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KE1044

December 19, 2017

©2017 by the Kellogg School of Management at Northwestern University. This case was prepared by Professor Alvaro Sandroni and Farhad Aspy Fatakia ’16. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Some details may have been fictionalized for pedagogical purposes. To order copies or request permission to reproduce materials, call 800-545-7685 (or 617-783-7600 outside the United States or Canada) or e-mail [email protected]. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Kellogg Case Publishing.

A LVA R O S A N D R O N I A N D F A R H A D A S P Y F ATA K I A ’ 1 6

Kirat Housing Development Society

Phil Lee’s heart stopped when he saw who was calling: Dad. It was a cold fall day in Washington, D.C., September 15, 2016. They exchanged the usual small talk before Phil’s father got around to the subject both he and Phil dreaded discussing each week. “I know this isn’t fair. You’ve just finished your MBA, and here I am asking you for financial help. I mean, what kind of parent am I?”

A proud man, Phil’s father, Eric, had come up from nothing, driving trucks for over twenty years to put his only child through college and later helping finance his MBA. Now, however, Eric Lee was facing hard times. The truck drivers’ union in his town disbanded three months ago, after an embezzlement scheme was discovered. The trucking company decided to take the opportunity to fire its senior employees to make way for younger drivers with fewer benefits. But it was after losing his job that real disaster struck: Eric was diagnosed with stage one lung cancer. Now, with his union insurance and benefits dissolved, he had no way to pay for the treatment. It hurt every time he had to pick up the phone and discuss the next medical bill that he would need his son’s help paying.

Phil ended the call telling his father not to worry; his new consulting job paid enough to keep both himself and his parents afloat. “Dad, remember what you used to tell me when I felt like I would never make it during my MBA? This too shall pass.” Phil wasn’t sure if he believed his own words, but fortunately, things were going well during his first year at Washington, D.C.-based Orion Information Technology Consulting. His boss had just assigned him to a team handling a large deal that needed preliminary due diligence before bidding. It didn’t bother him that the deal was halfway around the world in South Asia; after all, Phil had specifically requested projects in emerging markets when he was hired.

This document is authorized for use only by Edwin Quinn ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

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The Client: Kirat Housing Development Society On the long flight to New Delhi, Phil studied the brief on his new client. Kirat Housing

Development Society (KHDS) was one of India’s most respected private residential property developers. Retired General Bipashu R. Ravani had founded it in 1982 with a few members of his platoon that were exiting the Indian Army, as a way to remain professionally active. Since its founding, KHDS had grown at a staggering pace and had delivered over 400,000 square feet of high-end residential and commercial property. Ravani’s extensive experience in the engineering corps during his army career provided a plethora of connections that supported KHDS locally over the years. If KHDS needed a permit from a local government authority, odds were the approving authority was someone Ravani had worked with in the engineering corps. The major focus of KHDS was developing luxury high-rise residential properties for India’s rich and famous, commanding square footage rates that rivaled those of Fifth Avenue in New York and Kowloon in Hong Kong. For many in India’s major cities, owning or even just living in a property developed by KHDS was the ultimate sign of having made it professionally.

Throughout its history, KHDS had a strong emphasis on incorporating technology into the living spaces it designed, and had used Orion’s proprietary building management software in a handful of its projects in 2004. Karl Lehner, Orion’s project management director who had been part of the team that won the last project Orion and KHDS collaborated on, would attend the meeting with Phil. Karl warned Phil that KHDS was “hard to please,” yet called it a “strategic account that could not be missed out, especially given how awful the numbers are for us this year.” Phil confessed he was nervous about negotiating with such a high-profile client. “Don’t worry,” Karl reassured him. “I’ll take the lead.”

Apart from his nervousness, the idea of meeting for a project Orion was about to bid on seemed odd to Phil. The tender clearly called for a building management software solution that could be implemented in the last three months of KHDS’s newest residential property in development, Sikandar Luxury Tower. The tender already provided an 86-page description detailing exactly what modules would be required, and even included specific penalty clauses for delays. With that amount of detail, Phil was stumped over what could even require further discussion at this stage.

Sharks in Suits Just off the flight and jetlagged beyond belief, Phil and Karl walked into the conference room

at KHDS. Once the handshakes were over, Phil and Karl sat across the table from KHDS’s head of procurement, Colonel Bhaman, and his assistant, Rohana Yousuf.

