renewal, due to internal error.

Steyn outlines several overarching mechanisms for improper and corrupt practices in software procurement:

Inflated pricing and kickbacks

In this approach, the true cost of software or services is inflated and pushed through the system, with a kickback for the employee who enabled the procurement. Steyn notes that Dante Deo’s expertise in IT procurement allows it to benchmark proper costs and align the software or services with the needs of the organisation.

Rigged scoping

In this approach, a supplier is involved in specifying the scope of a tender to ensure they are the only successful party and the only one who can deliver on the scope. A bribe or kickback is often involved. Dante Deo experts can analyse the true needs of the organisation and help procure and negotiate appropriate solutions and pricing.

Crisis creation

In a crisis situation, the normal procurement processes may be sidelined. Steyn notes that all crises where the origin could have been avoided should be seen as red flags and an opportunity for fraud. “Many of these have been manufactured to utilise the mechanisms of emergency procurement, where some of the normal checks and balances needed are taken away,” he says.

“More than 50% of the time, a solution implemented in a crisis is not an appropriate solution,” he says. “Even in the event of a crisis, proper benchmarking and risk assessment must take place and this can be done relatively quickly.” He cites the example of a multinational mining company that needed a track-and-trace system in place at the beginning of the pandemic. Within the space of just four weeks, Dante Deo assessed key vendors, negotiated the deal, ran the pilot and made the selection of a global solution for 14 countries.

Steyn also warns that certain management styles and operational procedures can increase the risk of improper procurement, unnecessary expenditure and fraud.

These include overly authoritative executives who bypass procedures and best practices and who put pressure on procurement teams to acquire particular software or IT services without due diligence. “Power plays are incubators for corruption,” he says. “Normally it comes from people going from ‘I want this to I need this’. Bypassing proper procedures and insisting on a particular solution can also be misguided – you generally see this when someone comes aboard and tries to replicate success they had with a solution in a different environment."

Steyn explains that Dante Deo works as a partner to its customers, integrating into their operations and functions to manage risk across IT renewals and software and services procurement. Dante Deo analyses the usage, requirements and the contracts associated with software and IT services to ensure they are fit for purpose. Focusing heavily on governance and with its extensive understanding of industry benchmarks, Dante Deo flags suspicious, irregular and over-priced contracts, allowing organisations to curb fraud.

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