Customized ERP Systems Require Customized Contracts

At the beginning of 2018, numerous organizations and people involved in various aspects of the Enterprise Resource Planning (ERP) industry issued their projections for the year. As an ERP attorney, we were among the many who made a prognostication.

Several of the trends identified as likely to emerge this year and into 2019 included more cloud-based ERP solutions, employing Artificial Intelligence in ERP systems, and finding ways to mine big data in ERP software to gain insight into business functions and processes.

Not long after we soothsayers issued our predictions for the year, Panorama Consulting’s 10th annual report on the use of ERP came out. As we wrote in March, 2018, among its many intriguing findings the survey of users revealed that an increasing number of new systems are being customized to meet the specific needs of users: Some 58-percent of new installations in 2018 have some degree of customization, up from only 32-percent in 2017.

What these trends indicate is a growing need to reject a developer’s or vendor’s standard template contract, and for buyers along with their ERP software attorney, to conduct intense negotiations to revise the ERP contract before signing a deal to acquire, install, implement and use an ERP system.

There is a very simple reason for negotiating an ERP contract and ERP service agreement to include not only provisions that reasonably allocate risk, but also provisions that manage the vendor relationship and implementation: ERP software implementations fail at a very high rate.

Software lawsuits are time-consuming and expensive. The best way to avoid an ERP failure and the ensuing ERP software lawsuit is by drafting ERP licensing and implementation agreements that manage expectations on both sides of the table and ensure that the contract defines everyone’s role with a good deal of specificity. As an ERP software attorney, I’ve seen far too many lawsuits begin with an ERP user muttering a befuddled “That is not what I believed I signed up for!”

In fact, a user needs to take at least these eight things into account when negotiating ERP software contracts:

  • Negotiate meaningful software vendor warranty obligations;
  • Ensure that the limitation of liability is reasonable and allows a user to recover enough damages to make it whole in the event of a breach of the software license agreement by the ERP vendor;
  • Make sure that the software product(s) the user is licensing are properly and accurately described;
  • Understand what type of maintenance, support, updates and upgrades are being provided;
  • Understand the scope of the license grant and any associated license metric;
  • Include a detailed scope of work with respect to any services being provided;
  • Carefully defining and documenting milestone and deliverable obligations;
  • Ensure that the software and services contracts and statements of work contain a process for rejecting deliverables and a process for remedying defective deliverables.

To help a client develop a strategy for creating the best ERP contract possible – which means an ERP contract that mitigates risk and addresses business needs – typically we follow a six-step process:

1 – Client education to enable executives to understand the business processes that need to be addressed in the ERP contract.

2 – A review of the initial terms and conditions, highlighting risks and proposing changes for client review.

3 – Conducting a negotiating strategy conference with the client to review the risks posed by the vendor’s template contract and to prioritize the client’s business objectives so that we can ensure those business objectives are addressed during contract negotiation.

4 –During negotiation with the ERP vendor or integrator we leverage our knowledge of standard ERP vendor tactics to negotiate an ERP software contract that reasonably addresses the client’s issues, and business objectives.

5 – A final review of the negotiated contract to ensure that all negotiated terms are addressed prior to execution.

6 – After the ERP software contracts are executed, we continue to work with the user to ensure that the software vendor is meeting its contractual obligations and, if not, we enforce the negotiated terms and conditions.

An ERP system contract is not a simple, straightforward agreement. Using the vendor’s “off the shelf” ERP template contract is never in the best interest of a company acquiring ERP software. When negotiating an ERP contract, we keep two objectives in mind: First, strive for a win-win deal for both the vendor and the customer so that both sides understand and can meet their obligations for the life of the ERP system. And, second, protect our client in the event of the worst happening.

By Marcus Harris