Karl began by thanking the colonel for the meeting and discussing his previous experience working with KHDS. As it turned out, Yousuf remembered that project well; it had been the first project he worked on after earning his MBA from Georgetown. Forty minutes into the meeting, Phil was relaxed and feeling optimistic about Orion’s chances. It looked like Karl had the meeting under control; he engaged the colonel in a lively discussion about Indian politics, as if he worked for Reuters instead of a boutique IT company. Cups of tea came and went. The conversation

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turned to the subject of a lack of regulatory compliance in India’s construction industry, and Phil seized the opportunity to ask about the status of the Sikandar Luxury Tower Project.

The colonel began with the usual stump speech about how the project was going to revolutionize modern luxury living, and then shared information about the build-out, which had almost been completed. By KHDS’s estimate they were six months from completion, and per company rules at least three bidders were required to participate in the building management software implementation project on offer. Karl explained that Orion was more than interested in bidding, and asked the colonel and Yousuf to share any advice that they might have on how to maximize Orion’s chances of winning the upcoming tender.

The colonel immediately obliged, apologizing for the lack of detail in the published tender document. “KHDS trusts my judgment and has given me a lot of discretion over the years to handle information technology matters, given that I was a software engineer in my armed forces days. The project will be assessed 70% on technical capabilities, according to the scoring metric that Yousuf will provide you with after the meeting. The remaining 30% of points will be assessed based on the price that you quote. All bids will be sent to my office sealed and will only be opened in the presence of a designated representative from each company. You can send anyone you like for this. We will determine the winner at that time.”

That’s fairly standard procedure, Phil thought. This should be similar to any of the other tenders he had to win over the years. It didn’t surprise him that KHDS followed international standards when it came to contractor bidding. No self-respecting IT firm with a competitive product would bid less than a million dollars on a project of this size. Fortunately, Orion’s latest building management software had just received industry recognition as best in class for luxury high-rise residential buildings, so the 70% weightage firmly favored Orion. Orion’s software would be a perfect technical fit for the Sikandar project. Phil could hardly believe his luck. Apart from the strategic importance to Orion of winning this bid, office rumor had it that Orion’s chairman had taken a personal interest in this particular bid, given the emerging market angle. A bonus if not a full-blown promotion would inevitably follow if even half of the water cooler talk were true.

The colonel’s long-term vision for KHDS also seemed to align well with other Orion products, allowing for considerable cross-selling and perhaps an opportunity to make a version of Orion’s building management software specifically tailored for South Asian markets.

One thing bothered Phil, however. How could he have missed a 70% weightage schema in the RFP he received from KHDS before the trip? He mentioned his confusion to the colonel, who looked puzzled and asked, “Mr. Phil, didn’t you already see this background information on page 12 of the bidding documents? Yousuf, did you provide them with an updated copy of our RFP?”

Yousuf nodded. “Of course, Colonel. The bid document contains this information, but I am not sure if our American friends read it.” Phil was about to reply that that couldn’t have been further from the truth, but Karl interrupted. “Sorry, Colonel, our fault. Maybe we can let Yousuf update Phil while we are here.”

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The colonel glanced at his watch, then stood up abruptly. “Please excuse me, gentlemen. I have a 3 p.m. with our CEO, General Ravani. Karl, if you would care to walk over with me, I’d like to speak to you for just a few moments to conclude our prior discussion. I am sure Yousuf can field any remaining questions Mr. Phil might have.”

As the door closed behind Karl and the colonel, Yousuf smiled wryly. Spreading his hands wide, Yousuf commented that while New Delhi was far from beautiful Washington, D.C., KHDS had been doing its best to make valuable development additions in India. Yousuf revealed that he had recently been promoted by his “uncle,” gesturing to the colonel’s empty chair. Apparently, Yousuf ’s father, who had been the Indian government’s minister of internal affairs for the last two terms, had recommended that Yousuf join KHDS given his interest in real estate development. Unlike the colonel, Yousuf had a more direct, less polished approach. He asked Phil point blank, “How much help do you think you’ll need to win this project?”

