As most project teams well know, ERP contract negotiation is one of the most complex activities an organization will experience. The magnitude of these agreements is due to the expansive scope, strategic importance, and range of options. Further compounding the challenge – ERP software pricing is complex. Most companies have not structured or negotiated an agreement of this type and lack the confidence or experience to work effectively.
It’s rare that a project team understands the totality of all the components or has a full understanding of the flexibility the respective vendors have in structuring the final agreement.
To be highly effective, we suggest a strategic approach to ERP contract negotiation. The approach must address the specific ERP project, to ensure the organization is not overpaying for software, is buying the right software components, and the company is protected in the arrangement with your new ERP partner.
Complexity of ERP Contract Negotiation
As an example of the complexity of ERP contract negotiations, consider the multiple items in an ERP contract that need to be negotiated. This includes of course the software price and contract along with annual maintenance price and contract details. The implementation can be a separate negotiation with different parties then the software. Consider Enterprise software implementation vendor professional services price and agreement as well as implementation of vendor’s statement of work. There could easily be 6 legal documents that need to be red lined and negotiated
Complexity is further compounded when looking at cloud solutions, as the contracts are new, and should consider SLA’s (service level agreements), renewals, etc. On premise solutions, have been around for a long time and their language and sticking points between customer and vendor are well understood. Contractual terms for cloud offerings are in flux, with each vendor having their own unique take on the legal terms and delivery methods (e.g. multi-tenant vs. hosted).
Pricing isn’t as straightforward as teams might think. Consider negotiations as related to modules, users, or applications along with negotiations related to a strategic long-term agreement, or any protections into the future and other key components of the contract. Larger Tier I vendors to price by named user, and Tier II and Tier III vendors, in most cases price by concurrent user.
Making sure you are buying the right number of users is one of THE most important determinations. You can’t give them back, if you buy too much. And if you don’t buy enough it could have affected your discount from the vendor (the bigger the deal the bigger the discount). Buy 5 to 10% less than what you think you will really need when fully implemented and secure a price lock for 3 years to be able to buy up to your needs when you figure out what you really need (after going live). Vendors will always sell you more! Maintenance and Support fees may be priced on list or discounted price (this is a big number when looking out five years). Consider negotiating support fees annually, or buy three years up front to get a discount.
Due to the scope of these negotiation considerations and many more, how can teams best manage the expansive scope, strategic importance, and range of options during ERP contract negotiations? There are three sets of things to negotiate with each vendor/software combination.
- The price of the software and the annual maintenance of said software, plus any hosting fees.
- The contracts of the software, the Software License Agreement (also called the SLA).
- The contracts of the implementation, usually an SOW (statement of work) that includes the price quote (hours and dollars) and a MSA (master services agreement) which governs all current and future SOW’s (legal terms).
7 Habits of Highly Effective ERP Contract Negotiation
While not an exhaustive list, summarized below are 7 habits of highly effective ERP contract negotiation. Keep in mind the three sets above when determining the 7 habits below. You may have slightly different answers depending upon the topic.
1) Set the best team: Establish point-to-point person(s) for the contract negotiations and instruct other team members not to discuss any details with any of the vendors. Understand there are multiple points to discuss to negotiate in the final contracts and it would be wise to engage a trusted advisor to guide you through the maze of possibilities. The right team is needed for the following phases:
- Establishing a negotiation target and strategy (who is collecting information and who is the enforcer)
- Comparing bids (software and service prices)
- Assisting with contract review (legal plus key business leaders) Assisting with negotiations (all three are negotiated at the same time, software price, software contracts, and implementation contracts/price).
2) Understand the Vendors: While every project is unique, it is wise to establish negotiations with an optimal number of vendors. Make sure you have the right number of finalists to enhance your leverage (two competing vendors is preferred, three is OK, four is too much and if only one, then you have lost your leverage).
3) Focus on Total Cost of Ownership: Software licensing isn’t the only price point to consider. Understand all the costs – including any annual fees (look out over five years), data conversion, integrations, enhancements, your need for IT support (or not I in the cloud), middleware software, and bolt-ons (e.g. Forecasting or CRM) – prior to making any decisions.
4) Consider Optimal Timing: Timing is everything. When planning for the ERP contract negotiatons phase, it is essential you understand the year-end and quarter-end dates for the final vendors.
5) Consider Payment Terms: To get an affordable cash flow, the vendor can offer financing options that may be more favorable than what a company could get through their own financing channels. Perhaps it’s more beneficial to allow payment terms over a longer period, and with a licensing commitment. When buying a cloud solution, if you commit to multiple years up front (paying annually) you may receive a better discount. Overall, when going the licensing route, the goal is to get the right price point today and for the future. If you over-negotiate licensing, there’s a chance the vendor will be less willing to provide price protection (lock in the discount for 3 years to buy more software) in years to come.
6) Assess the Details: You need to be assured that what you are buying was what was demonstrated, what is needed, and that there are no limitations on the type of user licenses that are being purchased in accessing this critical functionality. ERP vendors might present flashy functionality but then exclude it from the final proposal to minimize the cost. Conversely other applications may be included that are not needed initially or altogether. Additionally, we advise project teams to triple-check the respective user counts as well as the final ERP application footprint. Details like these can make or break an ERP contract negotiation.
7) Loop in the Legal Team: Once these areas have been thoroughly covered, it’s a best practice to have a final legal review prior to executing contracts.
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ERP Contract Negotiation Next Steps
Finalizing an agreement with your selected ERP software vendor can be a challenging proposition, although it’s one of the key tasks during ERP selection.
One of the key components of Ultra’s ERP software selection methodology is contract negotiation with ERP vendors. Because of our unique blend of independence, focus on ERP consulting and extensive knowledge of the ERP software industry, project teams end up with a negotiation experience that delivers desired results, quantifiable benefits and a strong return on investment on our consulting fees. In fact, we typically save clients hundreds of thousands of dollars in software license, maintenance and technical consulting costs – and sometimes even more for our larger clients – via our comprehensive and well-defined negotiation process.
Ready to explore how ERP contract negotiations can benefit your team? Contact us for expert insight to gain the confidence you’ll need to manage the magnitude and complexity of these agreements.