Federal Filings Paint Crocs IT Software As "Archaic," "Primitive" and "Hopelessly Error-Prone"

Buried in the various legal filings of a shareholder fraud lawsuit against footwear maker Crocs is an intriguing look into how routine IT operations and discussions can quickly become very public and seem really bad.

The case, which US District Court Judge Philip Brimmer dismissed on Monday (Feb. 28), told tales of a new IT chief whose software recommendations were treated by senior management "dismissively." Also mentioned were inventory and forecasting software that was "archaic," "primitive" and "hopelessly error-prone" and financial reporting software that consisted of "obsolete, unsuitable tools." And almost all of it involved the manufacturer's interactions with retailers.

The IT issues—which Crocs apparently did not dispute—never played a crucial role in the arguments, with the judge throwing out the case because he said the shareholders couldn't prove that senior management lied about these matters. That said, it's educational how close a linkage the shareholders drew between routine IT issues and critical financial shortcomings. Excel spreadsheets, for example, were blamed for product shortages and surpluses.

"One root cause of the company's failure to manage inventory was the fact that Crocs used archaic, error-prone Excel spreadsheets to track inventory and forecast sales. This approach ran directly contrary to the modern standard of using appropriate inventory control software which provides a real-time, up-to-the-minute picture of the company's vast inventory," said one filing from attorneys representing the shareholders. "The use of outdated technology led Crocs continually to both undershoot and overshoot the amount of inventory actually on hand, and to produce absurd quantities of unusable merchandise—such as size 13 shoes in colors such as fuchsia and butter, supposedly aimed at women customers."

Crocs media relations did not return a voicemail and an E-mail seeking comment.

Lack of upgrades also prompted a mention."Notwithstanding Crocs' rapid growth, defendants did not update Crocs' data management systems, which resulted in serious problems with the company's ability to manage its manufacturing processes, turnover its inventory, locate and manage its inventory, assess its product need, distribute the products it had that retailers sought, and forecast what products it would need to manufacture and distribute," the complaint said. "Crocs' system would say that there would be a certain amount of a kind of shoe, but there would actually be 10 times the amount the data reported; also, warehouses would record that they received a certain number of pairs of Crocs, while out-of-date spreadsheets reported that the warehouses received significantly more or less than the number the warehouses actually received."

The papers also discussed barcode associations. "Each Crocs product in a specific color, style and size was supposed to be assigned its own individual barcode but, in practice, these barcodes were often assigned to numerous products in the company's records. This left Crocs' employees in its warehouses always guessing about what products they would find listed under a single barcode," the filing said.

In addition, the complaint referenced a lack of change controls, saying that "there were no checks and balances in the data entry system. Anyone at Crocs could enter data into the company's computers."

The complaint said that Crocs fixed these issues by 2008, but that was too late to halt the issues it said were behind the inventory problems. The manufacturer argued—and the judge agreed—that unpredictable changes in the shoe environment and the economy caused the changes.

Before those changes were made, though, the complaint discusses the politics involved in a report from a new IT head (a more precise title was not revealed) and a global operations senior VP.

"In late September 2007, the recently hired head of Crocs information technology gave [the operations senior VP] a highly critical written report about problems he identified in the company's data management system worldwide. The SVP responded to the IT head's report and memos dismissively. He and the other members of Crocs' top management consistently minimized the need for changes in data management, siding with operations against IT."

The internal politics of any company—such as senior management siding with operations against IT—are certainly standard fare. But having it brought out in a federal courtroom? That should add a whole new dimension to those Monday morning meetings.