JSE-listed IT services group EOH has expressed disappointment in the way Microsoft has handled the termination of their partnership agreements after the software giant extended the cancellations to more of its operating entities.
EOH’s share price fell 4.3% to R13.46 at 11.30am in Johannesburg on the news. It has lost 71% of its value in the past year and 90% in the past three years.
The group said on Monday that its subsidiary EOH Mthombo’s relationship with Microsoft has now ended following a 30-day notice period. However, on 12 March, several other group companies received similar termination notices from Microsoft Ireland “without providing reasons”.
“While we understand the need for Microsoft to interrogate and finalise their own investigations, we are disappointed at the unilateral manner in which Microsoft has terminated the relationship prior to giving consideration to the impact on South African corporates,” EOH told shareholders in a statement.
“Further meetings and correspondence between EOH senior executives and local Microsoft leadership are ongoing to discuss the impact of these terminations and to seek a responsible solution that would limit the impact on all affected customers.”
The group said it has provided suggestions to Microsoft for consideration to resolve the issue. “We await their feedback,” it said.
“During these engagements, Microsoft’s local office advised EOH that they had initiated their own investigations into contracts involving Microsoft and government which may take six to 12 months to conclude. They advised they would not be able to enter into any discussions regarding reinstatement of the partnership until they had concluded their investigations.”
TechCentral reported in February that Microsoft had terminated longstanding partner agreements with EOH after an anonymous whistle-blower filed a complaint about alleged malfeasance involving a South African department of defence software procurement deal with the US Securities & Exchange Commission (SEC).
The whistle-blower lodged the complaint with the SEC at the end of November 2018 under the US’s tough anti-graft legislation, the Foreign Corrupt Practices Act. At the same time, the whistle-blower, through a firm of attorneys, wrote to Seattle, Washington-headquartered Microsoft’s board of directors, asking it to investigate the matter and take appropriate action.
The allegations centre on a contract, worth R120-million, awarded by the department of defence in 2016 to EOH Mthombo.
Following receipt of the letter, a Microsoft board committee hired Seattle law firm Perkins Coei to probe the matter. The whistle-blower’s complaint and the subsequent investigation by Perkins Coei led to an instruction by Microsoft to its South African subsidiary to terminate its agreements with EOH.
The whistle-blower claimed the government department overpaid EOH Mthombo to the tune of millions of dollars for Microsoft software licences.
EOH said on Monday that it has reached “acceptable arrangements” with a pre-existing Microsoft channel partner, independent of the group, to continue to get access to Microsoft software products and services.
“While the immediate short-term impact can be managed, EOH is assessing and discussing various alternatives to ensure the long-term continuity of service to all customers and to maximise value for shareholders,” it said. “EOH is confident that this can be achieved.”
It said the channel partner agreement between EOH Mthombo and Microsoft was not material to the group and reported a total profit before tax of about R10 million in the last financial year.
However, it still assessing the impact of the latest termination notices from Microsoft.
It said early indications are that its Microsoft-related bespoke application development business will be “predominantly unimpacted”.
‘Can be mitigated’
“Any long-term impact on the IP (intellectual property) businesses, including the core IP that has been developed for resale utilising Microsoft technologies, can be mitigated through migration to other cloud providers,” it added. “Our CRM (Dynamics 365) and productivity solutions business will be impacted in terms of access to partner support portals. Our Microsoft-related managed services business and clients will experience no impact as these services are provided on client infrastructure and platforms.”
It said its cloud business and platform business and the resale of Microsoft Azure cloud offerings will be impacted in the short term. “EOH is in discussions to find a solution to ensure continuity of service and revenue streams.”
It said the assessed impact of the latest notifications on profit before tax is estimated at less than R20 million in the current financial year, bringing the total impact of Microsoft exposure to R30 million profit before tax.
“There is an overall medium to long-term go-to-market and credential impact and risk in not retaining Microsoft Gold Partner status. EOH apologises for any uncertainty and inconvenience caused and will continue to use our best endeavours to ensure there are no outages or disruptions to any client services as a result of the terminations.”
EOH said investigations to determine wrongdoing by the group, partners, customers and employees are progressing. It has migrated its legacy public sector business into a new structure and employees implicated in wrongdoing have either been suspended or have resigned.
“We are committed to concluding the reviews as quickly as possible and have a team of people under the auspices of (law firm) ENSafrica dedicated to this. We have also implemented a new framework under which all public sector transactions and related enterprise development partners are reviewed, screened and independently vetted by ENSafrica,” it said.
“Furthermore, a subcommittee of the board comprising independent non-executive directors and the CEO has been formed to evaluate the findings and determine the most appropriate manner in which to act. We will engage with any affected entities and authorities to ensure appropriate accountability as required. We have filed a section 34 report in terms of the Prevention and Combatting of Corrupt Activities Act.”
This article was published with the permission of TechCentral, the original publication can be viewed here.