IBM's audit: fear and loathing in the MS relationship

As the count progressed, a 'kiss and pay up' policy emerged...

MS on Trial One of the big surprises from the evidence of Garry Norris has concerned the issue of IBM having underpaid royalties to Microsoft. Microsoft decided to link the negotiation of a Windows 95 licence to agreement about the audit of royalties due, realising this would speed matters up, since IBM's need for the final Windows 95 code was very great. It was therefore not possible for IBM to suppress the information that came to light. It was revealed by Richard Pepperman, counsel for Microsoft, that it was Jim Miller, a contract manager in IBM's procurement division, who had first threatened to suspend negotiations of the Windows 95 agreement until the audit was resolved. An internal IBM email noted that "Microsoft estimates $50-$100 million in underpayments based upon past experience with IBM." Norris responded: "Counsellor, that may have been Microsoft's position, but it certainly wasn't IBM's". Pepperman tried the old trick of pointing out that Miller left IBM a year later - as though there was a connection - without actually saying so, but his innuendo was ineffective. Miller's successor, Jerry Casler, revealed in an internal IBM email after a meeting with the OEM controller and the OEM director of operations from Microsoft, that "Restating what everyone knows, Microsoft is extremely upset with us and, in my judgment, with good reason. There is an unacceptable level of emotion and distrust. The root of this is a lack of communication and sharing of information across the board. This has been exacerbated by late and inaccurate payments (most frequently under-payments) the length of time the audit is taking and the fact that, in their view, we have so tightly locked the auditors with the confidential disclosure agreement that Microsoft won't have reasonable ability to validate it has been paid accurately." Jerry York, IBM's CFO, called Mike Brown, then Microsoft's CFO, presumably to apologise, and the email indicates that the call was "well-received". The audit was not finally agreed until the day of Windows 95 release. IBM had been doing an internal accounting review and found that there had been underpayment of royalties to the tune of $16.7 million - more than 20 percent of the amount due for LAN Manager and OS/2. A further $14 million was agreed, and the audit was settled. ® Complete Register trial coverage

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