Since its inception, ERP software systems have been historically used almost entirely by large organizations: Major corporations, financial institutions, federal and state government agencies and similar behemoths with complex structures and massive operations.
Over the last couple of decades ERP vendors have focused aggressively on small to medium sized business market. Today, a growing number of smaller businesses have gone live on ERP projects. We are not talking about mom-and-pop operations but stand-alone manufacturers and distributors with roughly $50 million to $100 million in sales. They may have only one or two factories or warehouses, but a possibly complicated supply chain and a far-flung customer base with different needs and expectations, and perhaps a few hundred employees and contractors to manage. All of these factors complicate managing the business.
This shift marks a change in who is using ERP.
It also means that executives and in-house counsel, if there is one, are contending with not just a transformation of the business but a type of contract they’ve not likely had to negotiate previously. Contracts for ERP software systems are nothing like the loan documents, sales agreements, leases, or employment offers that are typical of what smaller businesses review regularly.
Having devoted our career to ERP, we have seen how large, sophisticated organizations with considerable resources can run into problems with their project, starting with the contract they signed. To help smaller businesses venturing into their first ERP software system effort, here are six mistakes to avoid.
1 – Seeing ERP as a technology tool. It isn’t. Viewed correctly, ERP is a management tool that uses technology to better run the company. Understanding this has implications from selecting a vendor and its product to which integrator to choose and how the information will be used once the system goes live.
2 – Not planning for scalability. Small businesses plan their future growth. Likewise, they need to plan how their ERP software system will be scalable as the company grows. This needs to be factored into how business processes and requirements will take them into the future rather than automating business processes as they are now. If this is not part of the decision process, a company may find itself three-to-five years down the line and having to replace its entire ERP software system, a major undertaking and huge expense that can be avoided.
3 – The contract is straightforward. None of them are. An ERP contract slid across the table for you to sign may seem forthright but since the vendor and integrator wrote it, it favors them. Many of the clauses need to be negotiated and rewritten including those that spell out which side is responsible for which activity, who is authorized to approve change orders, and other provisions such as having you pay for licenses on software you may not need for years.
4 – The vendor and integrator does it all. They won’t even though many of them will tell you that they will. Starting up with ERP is nothing like ordering a new machine for the factory and then paying little attention until it is delivered and installed. To avoid cost overruns and delayed timelines, senior management must stay actively involved in every aspect of the project.
5 – It will be easy. Intgegration never is easy. ERP software systems are incredibly complex and integrating them with existing systems is a major undertaking. The pitfalls of ERP implementations are a bit like COVID-19: They do not discriminate between large and small businesses and the challenges that plague a Fortune 100 company might be on a smaller scale but highly disruptive for a smaller business.
6 – Forgetting about the users. All change is hard for employees. Launching ERP will make changed to the way many workers do their job. So, people may not be ready for the the discipline required by ERP systems. It becomes vital to plan for a change management. Effort. Critical project activities such as training, communications and organizational readiness are vitally important.
With many businesses starting to reopen, projects that were on to-do list and put on hold during the COVID-19 lockdowns are being reviewed and renewed. We have devoted our legal career to negotiating, drafting, and litigating ERP contracts so we know where the potential problems may lie.
If you are an owner, executive or in-house counsel for a smaller organization, we would be happy to share our knowledge with you and help you avoid avoidable missteps. Feel free to call or send an email.