ServiceNow embroiled in DOJ probe of government contract award

The probe also involves what ServiceNow said was the improper hiring of the Army CIO to serve as ServiceNow’s global head of public sector. That executive, Raj Iyer, told CIO “I resigned because I didn’t want to be associated with this fiasco in any way. It’s not my fault.”

ServiceNow has reported potential compliance issues to the US Department of Justice “related to one of its government contracts” as well as the hiring of the then-CIO of the US Army to be its head of global public sector, the company said in regulatory filings on Wednesday.

The DOJ is looking into the matter.

Following an internal investigation, ServiceNow said, its President and COO, CJ Desai, has resigned, while “the other individual has also departed the company.”

ServiceNow has been vague about the specific nature of the allegations and who is accused of doing what. The Department of Justice has not responded to requests to clarify the situation, while ServiceNow requested that questions being submitted in writing.

Although the company didn’t name him, the former US Army CIO who joined ServiceNow as head of global public sector in March 2023 is Raj Iyer.

CEO Bill McDermott told financial analysts in a conference call Wednesday that someone within ServiceNow had complained about the situation and that an internal probe “determined that our company policy was violated.”

“Acting with total transparency, the company proactively disclosed the findings of the investigation to the proper government entities. And as a result, today, we’re announcing the departure of the individual whose hiring was the subject of the original complaint,” McDermott said during the call. “We also came to a mutual agreement that CJ Desai, our President and COO, would offer his resignation from the company effective immediately. While we believe this was an isolated incident, we are further sharpening our hiring policies and procedures as a result of the situation.”

According to ServiceNow’s filing with the Securities and Exchange Commission, the “proper government entities” McDermott referenced were “the Department of Justice, the Department of Defense Office of Inspector General, and the Army Suspension and Debarment Office.” The filing noted that the DOJ “has commenced its own investigation into these matters.”

Not my fault, says Iyer

Reached on Thursday, Iyer told CIO that he did nothing wrong.

“I resigned because I didn’t want to be associated with this fiasco in any way. It’s not my fault. I don’t know what CJ did or did not do with regards to my hire. This had nothing to do with me,” Iyer said. “CJ’s departure — as stated — was a mutual agreement to terminate. I simply quit. I don’t know what may have happened internally to require a Justice investigation, but that would be on the company and not me.”

According to former federal prosecutors interviewed for this story, the allegations likely involve questions about what Iyer may have been asked to do for ServiceNow. The rules about what former government officials can do shortly after they leave government service are complex.

Although ServiceNow has multiple contracts with the US Army, Iyer stressed that he wasn’t involved in awarding any of them.

“I had no role to play in awarding any contracts to them as CIO. The Army certainly does do a lot of business with the company but it should not be inferred that there was any sort of quid pro quo,” Iyer said. “I went through all Army channels to clear my employment with ServiceNow after I departed the Army. Again, as you can see from the (SEC) reporting, they are faulting their internal process, not me.”

Iyer previously spoke to CIO.com about the US Army’s ‘warfighting’ cloud in October 2022.

Former federal prosecutor Mark Rasch, who has no direct knowledge of the investigation, said the most likely scenario is that Iyer properly told Army or Department of Defense officials that he would not be involved in helping secure government contracts in his new role. But, Rasch speculated, if Desai wanted Iyer to indeed be involved in such negotiations, that might be the issue. That is because government clearances for such hirings involve details about what the former federal employee would be doing in the new job.

Iyer “did the right thing by clearing the job with the appropriate DOD people,” but others at ServiceNow might have had different expectations, Rasch said. “The COO could have expected him to do things that would have violated conflict-of-interest rules and that’s why they hired him. There are rules about what you are allowed to do and what you are not allowed to do. You absolutely don’t want to push that.”

New reporting guidelines

Another former federal prosecutor, also unconnected with the investigation, said much of this case likely involves how things look.

“When employees take actions which, at minimum, create a significant appearance of impropriety, without first discussing the issue with management and/or the board, it suggests a lack of judgment,” said Brian Levine, who now serves as managing director at Ernst & Young. Such action “makes it hard for the company to have continued confidence and trust in the employee. Thus, management changes should come of no surprise,” he said.

In its SEC filings, ServiceNow also clarified Desai’s role. “Board of Directors (the ‘Board’) determined that Mr. Desai and the hired individual violated company policy regarding a possible conflict relating to such individual’s hiring. Mr. Desai has fully cooperated with the investigation and maintains that he did not intentionally violate company policy,” the filing said.

Levine said that recent changes in policy at the Department of Justice also likely played a role in ServiceNow reporting this incident. The Department is encouraging companies to make such disclosures with the promise of incentives such as remediation credit or a lower applicable fine range under the sentencing guidelines in the event of a prosecution, according to new guidelines on corporate compliance programs issued in March 2023.

“This may have been reported out of an abundance of caution, even if the company doesn’t have a clear theory of what may have been violated,” Levine said.

Severance agreement

As part of its SEC filings, ServiceNow published a copy of Desai’s severance agreement, which said that ServiceNow will pay Desai $525,000, “which is the equivalent of six months base salary, using an annual salary rate of $1,050,000 per year” along with bonuses and related benefits. Those payments are “subject to Mr. Desai providing an effective release of claims against the company,” the filing said.

Levine said that the severance package may not indicate anything about the board’s level of happiness with Desai as the exit terms were likely negotiated before the executive accepted the role.

As part of the executive changes, ServiceNow said that it has “appointed Chris Bedi as Interim Chief Product Officer, effective immediately. Mr. Bedi has been at the Company for nearly a decade with roles including Chief Digital Information Officer and Chief Customer Officer.”

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