Help? Phil thought. Oh, requirements. He outlined what Karl had shared with him the night before: a team of approximately twenty-six staff would be required, half locally sourced in India, the other half from Orion’s implementation team based in Park City, Utah. Phil remarked that the latest version of Orion’s building management software fit the RFP’s requirements like a glove, and that Orion’s proven track record of successful software implementations ensured it was a top contender for the bid. There was even the possibility of a site visit to a completed project similar in scale to the upcoming Sikandar Tower.

If any of that was new information to Yousuf he hid it well. “I anticipate a score of 492 points on the technical evaluation, which should be more than enough to demand a price of $1.9 million, along with an additional $200,000 of consultancy. That should be about right for three months of work.”

In Phil’s estimation, three months was definitely more than enough time to implement, but $1.9 million was an outlandishly high bid—the highest he had ever commanded for a similar solution was nearly half that.

“Absolutely,” Phil responded. “With respect to the bid points, I obviously can’t say—all we can do at Orion is hope for the best evaluation possible from Kirat.”

Yousuf appeared somewhat annoyed at Phil’s response. “You seem very confident, Mr. Phil.”

What’s not to be confident of? Phil thought. This is a slam dunk, and these idiots don’t seem to know the first thing about pricing IT solutions. Phil made the mistake of letting the silence linger a little too long and noted Yousuf ’s expression darkening.

Before Phil could try to lighten the mood, Yousuf continued. “Your product is good, but it is not perfect. We have complex needs in this part of the world, and your software might not be an adequate fit for them. Besides, it is always helpful to have some extra assurance so that you can enter the bidding process with the best chance. That is my sincere advice to you, Mr. Phil. If my father taught me anything, it is to always ensure success in advance as much as possible. Don’t you agree? You’ve come here to win this project, haven’t you, Mr. Phil?”

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Obviously we have come to win the project, thought Phil. No one flies from D.C. to New Delhi unless they are coming to see the Taj or close a deal. He recalled that whenever he had asked more experienced colleagues about selling abroad, they always said negotiations were “just different” in the emerging markets they worked in. Phil had enjoyed closing deals over the short time he had been with Orion and usually found it beneficial to make clients feel like they were in charge, especially at the conclusion of any negotiation. Though still unsure what had gone wrong here, he tried to appease Yousuf. “Yes, of course we’ve come to win, Mr. Yousuf,” he said. “And you are absolutely right: this is a new market, and our application is good, but not perfect.”

Yousuf appeared encouraged by Phil’s response, shifting comfortably in his chair and casually glancing at the conference room door. To Phil’s surprise, he then launched into a lengthy presentation of his credentials: a Georgetown MBA; several years of work experience in the region, including a brief stint in Malaysia with the group that had put up the Petronas Towers; a seemingly endless list of relatives that were in state and local government in Maharashtra and New Delhi. After about ten minutes of this, Phil was looking for an opportunity to politely steer the conversation back to the project when Yousuf concluded, “And so as you can see, you’ll need my help to ensure a successful implementation of the project.”

Successful implementation? Phil thought. Orion had such a successful implementation history that Phil wasn’t even aware of a project failure.

“Of course,” Phil said automatically, wondering how much longer until Karl returned. He couldn’t wait for this conversation to end.

“I have to say, I’ve always wanted to visit Las Vegas. I never got a chance to visit while I was at Georgetown with all of those group assignments. Have you been, Mr. Phil?”

Vegas? I guess we are really clutching at straws now, Phil thought. He forced himself to smile and responded, “Yeah, I have—great time, you’ll love it. Any idea how much time the colonel has with Karl before his meeting? I thought you said . . .” Phil couldn’t even finish his thought.

“You’re right, we should discuss terms,” Yousuf said. “You’ll need to convey my offer of help to your board. My business card has everything you need on the back. The going rate is $1,700 a technical bid point, but I am going to lower it for your company because I think it is the best solution. The best I can do is $1,000 per technical bid point. The account is with the Zurich branch of Credit Lausanne Bank. I recommend them highly. Standard terms—funds need to be in the account at least five days prior to bid opening. I use Woodward, Pickett, and Voils LLP for drafting all my international consultancy agreements. They’re the best in the business as far as I’m concerned.”

Phil felt like a train had run over him. For a moment, he questioned whether any of this was even real. He realized he still had that stupid grin on his face from Yousuf ’s comment about Las Vegas. Yousuf glanced again at the door before continuing, “I am sure you already have authorization from your boss, Karl. He understands the bidding procedure better than most.”

