Suit Alleges KPMG Misled CarsDirect.com About Software

KPMG Consulting Inc. knowingly misled CarsDirect.com about untested customer-tracking software that has cost the online auto store more than $50 million, CarsDirect.com said in a lawsuit.

The suit, filed in Los Angeles Superior Court, offers a look at closely held CarsDirect.com, which dismissed 90 of its 750 employees two weeks ago. CarsDirect said KPMG’s actions have “substantially impaired” its ability to meet customer demand and have caused “significant operating losses.”

KPMG said the suit is without merit and it plans to vigorously defend itself.

The suit says in late 1999, KPMG advised CarsDirect to replace its customer-tracking software with a more sophisticated system that could better handle increased online traffic. CarsDirect hired KPMG to select and guide installation of the so-called customer relationship management system software, in part because the consulting firm had advised it in other areas, such as strategy and cash disbursement.

CarsDirect called the software the “backbone” of its business.

According to the lawsuit, KPMG recommended a Unix-based software developed by Silknet, in which the consulting firm had an equity stake. KPMG told CarsDirect that it had experience working with the system when in fact it did not, the lawsuit claims.

The result was “disastrous,” said CarsDirect.

The system did not work as well as CarsDirect’s old software, which had been developed by outside programmers, according to the lawsuit. The new system’s performance degraded when 20 people used it simultaneously, though CarsDirect needs a system that can support 150 users. Using the new system, it took CarsDirect employees 20 seconds or longer to retrieve customer information. It took less than a second with the old software, the suit said.

KPMG “walked off the job” in August, six months after the February deadline for implementation of the software, the suit said. The software still isn’t usable, according to CarsDirect. A spokeswoman said the company is currently using its original system, which has been adapted to handle more business.

CarsDirect said it paid KPMG $1.25 million, about twice the original budget of $610,000. It refused to pay $1.2 million more demanded by KPMG.

A KPMG spokesman said the consulting firm plans to demand in court that CarsDirect pay the entire bill.