What Does it Take to Effectively Negotiate an ERP Contract?
Many of the manufacturing and distribution teams we speak with look with dread when it comes time to negotiate an ERP contract.
While this task comes at the end of business process improvement, technology evaluation and selection, we certainly understand the fear and trepidation project teams might experience when anticipating this task.
As an ERP consulting firm, we have first-hand experience in the nuances of what it takes to effectively negotiate an ERP contract.
Along with the importance of working through ERP requirements definition and other strategic efforts involved in an enterprise software selection project, the most successful enterprise technology projects can be traced back to fair and clearly understood ERP contracts.
When the team takes the time to effectively negotiate an ERP contract, the organization has a clear definition of the rights, responsibilities, and obligations of both parties. It’s all about setting clearly understood deliverables, expectations and protecting the interests of both parties.
From documenting the statement of work (SoW) to other contract documentation such as the “Master System and Related Services Supply Agreement” it pays to effectively negotiate an ERP contract as the terms impact the duration of the relationship between the company and the software vendor.
Steps to Effectively Negotiate an ERP Contract
As an example of the methodology Ultra employs to guide teams as they negotiate an ERP contract, the process includes establishing the correct budget for business process improvement, enterprise software selection, and implementation.
During a typical project, we help our clients evaluate ERP vendor proposals. After that step, Ultra assists in the negotiating phase by:
- Establishing a negotiation team
- Comparing bids
- Establishing a negotiation target and strategy
- Assisting with contract review
- Driving communications during negotiations
We’ve experienced several “lessons learned” when helping project teams negotiate an ERP contract. Here are a select few culled from the hundreds of projects we’ve led:
- Be sure the contract reflects accurate user count: It is important to confirm the respective user counts as well as the final ERP application footprint. 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.
- Double check that the contract captures required system functionality: ERP Vendors like to demonstrate the 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.
- Ensure that the terms of the agreement carry into the future: Companies should not lose sight of the fact that it a contract is a strategic long-term agreement which should include protections well into the future. This would include locking in long-term pricing for additional software and users well into the future (3-5 years) as well as limiting price increases on implementation services, maintenance agreements and other key components of the contract.
In the blog post “7 Habits of Highly Effective ERP Contract Negotiation,” we outline a strategic approach to teams seeking to effectively negotiate an ERP contract. They want to be sure the organization is not overpaying for software, is buying the right-fit software components, and is protected in the contract with your new ERP partner.
While not an exhaustive list, the blog cites the following 7 habits of highly effective ERP contract negotiation include:
- Set the best team: Identify the point-to-point person(s). It is wise to engage a trusted advisor.
- Understand the vendors: Negotiate with no more than two or three.
- Focus on total cost of ownership
- Consider the optimal timing: Understand vendor’s year-end and quarter-end dates.
- Consider all options for payment terms.
- Assess the details: Confirm that you got everything you need/want, nothing more, nothing less.
- Loop in the legal team
The Case for Legal Review
While Ultra’s guidance is critical to effectively negotiate an ERP contract, organizations are wise to supplement with legal counsel to make sure you are protected in the arrangement with your new ERP partner. That’s one of the habits we cited above.
Your legal team will want to review the terms and subsidiary agreements in place in relation to Dispute Resolution or Software Acceptance. The specifics of those agreements are often detailed in separate appendices or annexes other than the master contract. The legal review should consider documentation including Intellectual Property Rights, Confidentiality, Liability, Insurance, Warranties, and Dispute Resolution.
Also be sure the legal team reviews Enterprise software implementation vendor professional services prices, terms, and agreements in the contract.
Next Steps to Negotiate an ERP Contract
As a next step to negotiate an ERP contract, many project teams have contacted Ultra’s independent ERP consultant team for guidance.
Ultra understands that finalizing a legal agreement with your selected ERP vendor can be a very challenging proposition. Most companies have not structured or negotiated an agreement of this type and are wise to seek advisement from a team that understands the totality of all the components and has a full understanding of the flexibility the respective vendors have in structuring the final agreement.
As you consider the scope and strategic importance of ERP contract negotiation, contact Ultra to understand your options.
The 7 Deadly Sins of ERP Implementation
Some mistakes are just bad strategic or financial decisions. Some are the inevitable consequence of situational or organizational factors. Some, however, are the result of process-oriented or people-centric choices – and are easily avoided. These are The Seven Deadly Sins of ERP Implementation.
Jeff is the founder of Ultra Consultants, a well-known voice in the ERP consulting industry and an expert on ERP solutions for discrete and process manufacturers. Over the last 40-plus years, his companies have helped more than 2,000 organizations improve their business processes, select ERP software and implement advanced solutions.