Phil blurted out, “And how would we know you could keep your end of the bargain?”

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Yousuf ’s face darkened as he leaned forward and spoke in a low tone. “Do you not know my last name or who my father is, Mr. Phil? That should be more than enough, no?” Phil’s blood ran cold. Sitting back in his seat, Yousuf smiled. “Besides, I can think of 200,000 reasons why you can trust me, Mr. Phil.”

The conference room door swung open, interrupting Yousuf. It was Karl. “Gentlemen, sorry that took so long. The general cancelled his meeting and we lost track of time catching up. You ready to put together another winning bid, partner?”

Fear and Loathing in New Delhi Three days after returning to Washington, D.C., Karl and Phil looked nervously at one another

in the waiting area next to the chairman’s office. The last 72 hours had been nothing short of a nightmare for them.

After leaving KHDS’s offices together, they discussed the Sikandar project’s potential. With all the cross-selling that would inevitably follow, winning this bid would garner the biggest account Orion had managed to land since the financial crisis. The client was a perfect fit for Orion’s software application and would require little to no customization. Phil waited to get back to their hotel in Delhi that night before asking Karl to join him in his room for a celebratory drink and a short discussion.

As soon as Karl walked in, Phil poured each of them a scotch and then told him everything: about his father’s illness, how he couldn’t afford to get fired right now, and what Yousuf had said in that conference room. He felt threatened by Yousuf ’s question, “Do you know who my father is?” This was not what had drawn Phil to consulting. He had wanted to learn about different industries, help businesses solve their problems, and achieve financial security, but not like this.

Karl appeared absolutely floored. Yes, he had some experience in this region, but what Phil was describing was unbelievable to him. No, he had no knowledge whatsoever of KHDS asking for a handout, and his only prior interaction with Colonel Bhaman was meeting him last year in Dubai at GITEX, a conference where Orion showed off some of its software solutions. While the colonel might have projected the idea that they were close friends, it was a façade. Karl hadn’t dispelled that image because he thought it was good for client relations and improved their chances of winning the project. “Everyone acts like you’re their best friend around here—who the hell knows how close people actually are in this part of the world?” Karl exclaimed, taking a sip of his scotch.

Phil’s mind was spinning. “If you don’t have anything to do with this, Karl, then help me, please. We need to do something that will both save our jobs and save face here with the client. I can’t go back to D.C. without some sort of game plan.” They spent the evening thinking about every possible way to extract themselves from this situation. Hours later they decided to turn in for their redeye flight back across the Atlantic. While packing, half asleep, Phil noticed an ornate box on his dressing table. It had not been there that morning. He looked inside and found a small teardrop diamond pendant. With one last look, careful not to touch it, he gently closed the ornate box.

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By the time Phil and Karl touched down in D.C., they both knew they didn’t have a plan that would satisfy Orion’s chairman, Yousuf, and KHDS, and save their career trajectory. Things seemed hopeless.

Back at headquarters, Phil and Karl met with Orion’s chairman, who wanted a full debrief of their meeting at KDHS. The men outlined the highlights of the trip, and then Karl observed that this client turned out to be a perfect fit in every way but one. Phil felt like his stomach was going to fold over as soon as Karl got to the part about the bid points and Yousuf ’s international consultancy arrangement. A deafening silence followed. The chairman’s reaction was calm and collected. “Well, gentlemen. What do you think we should do?”

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Appendix 1: Text of the Foreign Corrupt Practices Act (FCPA) Statute, 15 U.S.C. §78dd-1(a), 78dd-2(a), 78dd-3(a)

FCPA violations consist of five distinct elements, all of which need to be proved by the U.S. government (Department of Justice/Securities and Exchange Commission) to ensure a successful prosecution:

(1) a payment, offer, authorization, or promise to pay money or anything of value

(2) to a foreign government official (including a party official or manager of a state-owned concern), or to any other person, knowing that the payment or promise will be passed on to a foreign official

(3) with a corrupt motive

(4) for the purpose of (a) influencing any act or decision of that person, (b) inducing such person to do or omit any action in violation of his lawful duty, (c) securing an improper advantage, or (d) inducing such person to use his influence to affect an official act of decision

(5) in order to assist in obtaining or retaining business for or with, or directing any business to, any person.

