With all the business software available in today’s market, finding a good ERP system isn’t too tough. However, finding the one that is the best fit for your unique needs can be somewhat challenging without an independent and experienced view of software options. Once this task is completed, it can be even more challenging to negotiate a good deal with your chosen ERP vendor.
Purchasing enterprise software is often a multi-million dollar investment, but companies often don’t invest the same time, expertise, and resources in negotiating these deals as they do with other major capital outlays, such as business acquisitions or new equipment. However, given the magnitude of the cost, time, and risk associated with large business software purchases, ERP contract negotiations should be treated just as importantly and as carefully as other investments.
Some of our clients go into vendor negotiations ready and armed to beat up their vendor on cost. However, negotiating a contract with your ERP software vendor isn’t just about minimizing cost – it’s also about managing risk, defining scope, and clarifying roles and responsibilities. A great low-cost deal isn’t going to do you much good if the vendor has shifted all the risk to you and your team to help get to the desired number. Finding the right balance can be a tricky proposition. Below are a few areas to focus on as you get started with your ERP vendor contract negotiations.
Consideration One: ERP Software Licenses
This is probably the most obvious starting point, but it can be overwhelming with all the inconsistencies in vendors’ software offerings and pricing models. Understand the scope of modules and functionality in the proposed contract you are negotiating. If you are negotiating with or comparing offerings from multiple vendors, are you comparing apples to apples? Keep in mind that not all ERP vendors group functionality within the same modules. A customer relationship management (CRM) module for one system, for example, may include a robust way to covert a lead into a customer with a corresponding order, while other systems require use of an order entry module.
Once you have a comparable scope, you then want to make sure you’ve clarified other important variables such as concurrent vs. named users, per user cost, and other hidden license costs. If you are negotiating with a Software as a Service (SaaS) vendor, you will also want to consider escalating annual charges for additional functionality, data, or transactions.
The key to effectively negotiating ERP software license costs is to benchmark to other deals and to identify your points of negotiating leverage. What is the vendor offering other companies similar to yours? What are the competitors offering? Does your incumbent vendor provide some additional leverage via upgrade or migration credits that may put cost pressure on other options? Are there ways to spread out your purchase of licenses or modules so you’re not spending all the money up front?
Consideration Two: Annual Maintenance
Although there is some variable costs associated with providing annual support, this is where vendors make their real profit. At an average 15-17% of the software license list price is paid to the vendor each year; one could argue that maintenance is a vendor cash cow with plenty of wiggle room to bring down costs. However, we’ve found that this variable is tougher to negotiate without the right experience. Keep in mind that vendors will usually hold the line on this annual fee, especially if you’ve negotiated an aggressive deal on software licenses. At the very least, you should remember to include a maximum amour that vendors can raise their annual maintenance fee – holding steady for at least 3 years and tying to CPI or some other metric beyond that is a good way to ensure that these costs don’t get out of control in the long-term.
Consideration Three: Contract Terms and Conditions
This is another area that can be difficult if you’re not used to reviewing software vendor contracts on a regular basis. But some common things to look for include payment terms (you don’t want to pay for everything up front) and what happens if you don’t like the vendor’s technical implementation resources. In addition, you want to look for other key conditions and pitfalls that can be more advantageous to the vendor than to your company.
Consideration Four: Scope of Work and Implementation Assumptions
This is arguably the most difficult area to negotiate and understand without extensive experience. In addition, it is the area that companies most often get themselves into trouble because they don’t understand the implications, cost, and risk associated with the assumptions.
For example, answer these questions as you are reviewing the vendor contract, statement of work, and assumptions. This is simply a starting point of the dozens of questions we try to answer when reviewing a vendor contract for one of our clients:
- Who is responsible for training end users (you or the ERP vendor)?
- Who is responsible for data cleansing and migration? How much historical data will be converted?
- Who will handle overall project management of internal and external resources?
- What are the assumptions surrounding changes to the configuration of the software? This is especially pertinent if you have been sold an “industry pre-configured best practice” solution.
- How many internal resources does the vendor assume that you will dedicate to the project?
- Who is responsible for system testing, business process testing, and integration?
- Who will create system and security profiles in the system?
- Who will handle Sarbanes-Oxley, FDA, system validation, and other regulatory compliance requirements?
ERP vendor negotiations can be a complicated and overwhelming task. However, it is not only manageable with the right expertise and guidance, but it can also save significant sums of money, reduce risk, and help manage expectations.
To learn more, attend our free upcoming webinar “Send Lawyers, Guns, and Money: Tips to Cover Yourself in ERP Software Vendor Contract Negotiations.” In addition to this webinar, Panorama can also help you with the following activities:
- Review ERP vendor contracts and cost proposals
- Benchmark your vendor’s proposed deal with our clients and our extensive database of ERP vendor contracts
- Develop a multi-stage vendor negotiation strategy
- Identify key points of negotiating leverage
- Identify costs and risks associated with an ERP vendor’s proposal or contract assumptions
Click to learn more about how we can help you with your ERP software negotiations.