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Appendix 2: FCPA Penalties Awaiting Violators

While enforcement was nearly non-existent in the 1980s and 1990s, the DOJ has since expanded its FCPA task force to some of the largest levels in U.S. history. Stiff penalties await violators:

• Individuals can face up to five years in prison for each violation of the anti-bribery provision of the FCPA, and certain willful violations can result in up to twenty years of jail time.1

• Financial penalties for business entities can reach $2 million for each violation, regardless of how small, and individuals are liable for as much as $100,000 each.2

• If there is sufficient evidence to show that the violations were willful, penalties can skyrocket to as much as $25 million for corporations and $5 million for individuals.3

• The fines and penalties above exclude any additional penalties that can be slapped onto a violating individual or entity; these penalties are capped at twice the gain received or the loss caused as a result of the violation.4

1 15 U.S.C. §78dd-1, 78ff. 2 15 U.S.C. §78dd-1 et seq.; 15 U.S.C. §3571. 3 15 U.S.C. §78ff(a). 4 18 U.S.C. §3571(d).

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Appendix 3: Five of the Largest Recent FCPA Violations (as of 2015) and Their Respective Outcomes

• Oracle. SEC charged the California-based computer technology company with violating FCPA by failing to prevent a subsidiary from secretly setting aside money off the company’s books to make unauthorized payments to phony vendors in India.5 (8/16/12)

• Hewlett-Packard. SEC charged the Palo Alto, California-based technology company with violating the FCPA when subsidiaries in three countries made improper payments to government officials to obtain or retain lucrative public contracts. Hewlett-Packard agreed to pay $108 million to settle the SEC charges and a parallel criminal case. (4/9/14)

• Weatherford International. SEC charged the Swiss-based oilfield services company with authorizing bribes and improper travel and entertainment for foreign officials in the Middle East and Africa to win business. Weatherford agreed to pay more than $250 million to settle cases with the SEC and other agencies. (11/26/13)

• Technip SA. SEC charged the Paris-based global engineering company with bribing Nigerian government officials over a 10-year period in order to win construction contracts worth more than $6 billion. Technip agreed to pay $338 million to settle the SEC and criminal charges. (6/28/10)

• Alcoa. SEC charged the global aluminum producer with violating the FCPA when its subsidiaries repeatedly paid bribes to government officials in Bahrain to maintain a key source of business. Alcoa agreed to pay $384 million to settle the SEC charges and a parallel criminal case. (1/9/14)

Source: U.S. Securities and Exchange Commission, “SEC Enforcement Actions: FCPA Cases,” http://www.sec.gov/ spotlight/fcpa/fcpa-cases.shtml (accessed February 10, 2017).

5 Sealed settlement agreements between violators and the SEC and/or DOJ may withhold the actual amount paid, if any.

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Appendix 4: Whistleblowing Provision of Dodd Frank Introduced in 2012

Expanding the federal government’s efforts to track down violators of financial crimes and bring them to justice resulted in a whistleblowing provision, which applied to FCPA violations from 2012 on.6 Part of the Dodd Frank Act and best known as the “qui tam” provision, the amendment promised whistle blowers up to 30% of the value of the resulting judgment against an FCPA violator. A whistleblower has to approach authorities with knowledge or hard proof of a financial crime having occurred that would otherwise be punishable under the FCPA, and that is not currently under investigation, in order to remain eligible for a reward.

Just three years old, the provision has already yielded significant financial awards to citizens who came forward to the SEC with actionable information about elaborate, hard-to-detect FCPA violations. Individuals receiving these payouts have their identities protected. In October 2013 the SEC revealed a single whistleblower received $14 million.7

Awards appear to be increasing not only in size but in number as well. In September 2014 an individual received $30 million for information that led to a successful prosecution of an organization that profited from corrupt business practices, just one of nine other awards handed out to whistleblowers in 2014 alone.8

6 Richard L. Cassin, “Huge Payday: SEC Whistleblower Awarded Record $30 Million,” The FCPA Blog, September 22, 2014, http://www.fcpablog.com/blog/2014/9/22/huge-payday-sec-whistleblower-awarded-record- 30-million.html.

7 U.S. Securities and Exchange Commission, press release, “SEC Awards More Than $14 Million to Whistleblower,” October 1, 2013, http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539854258.

8 Ibid.